Greetings to you all, welcome to the presentation of Sandvik's third quarter results. My name is the same, Ann-Sofie Nordh, Head of Investor Relations. The voice is, however, a little bit different today. I apologize about the huskiness. I've got a bit of a cold. Today we're going to run through the presentation as per norm. It's going to be our CFO and acting CEO, Mats Backman, who does that. I would just like to point out that all the numbers and comments we make in this presentation relates to the ongoing or continuing operations. That said, Mats, please go ahead.
Thank you, Ann-Sofie. Good morning, welcome everyone to this third quarter presentation of the Sandvik results. I'm starting with a short summary with some highlights from the third quarter, we continue to have a very strong cash flow. Operational cash flow for the quarter of SEK 4 billion. If we're looking on the year-to-date numbers for the nine months, we have actually the best cash flow ever in the company's history of SEK 9.4 billion. Very positive on the cash flow side. This is supported by a continued focus on net working capital. We released some SEK 1.7 billion in terms of volume in net working capital in the quarter. On the positive side, the cash flow.
Looking on the demand side, we saw a weak demand in the quarter with an order intake of some SEK 19.7 billion with a negative price volume of 8%. I will elaborate a little bit more on the development in the different markets and customer segments later on in the presentation. We reported an EBIT of SEK 2.3 billion in the quarter, with an EBIT margin of 11.2%. We saw a positive currency effect of some SEK 370 million, we saw savings of approx SEK 200 million in the quarter. However, the positive currency effect together with savings couldn't fully compensate for the negative effect we had from volumes in the quarter. We had a decline of operating profit year-over-year of 7%. We continue our portfolio review and our internal efficiency measures. We announced our intention to divest Mining Systems during the quarter.
We are continuing with the supply chain optimization program, savings year to date are according to plan. We're also looking on additional efficiency measures in order to mitigate the volume development we have seen. Last but not least, we are, everyone looking forward to our new CEO, Björn Rosengren, to join Sandvik November 1st. Moving over to the order intake by markets. What you can see on this slide is the share of the order intake in the different regions. The red arrows shows the order intake compared with preceding quarter, so the sequential development in the different regions. In North America, we saw a slight decline in the quarter. The same goes for Europe. However, you need to remember that we have a seasonal effect in the third quarter. Adjusting for seasonality in Europe, the trend was rather flattish instead of declining.
Asia, slightly declining. Looking on Asia, it's all about China. We had a negative development sequentially in China, but looking on the other important markets in Asia, like India, Japan, Indonesia for mining, for instance, we actually had a positive development in the quarter. South America, slightly up, but please remember it's from a very low level when you're looking on South America. Africa, Middle East, and Australia, slightly down during the quarter. Looking on the different customer segments. All in all, we have an organic development of -6% in terms of invoicing. If we're looking on the different customer segments, we had two segments that was performing over and above +5%, indicated by the blue color in this chart. That was mining, but again, mining is growing, but growing from a very low level. We also had a positive development within aerospace.
Aerospace is a little bit the opposite. That's from a very high level that we are continuing to growing on aerospace. We had three customer segments in red in this picture, meaning that we had the price volume development less than -5%. Energy, driven naturally by the development within oil and gas, construction, and also general engineering. General engineering, to some extent, also affected by the development within the oil and gas segment, where we can see an indirect exposure into general engineering being negative. For the other segments, we saw a flat development in the quarter. If you're looking on the red arrows, it shows the demand trend compared with preceding quarter. We have three segments that shows a more of a negative trend in the quarter. Starting with energy, again, it's all about the oil and gas side.
General engineering, also affected by the indirect exposure to oil and gas, but also in mining. When we're talking about the demand trend, it's more a kind of an uncertainty in mining rather than a negative trend. Just to conclude, order intake -8% in terms of volume in the quarter. We had a negative book-to-bill of 0.95 in the quarter, we saw negative organic growth across all regions. Two segments that we want to highlight that had a relatively better performance than the other ones, that's the aerospace, but also automotive to some extent. Looking on the invoicing, SEK 20.7 billion in the quarter, about -6% in terms of the price volume development.
