Greetings, everyone. I'd like to welcome you to the presentation of Sandvik's second quarter result in 2017. As per normal, we will run through the presentation, managed by our CEO, Björn Rosengren, and our CFO, Tomas Eliasson. After which we will open up for a Q&A in orderly fashion. With that said, I will leave the presentation over to Björn and Tomas.
Thank you, Ann-Sofie , and once again, welcome to the Sandvik second quarter report. I'm both happy and proud to present this quarter report, which was strong in many ways. Starting up with the orders, we were up 17%, and actually good contribution from all our three business areas, and also this time from all our three geographical markets. Stronger development there. Earnings, we made 15.8% EBIT margin, and I would say it's a strong 15.8%. I'm a little bit in front now. 15.8%, and it is a strong number because if you actually eliminate the currency effects as well as the metal price effects, it is 16.0. It's good numbers. We've seen good performance there, both from SMRT as well as from SMS, while somewhat weaker from SMT.
We have taken important steps in the direction of moving the company towards focusing on the core business. I'm sure you this morning also read that the second part of Mining Systems was today in a press release that we have found a buyer for that business. That actually concludes that we now have signed an agreement for the whole Mining Systems, and finally taking that into the next step. We have also, during this quarter, presented the sales of Process Systems to the investment company FAM, and we have also announced that we are selling the stainless steel wire business from SMT. We will start the last part, the sales of Hyperion, starting from 1st of September. That process going. We're coming closer to the target where we are of focusing on the core business.
This effect has helped us to strengthen the balance sheet compared together with the strong cash flow we have and gives us more room to start focusing on growth going forward. Let's take a first look at the market, what has happened. We see, as I mentioned, strong orders from all our regions. I think maybe from our perspective, the most positive during this quarter is that we start seeing Europe grow. We have 5% up. If we're looking at SMS, which is a good indicator of the market, the underlying there is actually 8%. Very positive due to the working days that were 3% less in Europe than the rest. North America, we show a very strong number as 40%, but if we exclude some of the large orders we have, it's around 16%.
Asia, +4%, underlying there we have China, which is 9%, also good. If we look at the different segments, we can see that more or less all of them have developed very positively compared to last year. If we compare to the previous quarter, I would say it continues to flatten out on a very high level, though. We see some improvements in some of them, but more or less on the same level. Looking into the order take, I mentioned that we had 17%, which is pretty much in line with what we saw previous quarter. Also the revenues are now starting to move upwards, and we had 9% positive during the quarter. Still a very positive book-to-bill ratio, which is building order book for the future.
EBIT margin, I said 38% up, and underlying there, it's actually 30% up if you take out the FX charges. If you look at the different businesses we have, let's take that on the next one. Machining Solutions. Strong quarter for the business area. We mentioned up on the orders as well as on the revenues, and a strong EBIT margin of 23.3%. Actually, there is an underlying leverage of 73% for the business, which we are really happy with. Machining Solutions have also managed to keep their inventory, so their working capital under control, and are at a level which is below 23%. These together have actually generated a very strong cash flow for the business area. Another business area has done an excellent job during this quarter, is Mining and Rock Technology. The growth continue on a strong level.
It's 23% up compared to last year. Here we see that the revenues are now starting coming. There is a certain delay between orders and revenues. Those are up 17%, and the EBIT margin, 16%. If we actually lift out the Varel business out of this, we would actually end up at 17.1%. I think we are now really coming to good levels for the business. Also, Mining and Rock Technology managed to get the working capital down to 23%, which the one who have been following this business during a long time, that this is exceptional, well done. We come to Material Technology. We saw strong orders, very positively, 40% up, but within that, we have a number of large orders consisting of approximately SEK 1 billion. If you take out that, we have a small slightly underlying growth there.
I would just like to mention that project business is actually part of the Material Technology, so we see that as an important part of the normal orders. Revenues were also on a good level for the quarter, up 7%. Where we have a little bit more challenges is on the profitability side. We reached an underlying margin of 6.4%, and reporting 5.0%. As you know, we have decentralized Sandvik, and in Material Technology, we have four product areas. Three of them are doing very good and one have a little bit more challenging, and that's the tube business. To be a little bit more specific, it's actually the so-called core and standard, which are still suffering from the effects of the falling oil price two years ago.
