Greetings to you all, welcome to the presentation of the results of Sandvik report for the third quarter 2016. I am Ann-Sofie Nordh , I am heading the investor relations department at Sandvik, I will guide you through the Q&A session later on. Before that, we are of course, going to run through the presentation, introduced by our CEO, Björn Rosengren , and our CFO, Tomas Eliasson. Please go right ahead.
Thank you, Anki, also from my side, welcome everybody to this Q3 report. You have to excuse my voice. I lost it during the weekend. If I am looking during the day here, I am sure Tomas will give me a hand also. Good. Thank you very much. The third quarter. I am pleased with the development of Sandvik here during the quarter. Despite lower sales, we managed to improve both the earnings as well as the margins. We also saw a stabilizing development of our order books, we had, during this quarter, the highest cash flow, I think, a record one for the Q3. The change in our organization and structure was put in place here, 1st of July this year, the development during this period has gone very smooth.
It has also been an exciting quarter in relation to new product launches, we will come back to that a little bit further on. The market stabilized during the period, both Europe and North America was flat, we saw some improvements in Asia. Two segments developed very well. That was the mining segment as well as the aviation segment. We still see challenges in the oil and gas industry, even though potentially it is pretty flat. On the order intake, I think we have seen a stabilization, actually looking at the last five quarters, we can actually see that the level has really stabilized. The revenues is still going down, this quarter we had 5% negative. On the book-to-bill ratio, we were just on one.
The positive side, I think, of the report is very much related to the EBIT development, which actually improved in a tough market environment with an improvement of 13%, we reached 13.2%, which is a good number for the Q3, which traditionally is a challenging quarter for the company. A lot of vacations during this period. This is mainly driven by our cost efficiency programs that we announced earlier, but also very stringent cost control during the year and the period. Starting out, if you look at our three business areas. Sandvik Machining Solutions, I think continues to show strength. We saw the market continues to be challenging with 4% down in price volume. If you are really looking at the underlying numbers here, there are some effects of this 4%. One is, we had a little bit shorter days than this, which affects about 1%.
There is also some tough comparables in Asia and Europe on the order side. The third effect, which is the 3%, is related to the Wolfram business which had been moved into the Sandvik Machining Solutions, where we see much more volatility in orders, and this quarter it was significantly lower. If you lift those things up and look at the business without them, it's about 1% down. Of course, all the activity continues, especially with the supply chain optimization program. We continue to work with the closing of the factories, at the same time, keeping a very stringent cost control over the business. I think 21% is a good number for Sandvik Machining Solutions. What's very exciting during this period also is that we have launched a number of new products during the IMTS.
It's a big exhibition in Chicago, and this was actually the first intelligent tools that we introduced to the market, and they are unique to this. I thought I'd show a picture with it from the products.
Sure.
Please.
Don't forget to visit the sandvikcoromant.com website.
This new line of products will help our customers to become more productive, and it's taking the first step into the digital tool market. These products are very well received in the market, and we believe that this will be the future in the tool and tooling market. Moving over to the Sandvik Mining and Rock Technology. I think on the market side here, we've seen the best improvements. We can see that the order intake is +5% compared to last year. This is mainly driven by the equipment sales. The aftermarket business is pretty flat. We had some good orders coming in during the period, both from Canada and also from Australia, which have helped the numbers in a good way. Also, in the mining business, we have introduced a number of new products, and this is more related to battery-driven drill rigs and loaders.
It's always exciting to introduce new products. During the mining expo in Las Vegas, which is a mining show every fourth year, this whole new range of battery-driven drill rigs and loaders was presented, also very well received in the market. This helps many of the mining companies to reduce their inflation costs by not using diesel engines underground. Let's move on. Sorry. We have also then come to the Material Technology, the last business area. In Material Technology, we had a very stable development.
We can see on the order side, we received a big order from the oil and gas industry, from BHP Billiton, for SEK 350 million, which came in at a good time, supporting the oil and gas industry, which has been under pressure for a certain time. Otherwise, they continue to work hard, keeping the cost under control, and we, during the quarter, had an EBIT level, an underlying EBIT of 5%, and then adding the negative surcharges, it went up to 6.7%. I give the word to you, Tomas, and give us a little bit more in-depth when it comes to the numbers.
