Earnings Call: Q2 2017

Jul 17, 2017

Greetings, everyone, and I'd like to welcome you to the presentation of Sandvik's 2nd quarter results in 2017. As per normal, we will run through the presentation managed by our CEO, Bjorn Rosengren and our CFO, Thomas Eliason, after which we will open up for Q and A in orderly fashion. With that said, I will leave the presentation over to Bjorn and Thomas. Thank you, Anssi. 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 three of our geographical markets. So stronger development there. Earnings, we made 15.8 percent EBIT margin, and I would say it's a strong 15.8%. I'm a little bit in front now. 15.8%. And this is a strong number because if you actually eliminate the currency effects as well as the metal price effects, it is 16.0%. So 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. And 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 with 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. And we will start the last part, the sales of Hyperion starting from 1st September, so that process going. So we're coming closer to the target where we are of focusing on the core business. And 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. So 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%, so 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, plus 4% and underlying there, we have China, which is 9%, so 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. And 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. So looking into the Odentego, I mentioned that we had 17%, which is pretty much in line with what we saw previous quarter. But also the revenues are now starting to move upwards, and we had 9% positive during the quarter, but 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, I think we're sticking out. Let's take that on the next one. The Machining Solution, 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 business, which we are really happy with. Machining Solutions have also managed to keep their inventories or their working capital under control and are at the level which is below 23%. These together have actually generated a very, 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. So those are at 17% and the EBIT margin 16%. And if we actually lift out the Varell business out of this, we would actually end up at 17.1%. So I think we're 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. Then 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 1,000,000,000. So if you take out that, we have a small slightly underlying growth there. But 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 percent. And as you know, we have decentralized Sandvik. And in material technology, we have 4 product areas. 3 of them are doing very good and one have a little bit more challenging, and that's the tube business. And to be a little bit more specific, it's actually the so called the core and standard, which are still suffering from the effects of the falling oil price 2 years ago. And here, we have a challenging situation, and that actually comes from that there is overcapacity in the market, which was built up during the good old days. And many of our competitors are focusing on these more simple products. Could be hydraulic tubing. It can be a heater changes 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's why it has effects. And I think the product area, the management team there has to look into that we have to put our 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. Thomas, maybe you talk a little bit about the financials. Yes. Thank you, Bjorn. Let's get into the numbers. And 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 plus 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. And we'll look at the bridge in a second. Working capital, 23 point 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%. So let's jump to the bridge. And here we see the organic growth, the currency effects and the metal price effects. And if we spend some time here on the organic column, more product 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've had for quite some time. Behind that number of 47%, we have SMS 73% SMRT 50% and then SMT negative. So that meant an accretion of 2.7 percentage units. So if you take the 13.3%, add the 2.7%, you end up at 16% organically. It's a very strong quarter. Currency added 20 points, metal price effects took off 40 points, so 15.8 percent in margin overall. On the next slide, we have working capital. And as I mentioned, working capital in relative terms continue to improve. It's down on 23% now. On the right hand side, you see the business areas, but you should really look at the blue line and the red line. That's SMS and SMRT, which is 80% of the business. Both of them are down on 23% now. It's 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, SEK1.4 billion. Working capital is, of course, goes up a bit because of the top line growth, but the relative number is going down as mentioned. CapEx basically unchanged. So all in all, the free cash flow is up 26% or NOK 500,000,000 in excess of NOK 500,000,000 Net debt continues to go down. In the Q1 sorry, Q2, we of course have the dividend. So they have a little bit of a pickup there. But the gearing after the second quarter was 0.71. It was 0.73 when we started the year. So it is down compared to the beginning of the year. So we have the target of 0.8% still in sight, sort of. Now if we look at the outcome and the guidance that we have given, so let's start with the currency effects here. We guided SEK400 1,000,000 a quarter ago in transactional and translational currency effects and we ended up on plus €409,000,000 So we're basically spot on when it comes to the guidance. What then happens, of course, is that 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. So it took down the positive currency effect to SEK264, but the underlying guidance is spot on. And this is year over year numbers. Then the metal price effects were a bit lower than we had guided and this is an in quarter effect. For the Q3 2017, we see that with the current exchange rates, we will have like 0 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 minus 100. The full year guidance, we stick to the CapEx guidance of SEK3.9 billion. We did SEK1.5 billion for the 1st 6 months. The finance net was a little bit low in the