Here we have a challenging situation. That actually comes from that there is overcapacity in the market, which was built up during the good old days. Many of our competitors are focusing on these more simple products. Could be hydraulic tubing, it can be heat exchanger tubing, and here the price pressure is pretty tough. This is a pretty big part of SMT. It represents approximately 25% of the business area, and that is why it has effects. I think the product area, the management team there has to look into that we have to put the business in good shape so we can deliver good numbers also in the future. On the net working capital, it ended up just over 28%, so a little bit tough on the cash flow for SMT. Tomas, maybe you talk a little bit about the financials.
Yeah. Thank you, Björn. Let's get into the numbers. Let's start with the financial overview. As you heard, 17% orders, 9% revenues. If you look at the upper right-hand corner, you can see that +6 in currency effects took the total reported numbers to 23% for order intake and 16% for revenues. Earnings up 38% or 30% if you exclude FX and metal prices, and margin 15.8%. Quite an accretion compared to the same quarter a year ago. We will look at the bridge in a second. Working capital 23.3%, continues to improve. Cash flow up 26%, even though, of course, with this top line, we eat up some working capital, but the relative number is still improving. Return on capital employed, adjusted, 19.3% in the quarter, and a healthy increase of earnings per share with 30%. Let's jump to the bridge.
Here we see the organic growth, the currency effects, and the metal price effects. If we spend some time here on the organic column, more sorry, price, volume, and productivity here, we can see that the leverage this quarter was 47%. This is one of the strongest operational leverages we have had for quite some time. Behind that number of 47%, we have SMS 73%, SMRT 50%, and SMT negative. That meant an accretion of 2.7 percentage units. If you take the 13.3, add the 2.7, you end up at 16% organically. It is a very strong quarter. Currency added 20 points, and metal price effects took off 40 points, so 15.8 in margin overall. On the next slide, we have working capital. As I mentioned, working capital in relative terms continues to improve. It is down on 23% now.
On the right-hand side, you see the business areas. You should really look at the blue line and the red line. That is SMS and SMRT, which is 80% of the business. Both of them are down on 23% now. It is a very healthy development. The cash flow, look at the table on the right-hand side, you can see that we continue to have very good contributions from improved earnings, SEK 1.4 billion. Working capital, it of course goes up a bit because of the top-line growth, but the relative number is going down, as mentioned. CapEx basically unchanged. All in all, the free cash flow is up 26% or in excess of SEK 500 million. Net debt continues to go down. In the second quarter, we of course have the dividends, so they have a little bit of a pickup there.
The gearing after the second quarter was 0.71. It was 0.73 when we started the year, it is down compared to the beginning of the year. We have the target of 0.8 still in sight, sort of. If we look at the outcome and the guidance that we have given, let's start with the currency effects here. We guided SEK 400 million a quarter ago in transactional and translational currency effects, and we ended up on +SEK 409, we're basically spot on when it comes to the guidance. You get revaluation of payables and receivables in the balance sheet, depending on what the exchange rate at the last day of the quarter. We can't guide on that. We never guide on that. It was quite negative this time, it took down the positive currency effect to SEK 264.
The underlying guidance is spot on, and this is year-over-year numbers. The metal price effects were a bit lower than we had guided, and this is an in-quarter effect. For the third quarter 2017, we see that with the current exchange rates, we will have zero in currency effects on translation and transaction. The other parts we can't guide about. The metal price effects, as we see it now, is -SEK 100. The full year guidance, we stick to the CapEx guidance of SEK 3.9 billion. We did SEK 1.5 billion for the first six months. The finance net was a little bit low in the second quarter because we had some positive revaluation effects, which took down the second quarter finance net. The underlying finance net is still the same, around SEK 350 million per quarter. We stick to the guidance of SEK 1.4 billion-SEK 1.5 billion.
If this positive revaluation stays, it will be lower than SEK 1.4 billion, you never know. It can all reverse in the next quarter, and who knows what will happen. SEK 1.4 billion-SEK 1.5 billion, we stick to that. The tax rate, 26%-28%, 27.5% for the first six months. We have an extra slide this time on Mining Systems just to shed some light on what has happened or what we're doing, really, with Mining Systems. Mining Systems is a business very much mining related, of course. It goes up and down with the business cycle. The turnover is normally between SEK 3 billion and SEK 6 billion. It was SEK 2.9 billion last year. On this slide here, you see the split of the business.