Thank you, Ulf, and good afternoon. Let's jump straight into the financial overview. As you heard, the order intake was flat this quarter, and it was actually a flat year around it, +0.2%. This is the first time in a couple of years that we have an order intake which is not declining. Revenues were down -5%, of course, given the negative order decline in order intake in the previous quarters. The EBIT came in at 13.3% compared to 11.2%, an EBIT margin which we're very happy with. An increase in margin and in numbers, up 13% in numbers. Working capital improved year-over-year, and cash flow was record high. Just a quick note on the return on capital employed. The return on capital employed numbers that we report are rolling 12-month numbers.
We might change that going forward, this quarter, we had quite an improvement in return on capital employed, which is a good quarter by itself. Earnings in terms of return on invested capital. Let's take a look at the bridge. 5% down on the top line meant a decline of SEK 114 million on revenue. Sales programs, +SEK 190 million. The net effect of the two was +SEK 6 million. Currency, +SEK 62 million, and change in net price effects in the bridge effect was SEK 118 million. That's the journey from SEK 2.3 billion to SEK 2.6 billion, or from 11.2% to 13.6%. Let's take a look at the accretion and dilution in the bridge, starting with the organic growth, which means just the pure volume and the sales programs. -5% means SEK 960 million down on the top line, but we ended for about SEK 60 million.
We had really good performance in all business areas, especially in SMS. SMS was really outstanding for the time, even more in Q4. Currency was SEK 62 million, SEK -20 from the audit side, SEK +62 from the other side. We have the items SEK -60 million for this quarter, and that's guided for transaction and translation. The real transaction translation came in at close to that SEK 272 million. The rest of the bridge effect for the evaluation, and the evaluation was for multiple parts of that. The net method anyway is SEK 62 million. I think it's pretty big, as a bridge effect this quarter, very big, having a big negative effect a year ago, and this quarter we have positive effect. That's SEK 196 million. The important story is that it's 210 base up.
Even if you take back the currency effect here and the method practice effect that you would have to, we still have SEK 86 million organic improvements, so it's four. Okay. Net working capital. On the left-hand side, you can see we have the improvements where we have working technologies and in mining. On the right-hand side is the new business areas for the first time. SMRT, Mining and Rock Technology came down to below 30% for the first time in many years. SMS is doing fine, and the SMC, the orange one looks a bit odd, but it's perfectly fine because if you really sit here into the back of half of the boxes, you have a few reds. A year ago, we don't have those reds here. The inventory situation is completely out of control. The cash flow side of Q3 is what was good.
Q3 last few years was between SEK 15 and SEK 16. This year in 2016, Q4 was even better with SEK 4.3 million in free operating cash flow. Of course, if you have an improvement, you have released some working capital, and if you have a flat CapEx, you get cash flow. The net debt came down with 7% compared to a year ago. The financial net debt, which is the gray part of the corporate here, the bar, came down even more, 14%. What happened was that the discount rates for us and for everybody else came down, which impacted the pension liability. Pension obligations improved. Not improved, decreased, I should say. As you know, the pension accounting is like a future definition, which obligations is discounted to today's value.
This goes up and down with a couple of billions for every percentage unit, the discount rates goes up and down. This will go down eventually when the discount rates comes up. Important thing is that the financial net debt, it continues to come down. Net gearing ended at 0.95. We're back to pre-dividend levels from Q1, which partly reflects that we had record high net financial items. To finish off with some outcome and guidance and currency effect. That's SEK +142. We guide SEK -100. Sorry, I said SEK -60. The guidance was SEK -100. Method price effect came in at SEK +61. The other SEK +30, so pretty close. For the fourth quarter, we guide the currency, positive currency effect of SEK 200, transaction translation, and we guide SEK 60 for method price effect.
If you look at the full year numbers, CapEx, we keep the guidance with SEK 4.1 or less. If you look at the run rate, we are not on SEK 4.1 right now. We are lower than that. We might, or we will most likely end up on something below four, but we keep the guidance as such. Net financial items, though, we have taken down from SEK 1.7-SEK 1.9 to something between SEK 1.6 and SEK 1.7. The tax rate looks steady between 26% and 28%. 11.3% again.
Thank you, Tomas. Summarize a little bit. The market continuing the most segments that we are operating to be challenging. Even if we've seen an improvement in the mining sector, we still believe that this will continue, and we need to continue to focus on efficiency improvements and stringent cost control even in the coming quarters. The process in moving Sandvik over to a decentralized structure continues, and we are continuously moving resources and centrally out into the operations to build up accountability and the entrepreneurial spirit that we would like to see in Sandvik. I think we are moving very well according to our plans. The last thing I'd like to mention that we are very happy that once again, we have been included in the Dow Jones Sustainability Index, and that we will continue to drive our sustainability purpose in Sandvik also going forward.