second quarter because we had some positive reevaluation effects, which took down the 2nd quarter finance net. But the underlying finance net is still the same, so around SEK350 1,000,000 per quarter. So we stick to the guidance of SEK1.4 billion to SEK1.5 billion. Of course, if this positive revaluation stays, it will be lower than 1.4, but you never know. I mean, it can all reverse in the next quarter and who knows what's happened, what will happen. So 1.4 to 1.5, we stick to that. And the tax rate, 26% to 28%, 27.5% for the 1st 6 months. So 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. It's sort of the turnover is normally between SEK3 1,000,000,000 and SEK6 1,000,000,000. It was SEK2.9 billion last year. And 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. So what we have done is that for the project business, we have signed an agreement with Efelsmit, Danish Efelsmit to sell that. Efelsmit 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 Efel Smit when it comes to the mining projects, but we will keep the other non mining related projects within the books of Sandvik and some mining projects as well, which are sort of close to finalization. And we will deliver them through the Sandvik books, but we will buy resources and man hours from Eiffel Smith to do that delivery. On the conveyor component side, we signed, as you saw this morning, an agreement with the Australian company, NPN Conveyors, to sell that business and that goes over to them completely. And we think that these two book these two companies will be a perfect home for our businesses for the future. And for us, as Bjorn mentioned here, it's a way to focus on our core business. The provision we made in the Q3 2016 of SEK847 1,000,000 remains unchanged. We believe, as we see today, that we will be able to fit both these transactions within that extra provisions as per today on that. And with that, I would like to hand over to you again, Jan. Thank you, Thomas. Just to summarize, I think the quarter I think by the end for Sandvik is moving in the direction that we are taking the company. We have a good quarter behind us. I think 2 business areas are delivering excellent result. And one business area need to do a little bit of homework with some of its business to strengthen up. But 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 and maybe we should move over to the question and answers. Thank you very much. Yes. Let's do so. And I think we'll go we'll head straight for the conference call. And operator, can you put through the first question, please? The first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open. Yes. Hi, Bjorn 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 guess 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. So 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 the most of the mines has been underinvested. And we are in so called the sweet spot from mining, meaning that our equipment is ware equipment. That means you need to replace them all the time or you actually lose productivity in the mines. So I mean 4 years of less investment have, of course, built up 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 a good level. We've seen the mineral prices be quite flat for quite a 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 5.9%. And we know that when it reaches around 6%, we do believe that the investments will also come within this area. And that's one of the areas where we haven't seen so much movement yet. But 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. And we are in a and of course in a great spot there that if you place an order today, you will not get the products during this year. So normally when we see orders going down, we have quite some good time to act and make sure that we adopt the companies. During this upturn, we've been very, 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. And this business has been growing more than the market by itself, which shows that we are expanding our aftermarket business. And that is, of course, a high profit part of the business and gives the stability in the downturn. So 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 running the business in a good way. It's just the reason why I ask is, I mean, the previous cycle we had a big portion being driven by growth CapEx. And I understand that trade cycles are very short just looking at it, if we are almost at the previous peak, just looking at it, if we are almost at the previous peak, obviously, what you're saying is that it could be replacement of 2 cycles that are in for basically more growth ahead. But it's but we have to say that what's really coming at the moment, and this business is not different from any other, there's a lot of focus on automatization today in the business. And normally, the mining companies, when they are making money, and they normally do when the metal prices comes to levels where we are today, A lot of investments are being focused on the optimization, meaning that you have more mines where you have more trucks and drill rigs without people driving. And this development has accelerated during the last time, and we think this is a trend that will continue. So there are these areas that the thing with the mining companies is, of course, when they don't start making money because our metal price is going down, they have a tendency to cut many of these investment projects. But at the moment, I think there's pretty healthy levels on the money. 