Hi, everyone, welcome to the presentation of the second quarter results for Alleima. My name is Emelie Alm, and I am Head of Investor Relations. I am joined by Göran Björkman, President and CEO, and by Olof Bengtsson, CFO. Göran and Olof will take you through the results, and then we will have a Q&A session. You can, as always, ask questions through the conference call, and you can also write them in the field below the webcast. The presentation can also be downloaded from alleima.com. As always, we always put safety first, and it's a top priority for us, so I trust that you know the safety routines of where you are located. With that, I would like to hand over to you, Göran.
Thank you, Emelie. Also a welcome from my side. Let's go through Alleima second quarter, and let me start with the highlights of the quarter. I think the second quarter was an overall good quarter, where I think our revenue growth of +18% organic sticks out as very strong. With a book-to-bill close to 100%, we have a continued solid order backlog, which provides confidence for the near-term deliveries. Order intake on rolling 12 months was -4% on high comparables. Remember, Q2 last year was extremely strong from an order intake point of view. The organic decline was also due to mixed market demand. Several customer segments continue strong, while other customer segments have a more softer development.
We improved our earnings significantly, supported by high revenues, a positive product mix, and continued successful pricing, which offsetting cost inflation. Adjusted EBIT on 11.4%, it was 11.5% last year, this is a high, absolute level, which I'm pleased with. We are continuing our consistent strategic execution, where I think the breakthrough SMR order is a clear evidence of our strong position in the nuclear industry. We also completed the acquisition of Söderfors Steel, we continue to see strong momentum in Kanthal's industrial heating and medical business. Kanthal is really leveraging from the global trends of electrification of industries. Sustainability, we are continuing to make positive impact through operations. I think during the quarter, we have increased our focus on safety performance.
We have had several years with, I would say, flattish development. We have had too many accidents that clearly could have been avoided. This has made us focus even more on safety. I mean, a clear return from the top. We've done benchmarking with other companies. We have divisional programs to improve. We have more internal dialogues about our safety culture. Those are some examples of activities. Of course, I'm pleased to see a clear improvement in the second quarter compared to quarter one. I think we need to remember that improving safety culture is a long journey. Safety should continue to be on top of our agenda. Share recycled steel declined slightly, mainly due to product mix, where I can see that we have a quite a lower share, what I would say are standard grades.
Our greenhouse gas emissions are in the low range compared to peers. Despite already one of the lowest emitters in the industry, we can always improve, and the trend is positive. For the first time ever, we are below 100,000 tons of CO2 of for our Scope 1 and 2 emissions. The last KPI, the share of female managers increased by 1% unit, which I would say, considering our historical numbers, is a good development, and this shows that we are on the right track when it comes to improve gender diversity. As noted on the previous slide, I'm pleased with our operational improvements on sustainability, but as I have concluded many times, our largest impact on global sustainability is through our product offers, where we can improve customers' processes, products, and applications.
Global trends like electrification and the shift to fossil-free energy are trends driving our business opportunities. Let me share a couple of examples. Electrification of industries is a strong trend, and this is where Kanthal is very well positioned. The momentum in electric heating is solid. Kanthal has received several product orders, mainly related to some targeted product application that enable industries to make the green technology shift, I mean, areas like solar, steel, lithium-ion, battery manufacturing. We also received a breakthrough order to supply steam-generated tubes for NuScale Power. It's a provider of small modular reactors. The tubes will be installed in one of the first SMR power plants. This is really a milestone for growth in the power projects for the future.
We will supply approximately 200 kilometers of steam generator tubes for NuScale's first NuScale Power Modules. That each is capable of generating about 77 megawatt of carbon-free electricity. I think it's really great to see that this technology is now taking steps in commercialization, and we, where we play an important role. Market development. Looking at the market development, I mean, we saw lower demand in some customer segments, somewhat mitigated by long-term trends and underlying tailwinds from others, and which plays in our favor. On a sequential basis, demand slowed further, mainly for the low refined short cycle business, and the underlying demand in Asia increased, while it declined in North America and Europe. Quarter two last year was the best quarter ever in terms of order intake, meaning that, we are meeting higher comparables.