With that, I think we end and maybe we move over to question and answers.
Yes.
Thank you.
Let's do that. Let's just have to see if we have any questions here in the room. Yes, please. We have a question here at the front.
Hi, this is Brian Schmidt from HSBC. Thank you, Jan, Tomas. Could you shed some more light on FCF in terms of segment? We are seeing that across the market declining, then also construction and rail on top of that.
Sure. Absolutely. I think it's important when we are seeing improvement in the mining market. The development of the metal prices have gone up during the last, let's say, two quarters slowly. This has mainly come through gold prices, silver prices, and also while we have seen much tougher conditions in copper, iron ore, and coal. That's the part. We have seen mainly in the improvements on the equipment side, especially on the underground, where we've seen the best in improvements. The construction side, it could be flat compared with the previous quarter, small development. On the rest of the business, if you compare year-over-year, it is down. If you look at sequentially, it's slightly flat. We've seen the oil stabilizing around SEK 50.
We've seen a little bit of greenery and go up if you look from one year back, it's actually up 30% then I think 15% back sequentially. We haven't really seen those yet in the numbers for that. Early days into the mining rock tools. Aftermarket, that includes tools, then as the service and the spare parts, that has been pretty flat year-over-year and sequentially.
If you look at the rail in the last year and all the photos, it's been heavily in red, as I can see at least. Now you see this trend in North America with the rig counts coming up quite a lot since the end of May. What do you think is needed in terms of help from the market for you guys to be passing flatter levels on that bigger segment in SMRT?
Yeah. We try to avoid talking too much about the performance, I mean, the level of each business. It's correct, having pretty flat because we have been losing money. That of course includes also the rail. That's probably otherwise it's a loss still somewhere. We've had indications that things are looking a little bit brighter, I think we'll have to wait to the next months and quarters to see the effect. It's correct. Yeah, oil is operating at the moment, and that should actually have a pretty good amount of impact also for our orders.
Again, just to confirm that from an EBITDA margin point of view, it's just below zero. What we're needing from a cash point of view. Thank you.
We have another question from the room here. Welcome, please, Sandvik.
Yes, Anders from SEB. Could you elaborate on the machine solutions development in the various regions? How you perceive the during the quarter and what you see now in October?
Right. If you look year-on-year, North America continues to be a challenging market. That's actually no big change from what we have communicated before. I would say Europe pretty flat, somewhat up in the Chinese region. We are actually down in North America with 6%, which is quite sustainable sequential. That's not really a big change in that. That continues to be tough. If you look at the different segments that we operate, the aviation is doing very well. On the automotive side, which has been flattening out, probably a little bit down for us during this period. We do not really think that it is softening. It's more cautiousness among the automotive industry on the order side there.
If you're looking at the 22 weeks, mostly on the 2, 3 weeks on the quarter, there are no big deviations from the average from previous quarters. I think that's moving on in the same pace as we've seen earlier. No big changes.
Can I just clarify there that you haven't seen any change from that as of September, given the seasonality in the quarter? I think it's a valid point to make.
Okay.
Just one follow-up on SMS again. You said the margin was 1% higher than last year due to that you had destocking. Do you produce at the same level as SMS?
If you actually look at the business last year, the result was lower than we normally have during the fourth quarter. I think we had 84.1%. There, I think during the third quarter last year, they had a big destocking, which affected. On this year, there is actually no change. We are running it, as you said, but not affecting actually any improvement of the EBIT because it is a little bit due to destocking. It is more a netting it from last year.
Okay. Thank you.
Thank you. I know we have lots of questions from the conference call. Operator, would you please let the first question through?
Certainly. The first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Björn. Tomas, it's Klas from Citi. Firstly, on the margin Mining and Rock Technology, if we focus on the mining side, if we try and split out between equipment and aftermarket, the margin in equipment improved last quarter. Was it at a similar level this quarter, or have it improved further? Roughly at what level, please? If you could say how the margin developed in Varel and construction in the quarter.
I don't think we normally give any details on equipment. We've been transparent in a way to say that equipment margins are lower. What we've mentioned on especially the last quarter that we had, I think, one order where this was related to lower margins. I don't think the equipment margins is pretty stable. No real changes on that side. On the aftermarket, also the margins are pretty stable. No big changes, which is very much also related to the volumes that we have seen there. No big changes there either. Varel, I think I mentioned that part. If you look at year-over-year, yes, it is down, but the change is pretty flat and not so much. Construction, no big changes at all, I would say.