We had a negative organic growth for four out of five business areas, with only mining showing the price volume growth in the quarter, very much supported by the strong order intake on equipment during the first six months of the year. Looking on the EBIT numbers, as I said, we had a year-on-year adjusted earnings decline comparing to last year, -7%. That is despite the positive currency effect and what we can see coming from savings. In terms of cash flow, as I said, a record high cash flow in the quarter. I would like to highlight one item when it comes to the cash flow, that was that we had a lower CapEx in the quarter than we normally have. We are actually adjusting the full year guidance when it comes to CapEx to about SEK 4 billion from previously SEK 4.5 billion.
That is also contributing to the total cash flow for the company. Net working capital. In absolute value, we decreased net working capital with some SEK 1.8 billion in the quarter, and it is all about volume. We had a volume decrease of SEK 1.7 billion. Looking on the relative net working capital, we have chosen to show two lines in this one in order to illustrate the structural effects from bringing out Mining Systems from the rest of the operation. We have a structural effect from Mining Systems of about 2% unit on relative net working capital, and I think that is important to remember. Looking on the relative number for the quarter, 29.6%. That is actually the second-best third quarter if you are looking from 2007 and forward.
The only quarter that is better than this quarter in terms of third quarter is the third quarter 2010, and that was actually the quarter ahead of the only quarter where we have been hitting the 25% relative net working capital target. It looks very good, in the big picture for net working capital. We have also chosen to show a bridge analysis explaining the margin development comparing to the third quarter 2014. If we start with the third quarter 2014, we were reporting 12% in EBIT margin to be compared with the 11% that we present this year. This year's operating profit of SEK 2.3 billion, and then we have done an adjustment in terms of structure and one-offs in order to get comparability between the years. In the minus SEK 250 million, that contains of the metal price effect adjustments.
We had a negative metal price effect this year of SEK 130 million and a positive last year of SEK 170 million, giving a delta of about SEK 300 million year-over-year. We also have a slight adjustment of SEK 30 million negative in order to adjust for structure, and that relates to divestments that we did within Materials Technology last year. Finally, a positive adjustment that are getting to the total of SEK 250 million, and that is SEK 80 million adjustment for purchase price allocation related to Varel. We had a higher purchase price allocation last year than we have this year, we have chosen to adjust for that one. Then we had a currency effect of SEK 370 million, ending up with a residual of SEK 290 million in terms of delta comparing to 2014, which gives an operating leverage of 29% negative.
However, it is important to remember that we had a higher destocking this year comparing to last year, and we had a result effect from under absorption of destocking of about SEK 100 million for the group as well. If we are adjusting for that one, we have an underlying leverage of about minus 20%, which I think is decent given the market development and the volume development. Looking on the savings, we have communicated a saving target of SEK 1.7 billion. We now have a run rate end of September of some SEK 845 million when it comes to savings. We can say that we are halfway through the savings program, looking on the outcome as well right now. The first step of the supply chain optimization program, that is running according to plan, and we can see the savings coming through as previously communicated.
Looking on the guidance going forward, we are guiding a negative currency effect, or excuse me, a positive currency effect of SEK 100 million in the fourth quarter, and that is based on the closing rates end September. We are guiding for a negative metal price effect of SEK 100 million, also based on the closing rates end September. Looking on the full year guidances, we are changing the guidance for capital expenditures to about SEK 4 billion. I think it is important also to highlight that this is an underlying difference when it comes to the capital expenditures, because the carve out of Mining Systems doesn't really affect the capital expenditures, as it is a very low capital expenditure business, the Mining Systems. That is on the underlying business now. We are keeping the guidance when it comes to net financial items as well as the tax rates.
Summary of the quarter, and I think I will not repeat myself. I think we went through all the items already, I would like to move straight into the Q&A, Ann-Sofie.
Yes. We will open up for questions. I will just kindly remind you and ask you to stick to one question at a time with one follow-up. While we do that, shall we start to see if we have any questions here in the room? Yes, please, Anders.
Yes, Anders Sjölund, Swedbank. I would like to hear the usual comments about the Machining Solutions demand situation in the actual month, and also a little bit about production levels in Machining Solutions, how much below and cost from the absorption, and what do you look forward to in to the fourth quarter? If we start with the demand, the third quarter is a little bit of a tricky quarter in terms of seasonal effects. We saw the normal seasonal effect in July, August, and looking on the September number, September is pretty much the whole quarter for Machining Solutions. What we have seen so far when it comes to the order intake is the same level as we saw in September. No change on the demand side in that area.