Let me go through the demand dynamics of different segments, and let's start with the segments where we see a softer market development. This is mainly our short cycle business and mostly for the low refined products, but also for parts of our replication tool business. To look at the industrial, demand was negative on a sequential basis, and it declined in all regions for the low refined products compared to last year. Consumer demand declined year-over-year, mainly due to Strip products, such as compressor valve steel and knife steel, but also appliance wiring Kanthal. However, on sequential basis, the demand was, I would say, more stable than on the year-over-year.
In the chemical, petrochemical segment, demand was lower, both compared to last year and also sequentially, with some destocking effects at customers and distributors and an overall somewhat softer market in Europe and North America. Demand in Asia remains really solid. Other customer segments are strong and with a continued positive outlook. For instance, oil and gas, I mean, investments continue to materialize. We had major orders, both for the OCTG and umbilical tubes, a total value of SEK 830 million, and many other small orders, of course. The market outlook and product list really remains solid. In industrial heat, we noted a stable development on a really high level and received several significant product orders, mainly for the solar industry.
What we can see also is that the gas to electric conversion inquiries from different kind of customers remain on a high level in all regions. Once again, electrification is driving. Minor construction order intake declined year-on-year, but that was mainly impacted by stock adjustments at some customers. I think the underlying demand remains solid, and we expect to recover in the medium term. Power Generation, this is mainly our nuclear business. I would say it's only our nuclear business. It remains solid and many discussion on future projects. They are progressing well, with one of them materializing through this SMR order. This industry, however, is moving slowly. Transportation, strong, mainly for aerospace and titanium tubing. Medical, strong, positive, underlying development.
However, if you remember, we had a large, really large order in quarter four. We see a very strong momentum for the full product portfolio and some successful new product launches. Through that, we expect this to continue to support our growth. Our renewable energy segment, I mean, this trend is very strong, and we note the continued momentum related to our hydrogen refueling stations, and the continued acceleration globally is expected in the longer term. However, we see some, I would say, downstream bottlenecks in part of our business, and that is the pre-coated strip steel for fuel cells, where some of our customers have some ramp-up problems in the short term.
In summary, we saw a mixed picture with good momentum in some of our segments and a bit softer in other. Again, I think this is... I mean, the diverse customer segment exposure is to clear strength at Alleima. A bit closer in order intake and revenue. We had an order intake of SEK 5.5 billion in the quarter, which is a high absolute level. Organic intake growth of -4% for a rolling 12-month period, and order intake growth of -15% in the quarter. We're meeting higher comparables with all-time high order intake Q2 last year. Total revenue, SEK 5.6 billion. This is a proud number, resulting in a very strong organic revenue growth of +18%, driven by growth in all 3 divisions. Look at the book-to-bill.
In the quarter, it was 98%, in rolling 12 months, 106%, so above 100 for the rolling 12, so our backlog remains solid. The mixed demand picture in the different customer segments means that we are consuming backlog in some segments while continuing to build backlog in others. I think the situation overall still makes us confident about near-term deliveries. If you look even closer into the order intake and revenue growth and the different components, metal prices now have changed to slight negative compared to the high positive impact in previous quarters, and the impact on currency is still positive, but not as high as before. Looking at the rolling 12-month, the orange lines, it's slightly negative for order intake, but positive for revenue.
Backlog is solid, absolute levels are high. Olof will dig even further into the details of that in a few minutes. Look at earnings. Adjusted EBIT increased by close to SEK 100 million, or 17% to SEK 642 million, with a margin of 11.4%. With high revenues and overall positive product mix and price increases, which continued to offset cost inflation, it was contributed to the strong result. High revenue with a stable and high margin, it was 11.5% last year, means, of course, that leverage was on the low side. There are several reasons for the lower leverage. We've had some temporary performance and productivity issues and some negative mix effects in our Power Generation and transportation segments.
In Power Gen, mainly related to some quality issues. In transportation, the problem relates to planning, output issues with an overloaded plant, including some orders for automotive with low prices. We also have some under absorption related to lower volumes, where demand is lower. I would say the largest negative absorption impact is actually something I view as positive. Our focus on driving operational efficiency has resulted in an all-time low inventory levels in the second quarter. Reducing inventory means lower production volume, lower absorption, and this had a negative margin effect of more than 100 basis points year-over-year. Reported EBIT of SEK 350 million, including metal price effects on minus SEK 293. This gives an almost SEK 1 billion negative bridge effect from changed metal prices. Pre-operating cash flow is SEK 72 million.