We have around 80% of the business within the project business and about 20% of it in the product business, the conveyor component business. What we have done is that for the project business, we have signed an agreement with FLSmidth, Danish FLSmidth, to sell that. FLSmidth is, of course, focused on the mining business as such, even though they're buying the whole operation. The order backlog that we have will be transferred over to FLSmidth when it comes to the mining projects, we will keep the other non-mining related projects within the books of Sandvik and some mining projects as well, which are close to finalization. We will deliver them through the Sandvik books, we will buy resources and man-hours from FLSmidth to do that delivery.
On the conveyor component side, we signed, as you saw this morning, an agreement with the Australian company, Nepean Conveyors, to sell that business. That goes over to them completely. We think that these two companies will be a perfect home for our businesses for the future. For us, as Björn mentioned here, it's a way to focus on our core business. The provision we made in the third quarter 2016 of SEK 847 million remains unchanged. We believe, as we see today, that we will be able to fit both these transactions within that provision, there is no extra provisions as per today on that. With that, I would like to hand over to you again, Björn.
Thank you, Tomas. Just to summarize, I think by the end, Sandvik is moving in the direction that we're taking the company. We have a good quarter behind us. I think two business areas are delivering excellent result, one business area need to do a little bit of homework with some of its business to strengthen up. That has been well compensated, actually, by the other two business areas for the quarter. By that, I think I'd like to end this presentation session, maybe we should move over to the question and answers. Thank you very much.
Yes, let's do so. I think we'll head straight for the conference call. Operator, can you put through the first question, please?
Ladies and gentlemen, if you would like to ask a question, please press 01 on your telephone keypad. We'll have a brief pause while questions are being registered. The first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Björn and Tomas. It's Klas from Citi. A couple of questions, please. Firstly, on mining equipment, if I adjust for pricing and currency, given that the Swedish krona has helped you since the last peak, I get mining equipment volumes now run rating at 90% of the previous peak. We understand that you have taken market share in the upturn, but it really feels like we should start to fade here in terms of growth momentum. In short, my first question is: do you think there is really more replacement demand, or have we hit the peak here in mining?
Speculating in the future is not something I like to do when it comes to mining. This can go up and down, and we have seen a lot of things during the years. What I mentioned is earlier that we have had a number of years where most of the mines has been invested. We are in so-called the sweet spot from mining, meaning that our equipment is wear equipment. That means you need to replace them all the time, or you actually lose productivity in the mines. Four years of less investments have, of course, built up a demand for equipment. How long this will last, I think it's difficult to say, but I think the money from the mining company is available as long as the mineral prices are at the good level.
We've seen the mineral prices be quite flat for quite the time, but on reasonable levels. We have seen the best, let's say, development is within gold, silver, and zinc for us. Copper is an area where we have strong belief in the future, not least because the world is digitalizing in this direction. The prices of copper has gone over 59, and we know that when it reaches around six, we do believe that the investments will also come within this area. That's one of the areas where we haven't seen so much movement yet. To speculate in the future, I think this is very difficult. We have to make sure that we are agile and that each of our so-called product area can follow their development when it comes to orders and deliveries.
We are, of course, in a great spot there that if you place an order today, you will not get the products during this year. Normally when we see orders going down, we have quite some good time to act and make sure that we adapt the companies. During this upturn, we've been very strict in keeping costs under control, and does not mean that we don't want to grow. We had to grow, of course, a lot of blue collar because of the production has gone up with, in many of the businesses, over 100%, so it's quite a lot. How that will look in the future, I don't know.
The good thing with the business we have is that such a big part of the business is aftermarket. This business has been growing more than the market by itself, which shows that we are expanding our aftermarket business. That is, of course, a high profit part of the business and gives the stability in the downturn. From my experience from this business, is that this is a business that you can keep on good margin levels, also in tougher times if you do run the business in a good way.
It's just the reason why I ask, it's the previous cycle we had a big portion being driven by growth CapEx. I understand that trade cycles are very short for you compared to others. There is more replacement. Just looking at it, if we're almost at the previous peak, obviously what you're saying is that it could be replacement of two cycles that are in for basically more growth ahead.
We have to say that what's really coming at the moment. This business is not different from any other. There's a lot of focus on automatization today in the business. Normally the mining companies, when they are making money, they normally do when the metal prices comes to levels where we are today. A lot of investments are being focused on the automatization, meaning that you have more mines where you have more trucks and drill rigs without people driving. This development has accelerated during the last time. We think this is a trend that will continue. There are these areas that. The thing with the mining companies is, of course, when they don't start making money because of metal prices going down, they have a tendency to cut many of these investment projects.