Okay, great.
You can actually see that we reached 10.5%, that is, of course, including in a 5% lower market, 5% decrease compared to last year.
The reason I ask you is because last quarter you said that the equipment margin in mining improved quarter-on-quarter. I was just curious whether the equipment margin actually improved yet again or it's pretty stable.
Yeah, I think it's pretty stable. No big changes on that. When you have more equipment orders, of course, you have better margins on the aftermarket. If you have a bigger sales of equipment, that means some of the total market, of course. That's how it goes. When we merge together the mining and construction part of it, I think our aftermarket is approximately 65%. Before we were over actually 70% when we were talking just on the mining side. It's a little bit less because we know that it's somewhat lower aftermarket in the construction business.
Yeah. My second question is on exploration, which is now improving. Pricing on rock tools have been an ongoing issue. Is pricing also improving this quarter? If you could tell us about the aftermarket, where you now say it's largely stable versus stable last quarter, how did the aftermarket in mining develop year-over-year and quarter-on-quarter?
I think on the, as you say, aftermarket in general, it is stable. There is some not negative on the consumables, which is, of course, also related to the miner business.
On pricing of tools?
Pricing of tools is pretty stable.
There's an improvement versus last quarter?
Yeah. We've seen, as we mentioned earlier, we've had a little bit down during some quarters, but not big changes. It's somewhat down, but not much.
All right, perfect. My final one is North America quickly. You indicate stable demand quarter-on-quarter. This has been the biggest concern for you as of late next to direct oil and gas. What do you see North America as the quarter progressed if you looked at general engineering, automotive, mining, et cetera? If you look at how the quarter progressed for each segment in North America?
Yeah. If you look at overall, we said we have a stable in North America, but that's also related to we had a big order in the mining segment up in Canada, which helped the numbers up. If you look at North America in general, I think it's more down, and I think if you look at the SMS business, we're actually down 60%. North America is still the worrying part. I think if you look at the market segment that we are operating. Aviation, as I mentioned before, continues to be very strong. Automotive is a little bit flat, even though our sales also moved it down during that part. General engineering, if you look sequentially, it is pretty flat. Also, if you compare to last year, even more flatting out, I would say, on that part. Mining is up. I hope I got all the segments.
You have to check me on this, Björn.
No, that's perfect. Thank you.
Thanks.
Thank you, Klas. Operator, can we have the next question, please?
The next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes. Good afternoon, Tomas and Björn. Graham Phillips from Jefferies. If I could just focus, banking on SMS, please. When we look at the North American development, down minus 6%, and you cite automotive, but I believe auto production was up about 3%. Can you talk a little bit about the competitive Kennametal with the new CEO in the business there, and he's indicated that he's prepared to use pricing to retain share, which they've lost a lot of in the last decade or so. Also, what's happening technology-wise in terms of substitute materials, competing materials to the cutting tool business?
Yeah. There could be a lot of things here that are being affected. As how we see the automotive industry, it is pretty flat during this period, even though our sales have been little bit less. We do not see that as the market share decrease to auto parts. More and more cautiousness in the buying procedure from the auto industry, because we're just taking off a little bit from the improvement that was previous. We all know that when the automotive goes into other materials, going into battery driven and so on, that affects, of course, our business negatively. I don't think this short term, you cannot actually see those effects. I think that's more related to the buying behavior at the moment.
Okay. Just a little bit about Asia, because again, I think there had been expectation of some good growth in Asia for Machining Solutions, we're seeing orders slipping there further. What are the dynamics in the Asian Machining Solutions market that again, they're causing some underperformance there?
When it comes to Asia, I think the positive side there of automotive continues to be very strong, as well as the aviation side. The negative part is actually related to the oil and gas industry. There, it is very flat.
Okay. Just also on the competitive issues in the U.S. Are you seeing Kennametal a bit more aggressive? They've obviously changed their distribution method as well to use more independent, so there will be more of their product coming on the shelves of the distributors.
I think the whole cutting tool market is a competitive market. Especially when the volumes are not going up at the time. Of course, there's a lot of players, a lot want to have a piece of the market. We feel that our market share is stable. We do not see actually any decrease in prices, rather somewhat positive on the pricing side in terms of SMS.
Again, I didn't get to see the video because I'm on the phone here. The digital tool market, how big should that be in terms of new products? What percentage of sales do you envisage that contributing to the division?