I think this is relatively weak due to higher accounts receivable and lower accounts payable, partly offset by reduced inventory. Normally, we have a stronger cash flow in the second half of the year. Let's look at the divisions a little bit more in detail, starting with Tube. Overall, I think Tube is performing well and shows a good momentum. Tube had a strong revenue growth in a somewhat softer market for certain segments then. There is a continued subdued demand for the low-refined products to the industrial segment and lower order intake for application tubing to the chemical and petrochemical segment in North America and Europe, while Asia continued strong. We have a continued strong oil and gas momentum with the three major orders of totally SEK 830 million, and the outlook for oil and gas remains solid.
Transportation showed positive development, mainly driven by aerospace, and a strong organic revenue growth of 20% and a backlog that remains solid. Adjusted EBIT margin on 11.4%, which is, I think, a high level, but slightly below last year. I would say the comments I made on margin development are the same as for Alleima Total, with the high revenues, price increases, which more than compensated for cost inflation, but also the temporary performance and productivity issues in Power Gen and transportation segments are fully related to Tube. I also say that the largest negative impact on absorption due to inventory reduction is within Tube. I think inventory management and operational efficiency resulted in an impressive reduction of inventory.
Within strategy execution, we conclude that we closed the acquisition, Söderfors Steel, and that we did on May 2nd, now starts to work to qualify products mainly for aerospace and medical in small-sized bars. Let's move to Kanthal. Kanthal, a very good quarter. I mean, the continued strong development, a strong momentum, I think, clearly benefiting both from the electrification and the medical trends. We see a stable development on high levels in industrial heating, with significant orders and a continuous strong momentum in the medical segment. Order intake in medical is, however, below last year, as I already commenting, due to timing of orders, and this is, of course, related to the large medical order we booked in Q4 last year. Year-on-year order intake declined somewhat in the consumer segment, but sequentially flat.
Organic revenue growth of 15% with a broad-based positive development across the divisions or regions, and yet another quarter record high revenues in medical. Adjusted EBIT margin grew with more than 40% to a strong margin of 19.3%. Increased revenues, strong product mix across the division, and a continued price increases compensating of inflation supports a strong profit improvement. Of course, the share of a medical increase significantly, and this drives the margins in the right direction for Kanthal. I think Kanthal is a very nice and well-run business, and although we might not see the same high margin every quarter, but it's clearly improving over time. I'm gonna take a look at the graph to the right. I think it's an impressive development for Kanthal.
Of course, to meet the growing demand for electrification across our segments, such as solar, lithium, ion battery manufacturing, and downstream steel production, we are expanding the current premises in Walldorf, Germany, roughly 2,500 square meters of manufacturing area at that site. Strip. We continued soft market demand with an order intake decline year-over-year and quarter-over-quarter in all regions for the consumer segment. Customers are signaling about high stock levels, and we believe that this will be corrected in the short to midterm, and then return with the demand that will return. Demand was slightly higher than last year within the medical segment for the Strip division.
Organic revenue growth of 1%, driven by razor blades for the consumer and precision strip for medical segment, and of course, also the pre-coated strip steel for hydrogen and renewable energy segment, which had a good momentum, however, coming from low levels. adjusted EBIT margin on 10.0%, continued under absorption effects from lower production volumes, negative revenue mix as we have less share of compressor valve steel in the revenue. Mitigating activities to adjust capacity and reduce costs are ongoing, and this is mainly related to manning reductions. I mean, I believe that we might still have a couple of tough quarters ahead of us from the, for the Strip division. Part of the strategy is to find new applications for in the medical segment, Happy to say that we received precision strip steel orders for two new medical applications.
Orders are small, but in interesting areas, and they are in the areas of cardio and identifying cancer. I'll leave to you, Olof.
Thank you, Göran. Olof here. Let's dig into some numbers. Go to the first slide, the financial summary slide. If we start in the upper right corner, with the bridge on order intake and revenues, we see an organic development of -15% on order intake. Please remember that this quarter, we are comparing to a very, very strong quarter last year, SEK 6.4 billion in order intake. Revenues, a strong 18% increase organically, invoicing from a solid backlog. Structure-wise, it's the small acquisitions we've made, contributing 1 percentage point, still a good currency tailwind.