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 a fantastic future, that's normally when things go sour. So 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, Anssi, is on Machining Solutions. The margin came in a bit below my forecast. Maybe difficult to answer, but what do you think the 3% working day impacted the margin in the quarter? And then 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. So that gives you a little bit of an indication. I think you want to answer on the 23.3%. It is a leverage of 20% or 73 percent, which from our perspective is a very good level. And you should know that they have actually taken down or kept the inventory on good levels. So there is actually no positive impact from increasing inventory in these numbers. So from our perspective, we think it's a fantastic strong number. Thank you, Claus. And the next question please. The next question comes from Giamo Pigneau from UBS. Please go ahead. Your line is now open. Guillermo Peigneau from UBS. I was wondering whether you could actually give us some granularity on Varell's growth during the quarter, both from an organic standpoint and also profitability wise? From which one? Varel. The Varel business. Sure. Let me talk a little bit about Varel business. As I mentioned, Varel is part of the Mining and Rock Technology side. We have during this last half year seen 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 trichome 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 1 year when we really bottomed out at that part. So we are seeing both growth as well as improvement in profitability. Anything you'd like to add? No, it's I mean, the growth is double digit, quite has been quite healthy for the last 6 months for Varell. And even if you include the PPA, it's kind of breakeven now. So it's developing in a very healthy way. Okay. And then may I follow-up regarding the Q3. In the past, obviously spoke 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're basically not you will not face this kind of under absorption or over absorption patterns in that that you've served in the past? I mean, 3rd quarter is I mean, you know Sandvik, the 3rd quarter is almost weaker than the other three quarters. So that would 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. So I mean from quarter part, next quarter will be somewhat softer than we have seen during this quarter. Yes. I mean we have closed like 20 factories over the last 3 years. Of course, we concentrate the manufacturing to fewer sites, but it will still be less production in the Q3. And then last one, I promise. Can you quantify savings into the second half twenty eighteen? What's left? Thank you. Yes. Well, I mean, on the savings, you mean the official communicated program, I guess, you're alluding to, yes. Well, I mean, we will reach above SEK1.8 billion or sorry, we have reached SEK1.8 billion by mid-twenty 17 and we will reach the installed savings SEK2.1 billion at the end of the year. So that means that the year on year effects for 2017 will something be in the P and L will be something like SEK400 1,000,000. And then you will have a year over year effect spilling over into 2018 of something like, let's say, SEK80 1,000,000 SEK 75,000,000 to SEK 80,000,000 in 2018. And then we're done with the program. And that is, 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 is trying to do, and this is the way that they are working forward. So just because that these programs are coming to an end doesn't mean that we will continue to drive efficiency in our operations. That will continue. No, of course, I mean, of course, 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. And we'll have another the next question put through, please, operator. The next question comes from Andrew Wilson from JPMorgan. A couple of 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 kind of improved? I think we were hoping that it was going to, obviously, as the volumes came back. Yes. 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. So 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. So there are some variation in part. But overall, it's moving the right direction. And second question, just on Materials Technology. Obviously kind of flagged the level of possibilities necessarily where you want it to be and taking actions. Can you give us an idea of kind of when we might see those actions coming through? I mean, appreciate the Q3 is difficult with the seasonality, but is this a kind of is this a 6 month thing? Or is this kind of over the next 12 months? Yes. I mean we talked, I think, during the Capital Market Day that we have our ambitions regarding S and T, 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 €5,000,000 and the underlying is €6,500,000,000 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. But sure, we do expect that a business which represent 25% of S and T should be making a reasonable profit. Thank you, Andy. And we'll have the next question put through them, please, operator. The next question comes from the line of Markus Almirud from Kepler Markus from Kepler Cheuvreux here. Starting with SMS and the market, if you can talk a little bit about the development throughout the quarter in underlying demand, especially for Europe but also for North America? And 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. So that's good. Otherwise, we continue to see a strong China and a strong Asia, but also North America is on reasonable good level. So overall, on good. They are, of course, very strong if you compare year over year and but sequentially, I would say flattening out in the 2 North America and Asia, while Europe is improving. And it's improving throughout the quarter as well. So it's accelerating, is it? I mean, 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. So when we saw the numbers during the Q1, everybody was a little bit surprised, a little bit shocked more or less. But the rest of the quarter has been tremendous strong. So I can say more than that. Okay. Perfect. And then moving on to Mining and the aftermarket business. So 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 Varell, also grow by double digits? And you say that you gained share. And do you gain share from competitors? Or do you still do you keep earning businesses from your customers and take over that? So if you can comment a little bit on that, please. I mean, you know my passion about the aftermarket. It's extremely important for us. And I think they've done a great job within SMRT in focusing. And they have actually been working quite some time on that. And we start seeing the numbers, as I mentioned, with a 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 limitation 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. So this is an area that you can continue to develop and we should. So I'm very pleased to see this good growth numbers, which is, as I mentioned before, higher than the mining growth, the underlying. So that's a good sign. I mean, 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. And 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. Yes. Hi, everyone. Thomas, Bjorn. Can I start with SMRT? Your order growth of 23% and your margins up 800 