I think this is at the very early stage. It was quite unique that they are presenting tools that can actually communicate, and in the future, that helps the customers. I think it's going to take a number of years before we see any significant big sales of this. It's a lot of opportunities in our work to connect the machine builders with the tools, with the digital opportunities, and help our customers become more productive. The interest was huge during the exhibition. If you look at that part of the market, it's still of course very small. I think you need to wait a number of years to see. We will continue to launch new products within this area, and eventually, it will become an important market.
Okay. Thanks, Björn.
Thank you. Operator, again, can we have the next question, please?
The next question comes from Marcus Alui from Berenberg. Please go ahead. Your line is now open.
Hi, Marcus Alui from Berenberg. I'd like to start with just a clarification on the answer to Klas' question on North America. If you look at underlying demand, you say that it's more down than anything, and then you mentioned minus 60%. If you look sequentially, we look at just demand, and I know that you said you were sliding your business second quarter versus first quarter. Do you keep sliding because of demand or is the trend stable sequentially? Could you just clarify that for a start?
I think we see that stable. Sequentially, it is stable. What we are measuring, of course, when it's one year back, then it's down. Sequentially, we see that pretty stable.
Okay. Perfect. Then on the mining equipment side, can I just ask, so the type of orders you're getting on the equipment side, is it mainly replacement or are you seeing some new projects et cetera coming in as well? If you could just talk a little bit about that.
I think it's a combination of that. Of course, all equipment in the mining business can sometimes be seen as wear parts, because they have a certain lifetime. It could be five years, could even be up to 10 years sometimes. As the older the equipment becomes, the more expensive they are to maintain them and keep them at a strong, competitive run. That means that you need to continue to replace products. If you look at last year, we still had pretty good orders on equipment. We were quite surprised that we got that much orders in that period. Now it has accelerated a little bit, we receive some really good orders from Australia, as I mentioned, but also from Canada, mainly in relation to underground mining.
Do you have any idea of the average age of your fleet out there, that you mentioned?
We had them. As you know, we have a lot of data about equipment. I don't know them here at the moment. Sure, we know all the equipment that are out there, how they are operating, how much consumables they are consuming, and so on. That data is available, we'll get a chance to see if we can put something together. I will see if Antii could get something, we can get information later on. I think the fleet varies a lot. I think we said last time that we have around 8,000 operating units at the moment out there. Of course, going back three, four years, because three years ago, the demand was enormous, was very good. It has cooled off a little bit the last three years, now it's stabilized and come back a little bit.
That's how the mining market goes.
Right. Thank you. Thank you, Marcus. We're going to have to let the next question through, please, from the conference call.
Thank you.
The next question comes from the line of Lars Nilsson from DNB. Please go ahead. Your line is now open.
Hi. Thanks. Just two quick ones from me, please. One for Björn, one for Tomas. Björn, just on your SMS business, I'm actually most interested in Europe. You're down 4% in the quarter. You talk about tough comp. I'm not quite sure I understand. You were down 5% last year for SMS overall. We don't have apples-to-apples comparisons for Europe, but it looks like quite a weak quarter for Europe. Can you talk about whether you see any meaningful monthly variances? What did you see in September? I think there was a comment earlier, was it from [audio distortion], that talked about October trading. Can you just verify that, particularly what you've seen in Europe quarter to date, that would be helpful. Thanks.
I think Europe side, as I said, I think it's pretty flat there. We are not actually down in the volumes in Europe. It's pretty stable. As the 4% we talked about, that was the total SMS, and that was the 2% which were affected by shorter working days, comparables, as well as from the Wolfram business, which was significantly lower during the quarter. Otherwise, I think we said more or less that stable there and a little improvement in China.
Okay. I can't quite make that out. You talked about the book order in Germany. How big was that? What would you cite as your book order?
Book order from last year, you mean?
Yes.
That was about 1%.
Okay, fine. Thanks. Just a quick one for Tomas, if I can. Group cost, Tomas, SEK 154 in the quarter, that was lower than I think most of us expected. Why was that? Does that come back in Q4? Is there any change to an annualized level, around SEK 900 million for that line in European now?
It was a bit low, yes. Lower activity level, et cetera. Yeah, it's completely unpredictable, SEK 154. For the fourth quarter, we keep it at SEK 150.
Thanks.
No change on the annual run rate at all.
Cheers. Thanks, guys.
Thank you. Can we have the next question, please, operator?