Alloys, the alloy surcharge, which I think is, so to say, the biggest change, compared to previous quarters and also year-over-year, where we now have a negative effect on the alloy surcharges coming from the lower metal prices in the quarter, mainly the nickel, which has been on a level just above $20,000 per ton, compared to previous quarters where we have seen much higher nickel prices. Going into the big table, we see an adjusted EBIT, adjusted for the metal price effects, of increasing 17% or SEK 95 million in absolute terms. Further down, looking at the reported EBIT, there we see quite a lot, a fairly big swing, obviously coming from the metal price effects then.
This is what it is, this is normal. We will see swings in the income statement on the reported EBIT from the metal price changes. In certain periods, we will have positive effect and in other, negative effect. Please remember, when it comes to the metal price effect that we're calculating, that this is then for the sales where we have an alloy surcharge closed, there is a timeline between us buying the metal and then selling the metal. That is what we calculate when adjusting for this. Net financial items coming out at -SEK 39 million versus -SEK 171 million last year.
The big swings here are mainly coming from valuation of financial instruments that we use for hedging of various exposures that we have in our operations. We are gradually introducing hedge accounting in our books to avoid these swings. There are still some instruments that we need to value in this way. Underlying the finance net is fairly low. The interest net is a positive SEK 8 million in the quarter. The tax rate, the normalized tax rate, is 24.2 for the first half. It's better to look at longer periods instead of focusing on a single quarter, so the normalized tax rate is in line with our guidance.
Adjusted EPS, earnings per share, on a fully diluted basis, comes out at 1.79 versus 0.91 SEK per share, last year. That's a good healthy increase of 97%, and that comes from the improved adjusted EBIT performance and also from the lower finance net. We go to the next slide, that is the bridge on adjusted EBIT, so, splitting up the increase of 95 million SEK in various parts. First, we have the organic development of +83 SEK, coming down from a strong revenue development, the price increases that are more than compensating for the higher inflation, and also a good mix development. Other positive elements include the electricity grants that we have received in Sweden. That's a total of 48 million SEK in the quarter.
On the other side, we have the temporary performance issues that Göran mentioned in the power gen and transportation segments. We also have, as Göran also talked about, the under absorption effects from reducing our inventories and the lower product production volumes. In total, a healthy increase in the number, but the operating leverage is 10%, which we think is a bit on the low side than explained by the different factors I just mentioned. If, and I say, if we had adjusted for these factors just mentioned, we would have a leverage of between 20%-25% in the quarter.
Currency, we had a positive effect of SEK 18 million net of hedges, and M&A, the acquisitions, just had a slight positive contribution in the quarter. However, we have M&A-related costs, mainly from our most recent acquisition, that we announced during the quarter, that comes out at minus SEK 6 million. That is the sum coming up to the SEK 642 million in adjusted EBIT for the quarter. Going on and looking at parts of the balance sheet. Net working capital increased both year-over-year and sequentially. The sequential increase comes mainly then from the fact that we had a, as you saw, a fairly strong invoicing in the quarter, and the, with an average, days of sales outstanding of approximately 50 days.
A lot of the payments for this strong invoice come in Q3. That is one factor impacting. Also is, actually lower accounts payable. We have settled, some invoices, for raw material purchases made during the first quarter, when metal prices were higher, and they were settled at the end of the quarter. That means that we have an impact on our cash flows. This, both these, negative, factors have been offset by a more positive development on our inventories. The divisions have managed the inventories very well and decreased both in tons and in value. Of course, that the value has been helped by the lower metal prices as well.
Capital employed, excluding cash, increased sequentially and year over year. That comes from the higher working capital, just explained, also of course, from the acquisitions, also some currency effects when translating the foreign balance sheets into the Swedish krona. ROCE, excluding cash, decreased to 11.1% from 17.8%. That comes mainly then from the lower metal prices we have. We have the metal prices in the calculation of the returns. Going down to cash flow, free operating cash flow, a bit low, we think, SEK 72 million versus SEK 81 million, same period last year. Looking at the table up there, we have a lower EBITDA coming mainly than from the lower metal prices.
A non-cash items mainly relates to provision changes in the result, that is not cash flow impacting. We have a fairly big swing than on the changes in working capital compared to last year when the prices were higher, but so was EBITDA. EBITDA is lower, but the change in working capital is much lower. CapEx, more on a normal level compared to last year. The amortization of lease liabilities, no big changes, and then the free operating cash flow comes out at SEK 72 million. Q2 is normally, not a very strong cash flow quarter, as we normally are building inventories for the summer stop.