At the moment, I think there's pretty healthy levels on the mining. How long that will remain, I can't speculate in that. I've been in the market too long to say that. When you talk about fantastic future, that's normally when things go sour. It is what it is, and we have to adapt to it. I think that's our philosophy.
Okay. My second one, and final, I promise, Anzie, is on Machining Solutions. The margin came in a bit below my forecast. What do you think the 3% working day impact did to the margin in the quarter? How much of the growth was price? I think 1.7% last quarter. How much did you increase pricing this quarter in SMS?
I think we have for the group where we are approximately 1% up, and it's a little bit more on SMS than the rest of the group. That gives you a little bit of an indication. You want to answer on the
No
on the 23.3%? It is a leverage of 20 or 73%
73%
percent, which from our perspective is a very good level. You should know that they have actually taken down or kept the inventory on good levels. There is actually no positive impact from increasing inventory in these numbers. From our perspective, we think it's a fantastic, strong number.
Yeah.
Thank you.
Thank you.
Thank you, Klas. The next question, please.
The next question comes from Guillermo Peigneux-Lojo from UBS. Please go ahead. Your line is now open.
Hi, good afternoon. Guillermo Peigneux from UBS. I was wondering whether you could actually give us some granularity on Varel's growth during the quarter, both from an organic standpoint and also profitability-wise.
From which one?
Varel.
Oh, Varel.
The Varel business.
Let me talk a little bit the Varel business. As I mentioned, Varel is part of the Mining and Rock Technology side. We have, during this last half year, seen a positive development, and that is, of course, following the number of drill rigs operating in the market. They have also some of their business related to mining, and that's the reason why they are in the mining business. They make these so-called tricone bits for surface mining, where they're pretty successful. The profitability has continued to improve, and if you take away the PPA during the quarter, I think we were at 7.5%, which is, of course, a significant improvement from where we were one year when we really bottom out at that part. We are seeing both growth as well as improvement in profitability. Anything you'd like to add?
The growth is double-digit. It has been quite healthy for the last six months for Varel, and even if you include the PPA, it's kind of a break-even now. It's developing in a very healthy way.
Okay, thank you. May I follow up regarding the third quarter? In the past, you obviously stock ahead of the summer period, but those have been smoother recently. Could you comment a little bit of whether you were probably producing ahead of the summer season, or you will not face this kind of under-absorption, over-absorption patterns that you've observed in the past?
You know Sandvik. The third quarter is almost weaker than the other three quarters. That will be also during this quarter. How much it will be, that's too early to say. There are fewer factories today that are being closed, not least in Mining, because there is a lot of activities, but there is also maintenance jobs that needs to be done during this period, and people are taking some vacations here and there. From a quarter part, next quarter will be somewhat softer than we have seen during this quarter.
Yeah. We have closed 20 factories over the last three years. Of course, we concentrate the manufacturing to fewer sites, it will still be less production in the third quarter.
Last one, I promise. Can you quantify savings into the second half and 2018? What's left? Thank you.
Oh, no. Well, on the save, you mean the official communicated program, I guess you're alluding to.
Yes.
Well, we will reach above SEK 1.8 billion. Sorry, we have reached SEK 1.8 billion by mid-2017, we will reach the installed savings, SEK 2.1 billion, at the end of the year. That means that the year-on-year effects for 2017 in the P&L will be something like SEK 400 million. You will have a year-over-year effect spilling over into 2018 of something like, let's say, SEK 80 million, SEK 75 million-SEK 80 million in 2018. We're done with the program.
This, of course, is related to the supply chain optimization program. That is, of course, in all our businesses, continuous improvement in all our product areas that everybody's trying to do, and this is the way that they are working forward. Just because these programs are coming to an end doesn't mean that we will continue to drive efficiency in our operations. That will continue.
No. The big trick is, of course, to not put yourself in a situation where you have to make those kind of huge provisions. Instead, work with everyday improvements, small steps going forward.
That's our ambitions.
Thank you very much. Very helpful. I'll stay back online.
Thank you. We'll have the next question put through please, operator.
The next question comes from Andrew Wilson from J.P. Morgan. Please go ahead. Your line is now open.