bps excluding Varel, 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? And 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, but I can give you a little bit of a flavor there. I think when it comes to equipment side, I mean, we are probably in some of the most underground equipment, if you're looking to where we are, I mean, orders are over 100% and the factories are loaded in that part. On the consumable side, it's more or less following the market development, and that is a couple percent. That is the mining market doing. And the spare parts we talked about, it's on a low double digit level. So I probably said too much. You look very still relaxed. I'm so relaxed, Jan. But I think this is gives a little bit where we are. But the equipment side is definitely what has exploded in the market, really good growth numbers, and that's positive. And in terms of the margin increase, the 800 basis points excluding Varell, is that really all coming from the equipment growth? Or is there also I don't really want to go that deep into the part. But I mean, you can imagine, of course, in factories when you have under absorptions and you get good volumes going through, I mean, we are getting the volumes up finally in the factories. But unless until this quarter, we were quite limited in the growth numbers. Now we start seeing this falling through, which of course helps. But still, without doubt, the aftermarket is the high margin part of the business. Yes. I mean, if you go back to Q2 2016, that was not a happy quarter from an SMRT point of view. I mean volumes were still going down and you came from load levels of 30% to 50% or something like that in the factories. Now it's a completely different story. And if you probably remember there also that, that was the quarter just before we merged mining and construction part. So 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. So there was a lot of cleaning during last year, which we, of course, this year didn't have to go through. So 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. I mean, we are coming up to numbers now for the mining, excluding Warel, which is 17.1%, which I think is it's a rather good number. And on currency, if I could. At the current rates, not a lot next quarter, but 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 we've gone through a number of downturns in my years running mining business. And 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, 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 the 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 product unit that can survive both upturns and downturns because we all know that under absorptions kill any company. Okay. And 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. No, at this moment, we have no plans to do that as has been quite clear. But we are challenging every business that we have. And I mentioned also during previous speeches that as long as SMT contributes to the positive development of the Sandvik Group, it will be remain part of the group. So that talks for itself, I think. Thanks, And we'll have the next question please on the conference call. The next question comes from Peter Froelen from Handelsbanken Capital Markets. Please go ahead. Your line is now open. Thank you. Good afternoon. Well, I would like to continue to talk about the sort of leverage or rather the capacity. We have seen impressive leverage numbers of a standard business like mining where you see much higher leverage in the SMS business than you might wanted to comment upon at least a couple of quarters ago. So I think you mentioned a bit on mine that you're not willing to build capacity. But on SMS, when will the leverage come back to more normal levels? And are you sort of 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. And I think, again, looking at the Q2, Q2 was a quarter where margins were still flattish or actually going down. The SMS margin did not start to pick up until start of the third quarter really and same thing really for SMRT. So the comparison is quite easy. And then as Bjorn mentioned, we have a what do you call it, I don't think we have a lack of crap in the earnings for SMRT this quarter in Q2. So that of course helps. And in a year over year bridge, that boosts the numbers. But apart from that, I mean, our previous, let's say, not guidance, but our previous statement on leverage going forward is still valid. We talk about 30% to 40% for the SMS business. So you are actually sort of fixed costs are catching up or I mean the leverage will not go down if you don't increase the cost basically, right, because 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, I mean, 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 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 lease and that is probably not a normal one. So I stick to what Thomas says. It's between 30% 40% that we should be going forward. Yes. On group, yes. Or on SMS? Yes. That's on SMS, yes. Okay. And just a quick one. Could you just confirm whether core and standard are on red numbers or not? And then 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 auto market. It continues to the product portfolio and SMS, but I would be even more interested to hear about your M and A plans. Star, 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, but we also have something called business units. SMT has in the new structure that we presented for a couple of months ago, 4 product areas where tubing is one part of them. But 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, and we have special tubing, which are more sophisticated tubes and then we have the core and standard. So 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. And 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 overcapacity in the market. If the I think we were more or less on negative numbers, yes, on that business during the quarter. And of course, that's not acceptable. That's pretty clear. So that is really sticking out there. Then to the maybe more interesting part and more exciting part, and that is the growth. We have been streamlining the company now into our core businesses, and 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. So we still, in our strategy, have the philosophy, 1st stability, then profitability and then growth. So when we're looking at our PAs, which