This year is a bit different, with the lower inventories that we've just talked about, but obviously offset by the higher receivable payables. On to the capital structure. We continue to be well below our financial target on capital structure, debt to equity to be below 0.3 times. That's the target, and we are coming out at 0.03 times. And if you were to measure net debt to adjusted EBITDA, we would come out at a low of 0.16 times. Looking at the components then, of course, we have moved from a net cash position in Q1 of SEK 256 million to a net debt of SEK 448 million this quarter. There are some reasons behind that.
One reason is a higher pension liability, and that comes mainly from the fact that the long-term discount rates are actually a little bit lower, slightly lower. That means that the liability increase when you discount it. We have paid a dividend in the quarter, SEK 1.40 per share. That comes out at SEK 351 million in cash outflow. We have some acquisition payments, mainly than the acquisition of Söderfors, that also has impacted the quarter. That's how the net debt comes out. If you look forward, we of course, with expected better cash flows, we of course, will advertise on this debt.
Going to the next slide then, looking at how well our guidance for Q2 came out, starting with CapEx. We guided for SEK 800 million on a full year basis, which is a guidance that we will still keep. I will show you soon. We came out at SEK 150 million in the quarter. I think that we will be more active in the second half of the year, because this is obviously below the guidance. Currency, we guided for a positive SEK 100 million in Q2. We came out at SEK 78, net of hedges and so on. We came out at 18 basis points. The metal price effect, we guided for SEK 200 million negative. We came out at SEK 293 negative. The lower metal prices than expected.
The tax rate, I would say, for the first half of 2023, well, in line with the guidance we gave. Looking ahead, Q3, we're keeping our guidance for the CapEx, SEK 800 million full year. Currency, we basing this on end of June rates, and we think that the currency rates will give a positive impact of SEK 50 million on the operating EBIT for result for Q3. Metal price effects, based on end of June, again, we think that we will have a negative impact of approximately SEK 300 million in the quarter. Tax rate, as I just mentioned, I think we keep our guidance for the 22.26%. I'd like to hand back to Göran for an outlook.
Thanks, Olof. Let's some short comments on the outlook for the third quarter. I mean, market demand was mixed during the quarter, and in parts of our business, it is softer. On the other hand, some underlying trends are very strong, like energy, fossil-free energy, electrification, medical, aerospace, and they are expected to continue to mitigate the impact of uncertainty macroeconomic environment throughout this year. With our strong backlog, we are confident in the near-term deliveries. We remain, however, cautious regarding the impact from cost inflation and under absorption, of course, from lower production volumes in certain areas. Product mix is expected to be similar to the one in the second quarter. Orders, revenue, and adjusted margin in the third quarter are normally lower than the second quarter, based on seasonal trends due to the summer shutdowns.
Cash flow, as Olof just said, is normally higher in the second half of the year compared with the first half of the year. Let me make a sort of summary of what we have said. I think overall, I am pleased with the performance in the quarter. We are executing on our strategy, and I think we are clearly heading in the right direction. As I said, I think our revenue growth of 18% of organic sticks out as very strong. With the book-to-bill on close to 100%, we have a continued strong order backlog, and this provides confidence for the near-term deliveries. We saw lower demand in some customer segments, however, mitigated by long-term trends and underlying tailwinds that plays in our favor.
Global trends like electrification and the shift to fossil-free energy, high investments in the energy sector, and the strong medical market development are clearly supporting the Alleima business. Strong profit improvement and high margin, despite some operational issues, and we continue our consistent strategy execution, where the breakthrough SMR order is one clear evidence of a strong position in that industry. We complete the acquisition Söderfors Steel, and we continue to see strong momentum in Kanthal's industrial heating, based on the electrification and also their medical business. Also continue focus on operation and commercial excellence, where improved inventory management and operation is efficiency, drove down our inventory volumes to all-time low. That is something I'm very pleased with. Thank you.
Thank you, Göran, and thank you, Olof. It's now time to start a Q&A session. Again, you can write your questions in the webcast, or you can ask them on the call. Operator, please go ahead.
We will now begin the question and answer session. Anyone who wishes to ask a question may press star one on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star two. Participants are requested to use only hands while asking a question. Anyone who has a question may press star one at this time. Our first question comes from the line of Viktor Trollsten with Danske Bank. Please go ahead.