Hi. Good afternoon, everyone. Two questions, please. Starting on the mining side. Obviously, the margins have improved, the volumes have improved. Can you just talk a little bit about what you're seeing in terms of the pricing dynamics and whether that's improved? I think we were hoping that it was going to, obviously, as the volumes came back.
Yeah. Pricing are improving during the part, especially we see it in orders more than we see in the revenues, because what we are invoicing today is, of course, taken earlier. That has an effect. There is also differences between equipment and consumables. On equipment, we're seeing larger increases than we are seeing on consumables so far. There are some variation in part, but overall, it's moving the right direction.
Same question just on Materials Technology. Obviously, you kind of flagged the level of profitability isn't necessarily where you want it to be and taking actions. Can you give us an idea of when we might see those actions coming through? I appreciate that Q3 is difficult with the seasonality, but is this a six-month thing or is this kind of over the next 12 months?
Yeah. We talked, I think during the Capital Markets Day, that our ambitions regarding SMT, and we expect that this business should be a 10% margin business in the future. We are, of course, not really there because the reporting is 5% and the underlying is 6.5%, so we are somewhat away from there. There will be activities taken. I will not go into any point because we are a decentralized company. That means that the tubing management team, especially the management team for core and standard, will be focusing on what kind of action that need to be taken. Sure, we do expect that a business which represent 25% of SMT should be making a reasonable profit.
That's great. Thanks, Björn.
Thank you, Andy, we'll have the next question put through then, please, operator.
The next question comes from the line of Markus Almerud from Kepler Cheuvreux. Please go ahead. Your line is now open.
Hi, Markus from Kepler Cheuvreux here. Starting with SMS and the market, if you can talk a little bit about the developments throughout the quarter, in underlying demand, especially for Europe, but also for North America. Also, what kind of underlying growth do you see in Europe for SMS?
First, which I mentioned before, is that it was very positive during this period, and I think that's the really biggest change that we've seen from previous quarter, is that we've seen a stronger Europe. That's good. Otherwise, we continue to see a strong China and a strong Asia, but also North America is on reasonable good level. Overall, on good. They are, of course, very strong if you compare year-over-year. Sequentially, I would say flattening out in the two, North America and Asia, while Europe is improving.
It's improving throughout the quarter as well, it's accelerating, is it?
It's difficult to talk within a quarter, but everybody knows that April was a dreadful month. That was the month at the last quarter, and that was very, very short in Europe this time. When we saw the numbers during the first quarter, everybody was a little bit surprised, a little bit shocked, more or less. The rest of the quarter has been tremendously strong, so I can't say more than that.
Okay, perfect. Moving on to mining and the aftermarket business. You comment that you grew the aftermarket business by double digits. You also grew Varel or drilling completions by double digits. Did the aftermarket business, excluding Varel, also grow by double digits? You say that you gained share, and do you gain share from competitors, or do you keep earning businesses from your customers and take over that? If you can comment a little bit on that, please.
You know my passion about aftermarket. It's extremely important for us. I think they've done a great job within SMRT in focusing, and they have actually been working quite some time on that. We start seeing the numbers, as I mentioned, with the double-digit growth. When we're talking market share in aftermarket, it's against ourselves for what the customers are doing. Because from my perspective, there are no limitations in the aftermarket. It's your own creativity that actually describes how big that market is. It can be in many parts. It's a different kind of service product that you can offer. It's not only spare parts and so on. This is an area that you can continue to develop, and we should. I'm very pleased to see these good growth numbers, which is, as I mentioned before, higher than the mining growth, the underlying.
That's a good sign. They continue to work hard on this, and I know Lars has a strong focus on this. He talks a lot about the aftermarket and the focus on that, so we do expect that this will continue.
Okay, perfect. Thank you very much.
Thank you. We'll have the next question, please, operator.
The next question comes from James Moore from Redburn. Please go ahead. Your line is now open.
Yeah. Hi, everyone. Tomas, Björn. Could I start with SMRT? Your order growth of 23%, and your margins up 800 basis points, excluding Varel, are pretty impressive. Could you perhaps give us a flavor for how consumables versus service is growing organically in the orders, whether they're both double digit or whether there's a range? On the margin increase, I know you don't want to break it all down, but can you give us a sense to how much is the equipment side only coming up, or whether consumables and service margins have also been progressing favorably?