The next question comes from the line of Andrew Wilson from JPMorgan. Please go ahead. Your line is now open.
Hi. Just one. Just a quick question on SMS, again. On pricing, I think earlier you mentioned that pricing was still positive in SMS. Can I just clarify that was right? Can you talk about it by region, please?
I don't have it actually per region, but pricing overall is slightly positive.
Okay. At a similar level to what we saw last year or better than that?
Better compared to last year.
Okay, fine. Just on the aerospace, you referenced a number of times that aerospace has been relatively strong, which feels a little bit at odds with some of the new flow coming from that segment. Can you just talk about whether that's a market share thing or whether you might expect that to slow down in the Q4?
We've had a pretty strong aviation business for quite some quarters, and that was also during Q3, so stronger development there. That's also related to North America as well, Europe as well as China on the part. The question was, could you repeat the last part of the question?
Yeah, just how you might see the aerospace demand developing in the Q4, given that the new flow in the sector hasn't necessarily been particularly positive.
I don't think we've given any guidance on the development in no.
Not for an outlook comment, no.
No, we don't have an outlook on that really.
Okay. The commercial aviation?
We don't see any big changes. I think it's what I mentioned, it moves on in pretty much in the 15 average that we previously had.
Okay, perfect. Thank you.
Thanks.
Thank you. Can we have the next question come through, please?
The next question comes from Ben Franklin from Morgan Stanley. Please go ahead. Your line is now open.
Yeah. Good afternoon, Björn, Tomas, Ann-Sofie. Three, if I can. Firstly, just on SMT, where you won a large order. We haven't seen many of them over recent quarters. How does the pipeline look from here for winning further large orders, both on oil and gas and the nutrient side? That's the first one. Thank you.
Yeah. We were very happy that we received the order. I think if you look at the order book we have today, it's in line with what we had even a year ago. We continue to get these orders for umbilicals, which we are very happy for. You all know that I mentioned last time, during the Capital Markets Day, we were a little bit nervous how will this develop because of the challenges in the oil and gas industry. During, I think, last quarter call, I came out more positive that the pipeline looks good, which we stood up, and there is no change on that. It looks pretty good. Of course, you need to close the orders and for them to materialize, but I think the pipeline looks out there.
Just a follow-up, I think you said before that the backlog on the umbilical side lasted into next year.
I think. The average backlog I think is around six months, and I think it's roughly about there today also.
Great. Thank you. Just on mining, when you mentioned large orders, one in Canada, I think one in Australia. Now mining systems has gone. What is a large mining order for Sandvik? Are you trying to signal that perhaps the Q3 demand is unsustainable because of these one-offs, or you've got other large orders in the pipeline that can come through and maintain this order rate? Thank you.
I think when you look at equipment orders, they are normally pretty big. There's not so big changes there. You don't normally get one here and one there. It gets five, 10, maybe up to 20 units. There's no really change in the patterns how we get the orders. Of course, the last year has been a little bit more challenging on these bigger orders and when they're coming in. That's a more normal pattern to how orders are being placed. I think we have a good pipeline there also, but like everywhere else, it's competition, and you need to close them, and the contract materialize. Pretty happy.
Got it. Thank you. Just finally on SMS, I know visibility is low on the business. Just to clarify, if you look at the Q3 compared, you've obviously had less working days and tough comps from Wolfram. When you're looking for Q4, how does it look from a days perspective? Is there anything we should be aware of from Q4 last year that would make that a particularly difficult or easy comp? I am asking, does that 2% drop out in Q4? Thank you.
I think I mentioned already a couple of times that we don't see any major change in this quarter. Things are moving on pretty much in line with the previous. There's no big deviation that we need to communicate, I think, at this time. It's correct. I mentioned those three reasons why I think the orders were down 4%. You can take it as what it is. In the end, it is 4% down if you compare those. I think the underlying is a little bit better. I don't know if I missed anything that you asked here.
No, that's everything. Thank you.
Good. Thanks.
Thank you, Ben. Can we have the next question, please?
Yes. The next question is from the line of Alexander Vogel from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Hi there. Thanks very much, gentlemen. Just a quick couple of clarification ones, please. Tomas, would you mind just going back over the reason why your FX was positive on EBIT contribution? I think you mentioned that your underlying or underlying translation transaction numbers are actually pretty close to the original guidance, but the line was a bit crackly when you gave the reason for it being a positive SEK 60. Secondly, I think you talked about a lower central cost number earlier on. As if I look at the operating income and the P&L, that was also positive compared to headwind last year. If you could just explain why that, what the swing was there, and whether we can expect that going forward as well, that would be really helpful. Thank you.