Thank you, operator, and good afternoon, Göran and team. Maybe first, I got a bit surprised, but if I may ask about the leverage, Olof, that you mentioned, you said that, you know, leverage would have been 20-25% in the quarter, or, you know, if you had have had, you know, a couple of impacts.
Yeah.
Could you please help us, you know, sort of, you know, understanding the magnitude on each of them? What was it mainly, you know, reduction of inventories and, you know, temporary efficiency losses in tubes or?
Yeah, I mean, the adjustments I made was on the upside, so to say, the received electricity grants, those SEK 38 million. As Göran just mentioned, the under absorption effects in the inventory, that is 100 basis points year-over-year. Then the rest is the underperformance in the transportation and power gen units that we talked about.
... Those were the adjustments I made to arrive at 20%-25% average adjusted. Of course, I mean,
Okay
if adjustment, but that's what.
Yeah.
That's what I meant by that.
How isolated are these two, let's say, you know, Q2? I, you know, I take it that you sort of flagged for, you know, continued low leverage in the coming quarters. I mean, if we would assume, you know, 20%-25% leverage in this quarter, you would be at, you know, SEK 740 million in EBIT or 13% margin. How should we look, you know, think about leverage in the coming quarters then?
I can try to at least elaborate and think out loud, Viktor, we don't give really forecast. I mean, if we look ahead, because you're rough in a way, asking about margins going forward, I think, I mean, our order book is good. It's both big and with a good mix. Mix is, even if it's sequentially rather similar as quarter two, it's better than last year. We had the temporary effects, as you said, in quarter two, and still margins were, I think, healthy. Those effects will not disappear, but they would be lower over time. I think it would be faster to recover the Power Generation, it will take some more quarters to fully fix the issues in transportation.
I mean, we cannot save this or reduce the same inventory again. If we could reduce it some more, I would be happy to do that, I think that impact is probably lower going forward. How should I summarize this then? I would say, I mean, I don't see any reason to be too worried about margin development going forward. The leverage numbers that Olof, I mean, in the underlying, if it wouldn't have been, are normally numbers that we should be at. That's the best answer I can give you. Of course, remember, quarter three is normally not as good then.
Yeah.
You know that.
No. Yeah, we, exactly, that we know of. Okay, yeah, that's understood. Just, so, at first, in the report, I got it like, you know, 10% leverage is something we should, you know, continue to think about, but it sounds like, you know, headwinds are easing in the coming quarters. That is clear. Then speaking about margins-
Sorry.
Yeah?
A leverage below the margin, that's bad, and that's not at all what we aim for.
No, that, I'm happy you're saying that. Then, speaking about margins in Kanthal, you know, continue to print new highs in margins. I think you helped us quite good during the call to understand, you know, the underlying forces. What would you say, Göran, would, you know, take the margins down from here? I guess that, you know, with seasonal custom, we would be, around, you know, 18% EBIT margin in Kanthal. If it, you know, what would take that down, would you say?
interesting way to put the question, Viktor. I see no reason why it should go down. At the same time, I mean, it's a really strong increase from last year. Let's elaborate on that one as well then, without really answering the question. Their medical business is growing faster than the average. Even if the average is good, the medical is quite better than the averages. That should indicate even better. I would say part of the business, which we call heating materials, I mean, we are kind of surprised they were so good, so maybe that was more better than normal. It's a difficult question, quarter by quarter, but look on the trend on Kanthal, I see no reason why it should not continue.
A good product mix.
It's a good product mix. It's in strong position. It's a well-run business. It's a nice part of our Alleima.
Yeah, I guess it's fair to say that Kanthal is more stable versus, you know, other end markets. If you let me push you a bit, Göran, just if we say that, you know, Kanthal is around, you know, 18% business model, you know, how do we square that with your, you know, financial targets? I mean, if Kanthal has 18% margin, it would imply that, you know, our 2 basically has 5%-6% margin to come down to 9. You know, I'm just trying to get the equation together.
I mean, I've been pushed on this question before. Are your profit targets too low? Let's go through a downturn and see where we end up, and if we're better than we had, we should raise the bar, of course. The math you did, that is not the expectation we have on the rest of the business. From that point of view, you're right, of course.
... Okay. No, that's clear. Maybe if I, if I may, just one final question that I'm a bit interested in. You said that, you know, you reduced inventory volumes. Still, you know, networking capital is around SEK 7.8 billion. I mean, it's a record high figure. You know, historically, you release working capital during the second half. Just, you know, how should we think about working capital going forward? Obviously, it depends on business cycle, but how much can you sort of release, given where metal prices sit currently?