When it comes to under absorption from destocking, I would say, looking on the total destocking for Sandvik, we had two business areas with an under absorption effect in terms of profitability. I would estimate for Machining Solutions in the third quarter that we had about 1% unit in effect from under absorption. Going forward for Machining Solutions, we are planning to produce according to the demand in the fourth quarter. I can't foresee any big under absorption effects in the fourth quarter for Machining Solutions.
No major changes in your production levels for the fourth quarter?
No. The tricky thing with the fourth quarter is, if we see a kind of a shift in demand, historically looking on the fourth quarter, then we will get the whole impact towards the end of December, really, when the customers are prolonging the holiday shutdowns then. That you never know, but apart from that, no.
No specific trends regarding the big geographies, Europe, U.S., in Machining Solutions?
In terms of sequential development, we can't see anything dramatic because what you see in the year-over-year is we have very strong comparables looking on U.S. and Asia, mainly China. In terms of the sequential development, flat-ish, maybe slightly negative, but nothing kind of dramatic sequentially, no.
Okay. Thank you.
Thank you. Operator, can we take one call from the telephone conference, please?
Thank you very much. Our first question comes from the line of Guillermo Peinador from UBS. Please go ahead.
Good morning, everyone. It's Guillermo Peinador from UBS. I think in 10 years, this is the first time the operator pronounced my name correctly, so I'm very happy, very pleased with that. I wanted to ask actually one question and one follow-up. First on mining invoicing versus orders, do you think it's fair to assume that at the moment, the mining division looks a little bit over invoicing relative to the order intake, and therefore we should see that if orders do not recover from these levels, we should see revenues going down to order levels and some kind of impact on margins as well?
In terms of the equipment, I think what you need to remember that we had actually a pretty strong first half of 2015 when it comes to the order intake on equipment. What we have seen in the third quarter, it's, I would say, more uncertainty in the market because if you're looking on the year-to-date numbers in terms of order intake on the equipment side, it looks pretty good, actually. On the aftermarket side, what we have seen there is increased competition, and I would say, some price pressure when it comes to rock tools. It's difficult to say in the current environment, and especially looking on the production reduction we see with miners as well though.
Thank you. A follow-up regarding actually pricing trends in cutting tools. Can you comment on those?
Looking on the overall price effect for the quarter, I would say from a group perspective, we are flat in prices. If we're starting from the positive end, it's Machining Solutions, positive pricing, and we can see that continue, and also supported by introduction of new products. We also had Construction in positive numbers for the quarter, that's more driven by internal activities where we're addressing pricing. Mining, more kind of flat-ish when it comes to pricing, we definitely had a negative pricing effect looking on Venture, for instance, driven by oil and gas, and also slightly negative for Materials Technology, mainly driven by the impact on current standard in terms of tubular.
My last follow-up. Corporate line. It used to be around SEK 300, SEK 200, looks like two quarters in a row of circa SEK 200. I was wondering whether that is a new level, or should we be still thinking about SEK 200-SEK 300? Thank you.
The third quarter is a seasonally low quarter for group common costs. Saying that, we can also see impact from the cut in terms of spend and the savings that we are going through right now. I think it's fair to say, on an average level, around SEK 250 for the year.
Thank you.
Thank you. Operator, can we take the next question from the conference call, please?
Thank you so much. Our next question comes from the line of Sebastian Kuenne from Exane. Please go ahead.
Hi. First question is on Machining Solutions. Just coming back to your comment on the de-stocking in the quarter. If we look on page 15, net working capital to sale is still going up in Machining Solutions, has been the case for the last three quarters, which is rather strange when demand is weakening. What do you see in terms of receivables and payables in that division? The second question will be on mining aftermarket. Could you give us some color on the share of the aftermarket as a percentage of total sales in the third quarter? Can you help us on SMT, final question, what is the impact of lower nickel price on the top line in the third quarter, and what is volume driven? Thank you.
Many questions, so it's difficult to remember them.
Take them one by one.
When it comes to net working capital for Machining Solutions, first of all, you need to remember that we had a kind of a decline when it comes to invoicing of 5%. If you're looking on relative numbers, that is definitely an issue for the relative net working capital. When it comes to stocks, we have a de-stocking, and like I said, we had an effect of under absorption from de-stocking for Machining Solutions of about 1% units. I guess you can calculate backwards a little bit. We are decreasing on payables, and that's coming with a lower investment level and also when we're addressing spend. That's the only item that is going in the wrong direction, because naturally you have a positive effect from accounts receivables when you see a decline in sales.