Okay. You want to take that, Tomas? Okay. You start.
The FX. We guide only for transaction and translation effects, because that's the only thing that you can predict with some kind of certainty. The revaluation effect is, you never know. Depends on whether your creditors will give a pay or not at the day you close the quarter. The transaction and translation FX effects in the quarter were minus SEK 70-ish million, SEK 72. In the bridge effect between the revaluation now and the Q3 2016 and the Q3 2015, you have a big positive number, which takes it all the way up to plus SEK 62. That's the story behind the FX.
Okay, great. Thanks. Just, was that in SMS mostly, presumably, or was that across the group?
Yeah. Across the group, yes. The transactional and translational negatives, the minus SEK 72, it's very much a story about exports or mining exports.
Countries where we don't produce, where we just sell, where we are trade companies. It was very much South Africa and Kazakhstan this time on a major transactions side. The other revaluation, yes. You are absolutely right. It's a mess. The other question was the central cost. Was it central cost or was it other operating income?
No, it's the other operating income. I think last year you had a negative SEK 115. This year it was plus SEK 89. I just wondered what the swing was.
Yeah. Well, now it's becoming a little more complicated. It's actually currency again. You have three currency effects. You have the transaction effect, the translation effect, you have the revaluation effect. The transaction effect and the translation effect, that's all over the place. That's on every line in the income statement, wherever it appears, wherever the currency flow is. The revaluation effect, which we account for in other operating income, that's what you see there. It was a big negative a year ago and somewhat slight positive this year. That's the difference.
The end.
Yeah, the end.
Yeah. In the end, the total effect is actually plus SEK 62 million. Nothing more, nothing less. What you see on the other operating income is like a one-leg booking. You're seeing the debit but not the credit.
Okay, understood. Thanks very much. Final one, if I could, please. You had a little bit of an acceleration of savings. Can you give us any indication of what that might be for Q4? If I might just ask, if I look at the Q2 report for mining and construction savings, the annualized impact on the new SMRT looks like it's smaller, but maybe I'm just missing something in the consolidation there. Can you explain that? No, I don't think we guide.
We don't guide for future savings in Q4, sorry. We'll come back to that once the quarter is completed.
Okay. Thank you.
Right. Can we take the next question?
Thank you. The next question comes from Andreas Koski from Deutsche Bank. Please go ahead. Your line is now open.
Yes, thank you. It's Andreas Koski from Deutsche Bank. Two questions on SMS. I want to ask Ben's question in a different way. You had three percentage points negative impact on organic growth on working days, both from and bulk orders. What kind of comparisons do you make in the fourth quarter? If you assume demand remains flat quarter-over-quarter, what would the year-over-year impact be on SMS?
No, I don't think I get that.
No, we didn't guide out to that into the fourth quarter, I'm afraid.
No.
Okay. If you look at Wolfram and bulk orders, you didn't book any bulk orders in the fourth quarter. Wolfram, how did they do in the fourth quarter last year?
We don't have any specifics of that, as you mentioned, for the fourth quarter for now.
Okay. Then on 3D printing, because we are now seeing things moving in this area. It would be great if you could update us on what kind of risks and opportunities do you see for SMS?
3D printing is an area which we have been working with a lot during the last years. We have a 3D printing center up in Sandviken where we are learning everything what's possible to do about that. It's true that using 3D printing would mean less cutting, but at the same time, using 3D printing does not mean no cutting. Of course, you get the components which need to be grinded or finished in a grinding way. There are a certain amount of grinding and cutting also in this process. Probably, if this is going to be huge or in every part, of course, it will be affecting us. I think today it is being used in certain niches, and that's how we use it also in a certain amount in certain parts.
I think it's still so minor that it does not really affect the market yet. How that will be in the future, that's too early to say, to be honest. Sure, we are working with it, and we think it's a good way to use for certain components which are more difficult to make, and we have very small quantities of it. In the end, it's always going to be, which is the most efficient way to manufacture the components. I don't have any real insight on that part more.
May I ask, how many people do you have now working in the developmental research within 3D printing?
I don't know exactly. We have a team. I think we have three machines, and they're not only doing component for ourselves, they are also doing for others. It's becoming the talk of the town that we have a good knowledge in this, which means that customers are coming to us and asking if we can solve certain difficult niches for them. We are working both with the design and the manufacture. Of course, it's still on a very, very small number.