I don't want to dig too deep into it, I can give you a little bit of a flavor there. I think when it comes to equipment side, we are probably in some of the most underground equipment, if you're looking to where we are. Orders are over 100%, the factories are loaded in that part. On the consumable side, it's more or less following the market development, that is a couple of %. That is the mining market doing. The spare parts we talked about, it's on a low double-digit level. I probably said too much. You look very still relaxed.
I'm so relaxed, Björn
I think this gives a little bit where we are. The equipment side is definitely what has exploded in the market. Really good growth numbers, that's positive.
In terms of the margin increase, the 800 basis points excluding Varel, is that really all coming from the equipment growth, or is there also-
No, I don't really want to go that deep into the part. You can imagine, of course, in factories, when you have underabsorptions and you get good volumes going through. We are getting the volumes up finally in the factories. Until this quarter, we were quite limited in the growth numbers. Now we start seeing this falling through, which of course helps. Still, without doubt, the aftermarket is the high margin part of the business.
Yeah. If you go back to Q2 2016, that was not a happy quarter from an SMRT point of view. Volumes were still going down. You came from load levels of 30% to 50% or something like that in the factories. Now it's a completely different story.
If you probably remember there also, that was the quarter just before we merged mining and construction part. I'm sure there was a lot of cleaning in those very low 9% EBIT level. That was actually probably lower than where we underlying were.
Yes, it was.
There was a lot of cleaning during last year, which we, of course this year didn't have to go through. It doesn't mean that just with these volumes that you should get this kind of leverage continuing up. Maybe that's a little bit too optimistic. We are coming up to numbers now for the mining, excluding Varel, which is 17.1%, which I think it's a rather good number.
On currency, if I could. At the current rates, not a lot next quarter, but I'm thinking the quarter after that and the year after that, you could end up with some quite big negatives given the strength of European currencies. Would you be able to put any early numbers on that, or is it too early?
I want to be very clear on this because I've gone through a number of downturns in my years running mining business. I think the important thing is you must have a mindset that this is temporary. This is nothing that is going to last. If you have that means also that your investments in relation to these huge increases are done in a different way. We are actually outsourcing much more today. We are not building any more factories. We are rather closing continuous factories, and we are using external suppliers also when it comes to final assembly of equipment. That means we are not really building capacity. We will probably continue to be tough on this. I'm looking at Lars back there, and if he's nodding on his head, yes, he agrees with me. That we are not going to build any new factories.
It's going to be focusing on making sure that we have a tight production unit that can survive both upturns and downturns. We all know that underabsorptions kills any company.
Okay, just finally, are you tempted to make SMT non-core, given the challenges that continue for 10, 20 years?
That was a different way of putting that question.
I've never had that question before.
No, at this moment, we have no plans to do that, as has been quite clear. We are challenging every business that we have. I mentioned also during previous speeches that as long as SMT contributes to the positive development of the Sandvik Group, it will remain part of the group. That talks for itself, I think.
Thanks, Björn.
Thanks. We'll have the next question, please, on the conference call.
The next question comes from Peter Frölund from Handelsbanken Capital Markets. Please go ahead. Your line is now open.
Thank you. Good afternoon. I would like to continue to talk about the leverage or rather the capacity. We have seen impressive leverage numbers of a tender business like mining. We see much higher leverage in the SMS business than you might wanted to comment upon at least a couple of quarters ago. I think you mentioned a bit on mining that you're not willing to build capacity. On SMS, when will the leverage come back to more normal levels and always lagging in fixed cost in that sense? How should we look upon the leverage in SMS, please?
Well, I can start with a quick comment, of course. I think, again, looking at the second quarter was a quarter where margins were still flattish or actually going down. The SMS margin did not start to pick up until the start of the third quarter, really. Same thing really for SMRT. The comparison is quite easy. Then, as Björn mentioned, we have what do you call it, Tomas? We have a lack of crap in the earnings for SMRT this quarter in Q2. That, of course, helps. In a year-over-year bridge, that boosts the numbers. Apart from that, our previous, let's say, not guidance, but our previous statement on leverage going forward is still valid. We talk about 30%-40% for the SMS business.
You are actually fixed cost are catching up? The leverage will not go down if you don't increase cost basically, right? You will have still a decent volume situation. You talk about Europe still improving and the others are leveling out on a high level.