Again, please remember that we have minus 5% when it comes to the invoicing. When it comes to mining, the share of aftermarket, if you're looking on the third quarter numbers, it's 67%, to be precise, in terms of the aftermarket. Top line effect on metal price, Ann, that I need your help.
I need some help too. 150.
No.
On the top line-
You can find it in the bridge analysis with the backup slides. The EBIT effect is SEK 130.
Yeah, I'm looking on the top-line impact.
Yeah
The pass-through of lower nickel price. What is volume-driven, price-driven, and what is nickel price pass-through to customers?
Yeah. Please look on the backup slide when it comes to the bridge for Materials Technology. The EBIT effect is SEK 130 when it comes to change in metal prices, and it's all driven by the nickel price.
Okay, thank you.
We'll take the next question from the call, please.
Thank you. Our next question comes from the line of Andreas Koski from Nordea Bank. Please go ahead.
Yes, good morning. Thank you for taking my question. I want to know a bit more about your backlog and the duration of the backlog, because you have the book-to-bill of 0.95 in the quarter, and I want to understand when your revenues will reach the order level if demand stays where it is.
It's a completely different situation if you are comparing the different business areas.
I know that, we can focus on mining and SMT, maybe, because you had a book-to-bill of 0.87 in mining and 0.9 in SMT. If you focus on SMT and mining, that's okay.
Starting with Sandvik Materials Technology, what I think is very important to highlight looking on the order intake as well as the order stock, is that the part of the Sandvik Materials Technology business kind of exposed to a CapEx within oil and gas, that is mainly on the umbilicals side. Umbilicals, that's a really important segment looking on the profitability for Sandvik Materials Technology. When it comes to umbilicals, that is a business that is very late in the cycle, we still have, looking on the order backlog, I would say six months order backlog on umbilicals. Given the business being late in the cycle, we can still see orders that are out there for the fourth quarter. That will take some time before you see the full effect.
When it comes to mining, we had a decent first half when it comes to the order intake on equipment, that's what we see in the order book right now. We saw some uncertainty, I think it's very difficult to see the development going forward for equipment. I guess that's the key. When it comes to aftermarket, it's not that much of an order backlog on that side.
No, if I remember correctly, I think you've said that you have had no order backlogs on the equipment side, basically, and the backlog you have had in mining has been related to Mining Systems. Now it looks like you have some sort of backlog also for the equipment business. I suppose-
Yes
it's not longer than a quarter or at maximum two quarters, right?
No. I think one quarter is a fair assumption-
Yeah. Okay, good
when it comes to the equipment. You are right. Historically, looking on the order book for Mining, it has been all about Mining Systems with large orders.
For equipment, one quarter I think is a fair assumption.
Now more and more savings are coming through. Do you think you will be able to defend your margins when sales comes down through more and more cost savings also in coming quarters?
That's what we're aiming for.
Yeah, good. Maybe this is a bit premature, but can you say something about what you expect for CapEx in 2016? Do you think you will be able to keep the level at SEK 4 billion or lower? Or if you put it in relation to sales, below 5% of sales?
I think it's difficult. We will provide you with a guidance when we're getting there for 2016. What you can see as an overall target is the 5% in relation to invoicing, and that's what we're aiming for.
Okay, great. Thank you very much.
Thank you. I believe we have one question here from the room. Please.
Yes. Hello, Daniel Schmidt at SEB. I just wanted to ask you if you can update us a bit more on the divestment of Mining Systems, where you are in the process, what should we expect in terms of timeframe, and also the rationale behind the book value of SEK 2.3 billion. Is that a reflection of the indications that you've had in the market? Thank you.
When it comes to the process as such, I will not give an update now other than we have ongoing discussions with potential buyers. When it comes to the write-downs and the impairment we took in the third quarter, that's reflecting what we see in terms of the value for the business. From an accounting point of view, we need to show that.
Nothing on the timeframe. If you look six months out, do you think this will be sold by then?
That would be guessing. We are getting back with more information when we have it.
Thank you.
Thank you. Operator, please, can we have the next question?
Thank you very much. Our next question comes from the line of Andrei Kuknin from Credit Suisse. Please go ahead.