of the PAs are both stable and profitable, they should be focusing on growth. And 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, and that's where we would like to see the growth. And you have also seen better 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 a majority, which we have identified as 3 strategic growth areas. But 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. So we are really open for this. And I can assure you that our Board is also focused that we should start moving into growth phase and both organically as well as for acquisitions. That sounds promising. Thank you. Let me just double check. Do we have any questions here from the room in Stockholm? No? Then we'll continue with the conference 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. Bjorn, 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. We're talking about end markets. If we start, I mean, one of the areas where we talked a lot about is the automotive industry, and that's where we're focused. And 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. And 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 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. And China, it's pretty flat at the moment. So that's part. Other areas where we've seen good development is the general engineering side. And 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. Sure. That's helpful. So just to clarify, your comment on automotive was the market's down sequentially, but you were flat? No. Yes. 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. And we'll have the next question please, operator. The next question comes from Graham Phillips from Jefferies. 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. And specifically things like round tools, what proportion of the business is round tools? How does the pricing and margin compare in that area? And is this something perhaps you need to grow in with M and A? And the second question was around Mining Systems. Of the €847,000,000 how much is Why don't you take, Thomas, on the mining systems? Yes. Let's start from the back then. So yes, of the €847,000,000 is around €700,000,000 is cash really and a large portion of that will go out during the 4th quarter, but some will spill over into 2018 as well. When it comes to round tools, it's about 20% of that. And that's but 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. So yes, we have a strong focus on the Round 2 business, and we would like to extend and grow further within Round 2. How does and how does the impact of the growth in that affect the incremental margins? So this very strong number you've had for the quarter and the fact you said it's more 30 to 40 on a long term basis. Are they lower margin compared to the rest of the business? Yes. I think underlying, yes, round tools are lower margin than insert business. But at the same time, I think we had good growth development within the Round Twos and also managed to get margins on good levels for that business. So I don't think there is and maybe I should not dig it too deep into these differences, but 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. And we'll have one more question, I think, from the conference call, please. The next question comes from the line of Max Yates from Credit Suisse. Just one question for me. Just on the mining business, obviously, your orders are running ahead of where your revenues are. And 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? Yes. I think we do expect that margin should continue to improve. Of course, maybe not maybe 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 loading business. And you are seeing in the mechanical cutting, which is actually even lower than that. So 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 there is this business should be a high margin business even in the downturn due to the aftermarket part of the business. So I don't think you have to worry so much about big dilutions. Okay. And 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? And 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? Yes. I think that's something I don't really want to comment if we are looking that we will what I said before, challenge all our businesses and Varell is one part of it. That has not been on the top of the agenda because we see that it's a quite a long recovery on this company before it could be come up to the shape where we would discuss if we are going to sell it or not. But as I mentioned before, they have a very nice mining part. And if you're looking at the so called trichome bits and looking at the Sandvik trichome bits and the Varelkamp bits, we have actually over 40% market share with these bits. And that's this is a consumable market. So we like consumable markets for it. So there are advantages and there are disadvantages. The oil and gas business is maybe not so much synergies as the mining business, and we have to see how we take that. But they continue to do a good job in improving. And as the oil and gas market comes back as well as the mining mark back, we should also be back in margin for this business. And 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. And 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 Tim Schulz Melanda from JPMorgan. Please go ahead. Your line is now open. Hi, there. It's Tim Schulz Melanda from the spec sales. Thanks for taking my call. Just very quickly, Bjorn, when you first arrived, I think you mapped out your fleet of equipment in your mining business, and you noted how underpenetrated 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? I mean, the mapping off, I think the mining guys have put in a lot of efforts is now during a 2 year period with a strong focus. And 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. And 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. So yes, this gives opportunities for selling more equipment, but it gives also more opportunities for selling spare parts. So this is an ongoing job that the mining guys have started for quite some years ago, and we start seeing fruit from this. And 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. And that completes this presentation. I know you're all busy and have another call to run into. So with that, I'll bid you a good summer, and I'll see you in October. Thank you very much. Thank you.