We will continue to make sure that we have the right capacity for our businesses. We will continue to work with shutting down smaller and less profitable production facilities, moving this direction. That will be a continuous work going forward to make sure that we can keep the margins up on a good level. On the leverage side, in the end, I think we have a fantastic this, and that is probably not a normal one, so I'll stick to what Tomas says, it's between 30% and 40% that we should be going forward.
Yes.
On group, yeah. On SMS?
Yes.
That's on SMS, yes.
Okay. Just a quick one, could you just confirm whether core and standard are on red numbers or not? More interesting maybe, you mentioned initially that your indebtedness now gets you closer to start looking at the growth. Maybe you could open up a bit there. If you're not investing in capacity organically, I guess it will be to continue to take market shares in the aftermarket to continue to strengthen the product portfolio and SMS, I would be even more interesting to hear about your M&A plans.
Let's talk with the core and standard. I think you all are well aware of the structure that we have today. We have our so-called product areas, we also have something called business units. SMT has, in the new structure that we presented a couple months ago, four product areas where tubing is one part of them. Within tube, there are a number of business units also. We have the oil and gas part, which very much is related to the umbilical business, which is developing very favorably. We have the nuclear part, which has also good margin, we have special tubing, which are more sophisticated tubes, then we have the core and standard. When we're looking at SMT, there are so many good parts that are developing in a well part.
Unfortunately, we have one of the businesses which is not performing, that business is coming from the oil and gas, let's say the after part from the oil and gas prices come down, because there is over capacity in the market. I think we were more or less on negative numbers, yes, on that business during the quarter.
Yes.
Of course, that's not acceptable. That's pretty clear. That is really sticking out there. To the maybe more interesting part, the more exciting part, that is the growth. We have been streamlining the company now into our core businesses, we have now also strengthened our balance sheet and our net debt ratio is on a level which gives a lot of room for striking going forward. We still, in our strategy, have the philosophy, first stability, then profitability, then growth. When we're looking at our PAs, which of the PAs are both stable and profitable, they should be focusing on growth. It's not a secret that within our SMS business, that's where we have the best profitability and the best stability at the moment, that's where we would like to see the growth.
You have also seen, Peter, our strategy going forward, which we call the growth strategy. That means that we would love to extend our businesses both into the additive manufacturing part, in the software part, as well as metrology, which we have identified as three strategic growth areas. We are also interesting to strengthen some of the core business if we find some interesting companies that would actually add more products or market share in certain parts of the region. We are really open for this, I can assure you that our board is also focused that we should start moving into growth phase, both organically as well as through acquisitions.
That sounds promising. Thank you.
Let me just double-check. Do we have any questions here from the room in Stockholm? We'll continue with the conference call, please. Could you put through the next call, please, operator?
The next question comes from Alexander Virgo from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thanks very much, and good afternoon. Björn, I wonder, would you mind just giving us some color around the end market developments in SMS? Just if you can call out anything particular by region, that would be super helpful. Thank you.
Sure. Are we talking about end markets? If we start, one of the areas where we talked a lot about is the automotive industry, and that's where focus in. We have seen earlier than North America that it has flattened down and even gone down sequentially. I think that is pretty flat during this quarter sequentially. If you're looking at Europe, and that's the positive thing where I said we've seen some growth, while in Asia, we've seen a flattening off within that segment. On the aerospace, which is another very important sector, we've seen a growth in North America picking up while we've seen Europe a little bit flattening out. China, it's pretty flat at the moment. That's part. Other areas where we've seen good development is the general engineering side. The general engineering side, we've seen up in the most of the regions.
Maybe that gives some kind of indication where it's heading.
That's helpful. Just to clarify, your comment on automotive was the market's down sequentially, but you were flat?
No. I mean, if you look at overall, it's probably pretty flat, but Europe is up, and we've seen flattish in North America and in Asia.
Got you. Okay. Thank you very much.
Thank you. We'll have the next question please, Operator.
The next question comes from Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes. Good afternoon. Two questions, please. Just on cutting tools, Machining Solutions. Can you talk a little bit about some of your intentions there? You touched on them. Just specifically things like round tools. What proportion of the business is round tools? How does the pricing and margin compare in that area? Is this something perhaps you need to grow in with M&A? The second question was around Mining Systems. Of the SEK 847 million, how much is actually cash out, and when would the cash out be going to the buyers of that business?
Why don't you take, Tomas, on the Mining Systems?
Let's start from the back then. Of the SEK 847 million, is around SEK 700 million is cash, really. A large portion of that will go out during the fourth quarter, but some will spill over into 2018 as well.