Yeah. I understand that.
I think it's an exciting area, and both for us in the manufacturing world, the possibility to be making complicated tools, I would say. We will probably be using it in a certain amount of our production. We might even extend that business since we work with Sandvik. Because we have a lot of material knowledge, we have a lot of cutting knowledge, and we'll see how we can use that in the future. We should definitely participate in this development.
May I also ask, what is Sandvik Machining Solutions' most exported function in North America? Is it the same as overall, 25% of revenues, or is it a bigger number or a lower number there?
No, it's about right.
Okay. Lastly, do you disclose the order intake mix for Sandvik Mining and Rock Technology when it comes to aftermarket equipment?
Not for the order intake, we don't. If you look at it in terms of revenue, 67% of sales was from the aftermarket.
Perfect. Thank you very much.
Thank you. Can we have the next question, please?
Thank you. The next question comes from the line of Sebastian Holker from Exane. Please go ahead. Your line is now open.
Hi. Good afternoon. First question around SMS and seasonality. The margins, working capital has gone up in the quarter. You mentioned some FX revaluation impact on the impact. How should we think about the margin in Q4? Should we have the seasonality as usual? Could we see a lower seasonality? The second question is about your 2018 target beyond. As you have said, it's been six months since you released them. Just wonder if you feel more confident, which businesses are performing ahead or lagging, compared to your expectations. Thank you.
Let me start back with the SMS. I think it was very low on the FX side in the quarter. I think what you see, as we said, that there is the need to show that. Yeah.
Sorry.
Okay. Sorry. Sure. On the FX, let's look on the SMS side. We can see the difference between the previous one, where we have on the savings, it's SEK 1.2 billion. We have on the FX, SEK 0.9, and then we have this related to previous year, [audio distortion], which was SEK 0.8. If you add that up, I think you will get to SEK 18.5-SEK 21. That's about what it is.
Yeah, I'm thinking about the seasonality usually, Q3 is a weak margin for Sandvik Machining Solutions. We've seen working capital has gone up in Q3 where usually it goes down. I'm just wondering about, should we have the sensitivity on margins as we usually do for SMS? Or margins would be more or less stable going into Q4 because you don't have this overall production issue?
I think it's important that they are continuing to improve their performance and their productivity in the company. They have the different efficiency projects that we have announced, they're also working with improving the S&A costs and other efficiency within the business area. We expect from all our operations that there should be a continuous improvement. There should be a little bit better all the time, and that's also what we expect from Sandvik Machining Solutions going forward. That includes Q4, of course.
Okay. Thank you.
I think when you look at SMS, I think they are driving the efficiency within the business area very professionally. They are working with the back-end sides, with the production units. As you know, we have had in the last 10 years, decreased actually the number of inserts that have been sold into the market. That means that you need to continuously adapt your production facilities, your back end, which they are doing in a professional way. They're, of course, also focusing on all other costs, not least the S&A cost, which we know is high, but it's also part of the way they go to market. I think the way they operate is they very focused on the front end, make sure that we can help the customers become more productive.
They work with the cost side and the back side to make sure that is adapted. I think they are improving all the time. Even though the market has been challenging, they have been able to lower the net working capital during this period and deliver excellent cash flow from the operations. From my perspective, I think they did a great job, and I am sure. They are really focused, and I think this will continue to improve.
Despite the declining top line, the net working capital keeps improving quarter after quarter. The 2018 targets, how do you feel now compared to six months ago when you released them?
2018 targets? I think we have committed ourselves to them, and I think this report underlines that we are moving in high speed in the right direction. On that point, I think from my perspective, looking at Sandvik, as I mentioned, I am very happy with the development efficiency. Look at Sandvik today, we are today, compared to one year ago, 1,000 to 2,300 people less. We are 470 people less from last quarter, and we continue to make sure that our different operations are being efficient, but also our central costs. That is the process of moving that out. I feel very committed, and also the rest of the operating entities have committed themselves to deliver what they have promised, and we will do that.
Okay. Thank you.
Thank you. Time flies when you're having fun. Can we just finish off with one quick question, please?
Thank you. The next question comes from Ian Dillon from [audio distortion] . Please go ahead. Your line is now open.
I think that's a sign.
We left.
Yes, I think that's a sign. That's it for today. There may be some more questions out there on the conference call. Please feel free to contact us at investor relations, and we'll be happy to help you. Thank you all.
Thank you.