Yes. Hi, it's Andrei from Credit Suisse. Can I ask a question on SMS demand to follow up the previous discussion? Firstly, could you tell us how the demand evolved during the quarter? I know there's a lot of seasonality there, but I guess you've got the selling dates, you've got the data for each day of selling, so you could compare that, if you could share how that evolved. Secondly, what you indicated for Q4 being broadly stable or maybe small down, is this seasonality adjusted or not?
I think the question you're referring to was the de-stocking under absorption effect, and that is to a large extent season into that one when we are taking out volumes in inventories in third quarter. That's more of a seasonal effect. When it comes to the demand in the quarter, like I said, flattish, slightly negative in terms of sequential development for Machining Solutions. Talking about the development within the quarter, it's really difficult given the holiday season in July, August. Just stating that what we saw in September is basically what we see now in terms of the order intake. I wouldn't point out the trend within the quarter, no.
All right, got it. Can I just double-check on Venture? Are you planning any additional specific cost-cutting measures in this business given how the margins have evolved?
Yes, we are. That is a continuously ongoing effort. Especially looking on because we have done quite a lot when it comes to Varel, because they were really early in the impact from the drop in the oil and gas prices. What we have seen now in terms of more indirect effects into Process Systems and into Hyperion indicates that we need to do more, and we are doing more also from a structure point of view. It's interesting to see, if you're looking on Process Systems, for an instance, we can see indirect effects on the industrial processing, for an instance, where we can see effects on the sulfur market that also have an effect on Process Systems. Yes, we have additional ongoing cost measures within Venture as well.
Got it. Thanks very much.
Thank you.
Thank you. Operator, we'll continue with a question from the conference call, please.
Thank you very much. Our next question comes from the line of Marcus Almrud from Kepler Cheuvreux. Please go ahead.
Hi, Marcus Almrud from Kepler Cheuvreux. A couple of questions. First, on Europe. The European order intake you say is -6%, which is a bit weaker than I expected. Can you just elaborate a little bit on what sticks out and which end market is dragging it down? You're talking about it being sequentially flat if you take away the seasonality, but if you can talk a little bit more on that. Secondly, if you could just update us on the commodity exposure in the remaining mining business in terms of how much is gold, how much is copper, et cetera. Thank you.
Taking the last one first. We have reduced the exposure to iron ore and coal quite a bit with taking out Mining Systems from the figures. I think you can see the exact share actually in the supporting material.
Okay.
What is important to remember is that it's a decreased exposure on iron ore and coal on that one. On the first one, when it comes to Europe, again, looking on the businesses that are heavily impacted by seasonality, mainly Materials Technology and Machining Solutions, it's mostly seasonality. Within Europe, we see the same pattern as we have seen previous quarters. A high volatility and a negative trend more towards Eastern Europe with Russia. More stability looking on Germany, for instance. No significant changes from what we have seen before in Europe.
Okay, thank you. Finally, if I can just ask about the aftermarket. You gave us the Q2 numbers, but what was the share of aftermarket in the first nine months? Also, did you keep all of the aftermarket and service sales, or did you have parts of it coming with the Mining Systems as well? Thanks.
No. Aftermarket in terms of Mining Systems is almost non-existing. It is the continuous business. Taking out Mining Systems, I think we have a similar picture in terms of the share of aftermarket of the total invoicing for mining, meaning two-thirds of the business.
Okay, excellent. Thanks.
Thank you. We have one question here in the room. Please, Anders again.
Yes, hello. One question regarding construction. It seems that you had better order intake for a couple of quarters while sales is significantly lower. Are you having a better pipeline now?
No. If you're looking on order intake, we have had some major orders that are distorting a little bit when you're making the comparison between the invoicing and order intake. I think it's mainly due to major orders. When it comes to the underlying market development, that is not reflected when you see the major orders. There's no change looking compared to previous quarters.
Those major orders, will they be shipped in the fourth quarter or next year?
In partly fourth quarter and into next year as well.
Okay.
Thank you. We'll continue with a question from the conference call, please, operator.
Thank you. Our next question comes from the line of James Moore from Redburn. Please go ahead.