When it comes to round tools, it's about 20% of that. The good thing with the round tool business, it's an area where we actually are growing continuously. It's one of the fastest growing part of our business at the moment. Yes, we have a strong focus on the round tool business, and we would like to extend and grow further within round tools.
How does the impact of the growth in that affect the incremental margin? This very strong number you've had for the quarter, and the fact you've said it's more 30%-40% on a long-term basis. Are they lower margin compared to the rest of the business?
Yeah. I think underlying, yes, round tools are lower margin than insert business. At the same time, I think we had a good growth development within the round tools, and also managed to get the margins on good levels for that business. I don't think. Maybe I should not dig it too deep into these differences. I don't think you should see a big dilution in the margins, even if the round tools will continue to grow.
Okay. Thanks very much.
Thank you very much. We'll have one more question, I think, from the conference call, please.
The next question comes the line of Max Yates from Credit Suisse. Please go ahead. Your line is now open.
Thank you. Just one question from me. Just on the mining business, obviously your orders are running ahead of where your revenues are. Is there any risk that sort of as the higher OE revenues feed through, that we start to see any negative mix from that division? Or are the incremental margins on OE enough to keep margins going up with the volumes?
Yeah. I think we do expect that margin should continue to improve. Of course, maybe not as much as we have seen. I don't think the fall through will be as strong. I mean, we're coming up to pretty tough numbers at where we are today. Of course, this varies so much between our different businesses. From the crushing business is less margin than you have in the underground drilling and the loading business, and you are seeing in the mechanical cutting, which is actually even lower than that. I think it's difficult to say how this is actually going to affect, but what I've said before, and I stand for that, is that this business should be a high margin business even in the downturn due to the aftermarket part of the business.
Okay.
I don't think you have to worry so much about big dilutions.
Okay. Maybe just a quick follow-up. Within mining and rock, how do you think about Varel fitting into that business, and the synergies between Varel and the rest of the business? Is there any point, obviously in the U.S. onshore recovery that you maybe think about alternatives given we have seen a very healthy H1 development there?
Yeah. I think that's something I don't really want to comment. What I said before challenge all our businesses, and Varel is one part of it. That has not been on the top of the agenda because we see that it's quite a long recovery on this company before it could come up to the shape where we would discuss if we are going to sell it or not. As I mentioned before, they have a very nice mining part, and if you're looking at the so-called tricone bits, and looking at the Sandvik tricone bits and the Varel bits, we have actually over 40% market share with these bits. This is a consumable market, so we like consumable markets for it. There are advantages and there are disadvantages.
The oil and gas business is maybe not so much synergies as the mining business. We have to see how we take that. They continue to do a good job in improving, and as the oil and gas market comes back, as well as the mining market back, we should also be back in margin for this business. When the profitability is at the right level, it gives us bigger flexibility in whatever direction we take.
Okay. Thank you very much.
Thank you. I do believe if we keep it short and sweet, we can squeeze in one more question from the conference call. If there is one, operator, please.
The last question comes from the line of Andreas Willi from J.P. Morgan. Please go ahead. Your line is now open.
Hi there, it's Andreas Willi from the JP Morgan . Thanks for taking my call. Just very quickly, Björn, when you first arrived, I think you mapped out your fleet of equipment in your mining business, and you noted how under-penetrated the aftermarket was for you. Just if you scale that opportunity, can you give us some sense as to how much of that opportunity you've already addressed and is reflected in your order intake, and how much of that is still to come in the coming quarters? Thank you.
The mining guys have put in a lot of efforts this now during a two-year period with a strong focus. I think they've done an excellent job in finding out where we have our different equipment and how much each of them are consuming, and which of the equipment are operating. It gives us a pretty good viewpoint, where are the blind spots and where are the spots where we are strong in. Lars talks a lot about this. We have a lot of blind spots still in the market where there is not Sandvik equipment, which gives opportunities. Yes, this gives opportunities for selling more equipment, but it gives also more opportunities for selling spare parts. This is an ongoing job that the mining guys have started for quite some years ago, and we start seeing fruit from this.
It really helps us also to understand our position in the market, which is important. Transparency is very important.
Great. Thank you.
Thanks a lot.
Thank you very much. That completes this presentation. I know you're all busy and have another call to run into. With that, I'll bid you a good summer, and I'll see you in October.
Thank you very much.
Thank you