I guess I would like to refrain from giving you a number. Clearly, if you look at the various items in the working capital, I mean, inventory is at SEK 8 billion. That will clearly be a release when metal First of all, of course, from the better inventory management in the divisions, where each of them have a plan, of course, that we're following closely. Metal prices, yeah, there will be an effect. Hard to tell exactly where that will end up. Receivables, yes, we are constantly working on that. We have a DSO of 50 days, it can probably improve. Accounts payable, difficult to say. The accounts payable will compensate a little bit for the lower inventories, but I...
I mean, we have, of course, our internal targets, which are lower than what you see right now. I mean, we have 33%, I think, if you compare it to revenues, and the target we have internally is a bit lower than that. Hard to give you a number on that one.
To fill in on that one, I mean, it takes some time to flush through the system with lower metal prices.
Yeah
... if metal prices continue like this, it will go down. On the other hand, you need to work with the things that you can influence, and one thing you can influence is to improve your inventory management. I think so far, this is the best I've ever seen from a performance point of view.
Mm-hmm. Okay.
Second half is better than first half normally when it comes to working capital, so.
Okay. No, that's clear. Thank you very much. I'll step back. Thank you.
Thank you.
Thank you.
Thank you. The next question comes from the line of Patrick Mann with Bank of America. Please go ahead.
Hello, good day, Göran and Olof and Emelie, thank you very much for the call. I just want to ask a little bit more on the inventory. I'm just trying to understand here. Obviously, the volumes went down a lot, and the inventory management means you've got low volumes of inventory. You also said that led to some lower production volumes, some underabsorption of costs, and I think it cost you 100 basis points of margin in this quarter. How do you think about investing in inventory for that additional margin or sale? Is it because end demand in some areas is weak, so that's why there's been underabsorption? Could you have, you know, produced more?
Then, I suppose, related to that, given metal prices are moving down, you probably don't want to buy inventory where you think you're going to get a negative metal price effect. Did that also play a role? The main thing is trying to understand lower inventory on one hand, you know, is positive from your working capital management, but on the other hand, it did cost you some margin in underabsorption of costs and lower production. Just help me understand how you think about that and how we should think about that.
Let's see if I can try to answer your question. You need to help me, Olof. When we do the math on inventory reduction and how that impacted absorption, of course, that can be parts of the business where sort of, market development needed less, needed less inventory. That could be part of the equation. I would say, looking into exactly how we have improved inventory management, most of this comes from more efficiency. I'm gonna say that is the majority of the absorption problem. Of course, when it comes to inventory management, we don't. If you look at the purchasing side, buying metals, that does not really relate to sales. That relates to more to order intake and production plans.
Of course, with slightly lower production plans, we slightly need some less raw materials. Remember that this time of the year, we stopped the steel plant for 3, 4 weeks. That had, of course, a negative effect on the accounts payable, because we paid the old purchase invoices, but we didn't sort of have new ones. I'm not sure I answered everything, but I tried to answer at least.
Thank you. Then maybe one follow-up question. It sounded like Asian demand was stronger than Europe and North America in most cases, but I'm just wondering, with compressor valve steel, it seems to be quite a negative mix impact and still seems to be quite weak.
Mm.
I thought that was mainly China. Is that... or mainly Asia? Is that the right way to think about it? Maybe what are the issues there, and what's the outlook?
I mean, thanks. That's that was an important question. I mean, I think, if I compare a couple of businesses, if I take Tube are in China, mainly for China, or in Asia, mainly for Asia. That is the Asian market, very much connected to investments in chemical, petrochemical, et cetera. That is stronger than what we see in Europe and North America. In the Strip case, our customers' customers has put a lot of their supply in China, for compressors. Of course, the compressors go into refrigerator, freezers, air conditioners, et cetera. That's probably more a global market, but our customers are in China mainly.
Due to the lower demand in that customer segment, we have a sort of reduction of sales in China due to that, and that is mainly related then to the Strip division, if that explained it.
Okay. That's much clearer. Thank you. I appreciate the color. Thank you.
The next question comes from the line of Igor Tubic with Carnegie. Please go ahead.