Yes, good everyone. Good morning, everyone. Hi, Mats. Can you help us a bit more understand the impact of oil in both Sandvik Venture and SMT? Specifically, can you say roughly how much Varel revenues have dropped and what the book-to-bill looks like, and whether the margin, which I think had already gone from 16 to low single digit, is now in loss? Just trying to understand how that might develop. On SMT, I'm more thinking about next year. Is it that oil hasn't dropped so much in SMT, and will next year? Can you sort of scale how much it's dropped so far and how much you think it drops next year? I'm thinking about margin mix. I guess oil-based margins are way higher than standard in European consumer style margins. Can you help us quantify any mix effect into next year in SMT?
If not quantifying exactly, I can give you some guidelines on that one. Starting maybe with the Varel side. We're still in positive territory if you're looking on the margin for Varel. What you can see in the total number is a purchase price allocation effect of some SEK 50 million in the quarter. Taking out the purchase price allocation, we have a positive margin with Varel. When it comes to the impact on Varel, as we have a really heavy footprint when it comes to the unconventional U.S. oil and gas, we saw more of a kind of immediate effect on Varel from that one. I don't think you should assume that we will see a dramatic shift from Varel right now going forward, and especially as you have seen more of a stabilization looking on the rig count in U.S.
That goes for Varel. Looking on Sandvik Materials Technology, like I said, in terms of umbilicals, we have an order book until the end of first quarter of next year. We are still anticipating to see orders in the fourth quarter when it comes to umbilicals. That impact will be later if we don't see any kind of changes in the underlying environment for oil and gas.
Thanks.
What we see in terms of the profit effect, and I think that is important to realize when you're looking on Sandvik Materials Technology, we can definitely see an effect on the more kind of core and standard business within tubular that is indirectly an effect of what we see going on within oil and gas, because we can see a much, much tougher competition in that area, and more players are getting into it, to the core and standard side of it. That is definitely something that is negative in terms of underutilization and in terms of the productivity within Sandvik Materials Technology, and it's also price pressure in that area.
Thanks. If I could just follow up on automotive, I was surprised with your slightly stronger comments than I'd have expected, given global auto production seems to have slowed to one, and some talk about heading to minus one next quarter. Is that a market share issue or a timing issue?
No, I would say there's probably more a timing issue built into that one.
Okay, great. Thanks, Mats.
Thank you. We'll continue with a question from the conference call, please, operator.
Thank you so much. Our next question comes from the line of Alexander Verger from Nomura. Please go ahead.
Thanks, everybody. Good morning. Just a quick one. I wondered if you could give us a little bit more color around the continued softness in rock tools, in mining, I suppose, particularly, but also, I think you would call it out in construction as being stable. Just wondered if you could give us a little bit more detail around, I guess particularly the pricing dynamics and really what's driving that in terms of any comment you can make with respect to the conversations you're having with the customers. Thank you.
In terms of price pressure on rock tools, it's the competition. It is much tougher competition, and we can see more price pressure from contracts rather than the over-the-counter sales for rock tools. Yeah.
Okay. Thank you.
Thank you, Alex. Operator, we'll have the next question, please.
Thank you so much. Our next question comes from the line of Lars Bergström from Barclays. Please go ahead.
Thanks very much. Good morning, Mats Ann-Sofie . Just a follow-up on SMS, if I could, Mats. I was a little bit surprised to hear your comment earlier that you didn't see anything meaningfully dramatically by region within SMS. I thought Europe was notably weaker at minus 4% in the quarter. We've talked about that being the bright spot earlier. Does that reflect underlying market trends here? I would have expected you to be taking share on the back of your product rollout. I was a bit surprised to see the 4% decline there. Then on APAC, better, or at least declining less than in Q2. Again, a bit surprising given what we saw was a sequential deterioration in China. Can you just talk through those two regions, please?
Looking on Europe to start with, from a sequential point of view, it's a lot of seasonality built into the figures. It's really kind of hard to draw any conclusions looking on mainly July, August, in Europe. I would say seasonally adjusted, more kind of a flattish development in Europe. When it comes to Asia, like I said, a negative effect from China. We continue to see a very difficult market situation in China, in basically all customer segments looking on the development in China. While we saw a more positive development if we're looking on Japan and India, for instance, in Asia. The issues with China continues.