Thank you, and thank you for the presentation. I have two questions. First, I would like to ask about the Tube division. I can see that the margins have declined year-over-year, and I just wonder because the industrial segment is declining, so to say, are the oil and gas margins also declining then, or what's the reason behind the lower margin in Tube?
I'll try to answer that. I think the explanation we try to give on group level when it comes to poor leverage, mainly relates to Tube. That is one part of the answer. Oil and gas, I would say in average, yes, the margins in oil and gas is lower, but there is some, I would say, good reasons for that as well. Umbilicals are still a very profitable business, slightly lower than before, and that is mainly related to that we produce most of that or all of that in Czech Republic, and the currency impact has made a little bit more costly to produce in Czech Republic. The largest impact on the oil and gas margin is that we have grown the OCTG business a lot, and that is not a high-margin business.
It's a very important contribution, part for the large flows in Tube. That is also one reason.
Okay, thank you. Continuing on the oil and gas, I know that you have previously said that, you are fully booked for deliveries in this year in terms of capacity. How far away would you say, that you are from full capacity for 2024 deliveries?
I need to split it up. If we take umbilicals that most of you normally are more interested in, we are booking now in the second quarter in 2024. We also have seen. Should not be too sure about this, of course, but we also seen. I mean, in quarter one, some competitors booked orders that did not happen in quarter two, so I think they have also filled up their systems. Now we're booking in quarter two in 2024 for umbilicals. That's the case. In OCTG, it's even better or worse, you decide, but the backlog is even longer.
There it starts to be a stretch for us if we can book more because the growth in OCTG is so large and our backlog is so strong. We have lost some flexibility in booking more orders in that part of the business.
Okay, thank you. That was all for me.
For any further questions, please press Star and one on your telephone. Star followed by one.
We have one question from the webcast. Göran , how big has the destocking among distributors, et cetera, in certain areas in Tube?
Difficult to say, actually. I mean, we don't really have that number. I'm not sure I could share it, but it's normally when market gets softer, that is the first thing you see, because then distributors get worried. I think, at this point, I think that is the largest impact, and that will be flushed out within a quarter or two, like, but I really can't put numbers on it.
Thank you.
We have a follow-up question on the telephone coming from the line of Viktor Trollsten, Danske Bank. Please go ahead.
Yes, thank you, operator. Just to follow up on my side, if you could help us a bit with, you know, the seasonal pattern into Q3. I guess we all know that Q3 is by far, you know, the smallest quarter, but just when I look, you know, on the historical figures that we have... it looks like, you know, orders historically tend to come down, you know, 6%-8% quarter-over-quarter. As sales, you know, let's say 14%-15%. Could you just, you know, help us a bit on those figures? I guess what I'm asking is, you know, whether book-to-bill could, you know, turn, you know, about 1 again in Q3?
Good and difficult question, Viktor. where orders are lower in Q3 is mainly related to Europe, because Europe is also sort of slower in the sort of European summer period. On the other hand, and I think one learning is that you should not. I mean, learning, I think for everyone is not look at order intake in an individual quarter too much, you look at rolling. If you remember, and of course, you remember, quarter three last year was not very high on order intake. I think the biggest surprise we had quarter three last year was the lack of orders in oil and gas.
I think quarter three last year was weak, and that at least gives some indication that maybe book-to-bill could be positive. I think we need to go through quarter three until we conclude that. I understand where you're coming from, and I think your thinking is not wrong.
Yeah. Okay. No, yeah, exactly. No, it's helpful. Thank you very much.
We have another follow-up question on the telephone from Mr. Patrick Mann, Bank of America. Please go ahead, sir.
Thanks. I just wanted to know how you're thinking about M&A for the rest of the year. I mean, obviously, with the macro uncertainty, there may be more opportunities that come up, and where? Are you seeing opportunities in certain sectors, and if so, where? Thanks.
You know, we have a pipeline. Maybe we are still beginning because we don't look at opportunities based on business cycles. Maybe we should. It's the sort of the areas where we're looking for structural growth and part of our strategy, like, for instance, medical. I think our review on where we want to make acquisition has not changed, but I cannot sort of give more info from the pipeline right now.
Okay. Thank you.
There are no more questions on the telephone at the moment.
Thank you. With that, I think the time's running out. Thank you for all your questions, and also thank you for joining the call. We would like to wish you all a great summer. Goodbye.
Thank you. Bye bye.
Thank you. Bye bye.