Thank you. Just secondly and finally, if I could, on balance sheet and dividend into 2016. Obviously strong working capital as you pointed out in the quarter. You are scaling back a bit on CapEx and you should presumably see some proceeds come through from the sale of Mining Systems in the not too distant future. I wonder whether though, in light of the current demand trends, what your thoughts are on leverage and dividend payouts specific. I mean, you have been quite generous in the past few years. I wonder whether we should start to set expectations here to a payout ratio or policy, payout rather, closer to the policy level at around 50%. That would be helpful. Thanks.
I think when it comes to dividend, that is more a discussion for the board. What I can refer to is our financial targets we have when it comes to dividends, because we are talking about 50% of EPS, and I think that is probably a good starting point to see the long-term targets when it comes to dividends. Looking on the balance sheet, we are improving because it is extremely important looking on the cash flow development and looking on the net gearing. We are now below the 0.8 as we have as a long-term target. That I think is a good progress.
Thanks.
Thank you, Lars. Can we have the next question please, operator?
Thank you. Our next question comes from the line of Ben Maslen from Morgan Stanley. Please go ahead.
That's great. Thank you for taking the question. I'm standing in for Ben Maslen. I wanted to come back on the mining aftermarket again. I just want to understand the specific price dynamics within that business. I'm not completely familiar with how big rock tools is as a proportion of your overall mining aftermarket sales. Are you saying that this is something the price pressure is confined to rock tools, or is there any risk at all that that spreads to other product categories? That was number 1. Second related question is, are we talking about mid-single-digit declines in that category, or is it something more serious, i.e., are you seeing deep price pressure in one area, or is this just a fairly gentle downtrend? Then finally, how do you expect aftermarket pricing to develop over the next one to two quarters?
Again, a lot of questions. Let's see if I can remember them. If we're looking on the aftermarket, the 67% of the total, that contains our rock tools services and parts. Rock tools is definitely less than 50% of the total aftermarket exposure. Looking on the price pressure, what we see within rock tools, I would say, as you stated, it's less dramatic, using your words. We haven't seen any kind of huge impact.
It's difficult because given the more uncertainty we see in mining, and the development we have seen in the quarter with mining houses closing capacity and so forth, that might have a bigger impact going forward. That's still to be seen. What I would like to highlight looking on our portfolio for aftermarket is that we have done a lot when it comes to developing our services, for instance. That's more of a kind of a self-help, and we are increasing the penetration on our installed base. We're doing a lot of positive things as well within aftermarket.
Okay. I guess what I'm asking is it fair for us to assume that this effect that you're seeing right now in rock tools could actually be more broad-based within your mining aftermarket over the next six months?
I can't kind of answer that and give a forecast, what I can conclude is that if we have the mining houses starting to kind of take down capacity, we will probably have more idle equipment out there. Idle equipment would have an effect as well on the spare parts, for instance.
That's right.
We haven't seen that so far.
Thank you very much.
Thank you. Can we have the next question, please? We only have a couple of minutes left, so can I kindly ask you to strictly stick to one question going forward, see if we can squeeze in all the remaining participants. Thank you.
Thank you very much. Our next question comes from the line of Andreas Willi from JPMorgan. Please go ahead.
Thank you very much. My one question is a follow-up on Europe, where we earlier discussed kind of the weaker picture on the Machining Solutions side as well. Could you maybe give a little bit more commentary around that? A lot of the data we get on European car production, European appliances, it doesn't look like Europe is getting worse, but you've shown weaker development here. If you could give some color, maybe by geography or important end markets, why Europe's not improving like maybe some of the overall macro data is telling us. Thank you.
No. Again, looking on Europe for Machining Solutions and adjusting for seasonality, I wouldn't say that we have a negative effect in Europe. We're talking more of a kind of a flattish development in Europe. Of course, again, for Machining Solutions, the seasonality plays a big role in the third quarter every year. That makes it a little bit more difficult to kind of judge the trend in the quarter. What we said, adjusted for seasonality, more a flat development for Machining Solutions in the quarter.
Thank you.
Thank you. The next question please, operator.
Thank you. Our next question is a follow-up question from Andrei Kuknin from Credit Suisse. Please go ahead.
Yes. Thank you very much for taking the follow-up question. I just wanted to ask on Mining Systems, the business that is up for disposal, the book-to-bill is 0.35 in Q3, which seems to be down substantially from H1. Is Q3 performance indicative of underlying, or was there a particular sort of drop off or something else just to gauge sort of how that may look for the full year?
No, I think it's more kind of normal given the market environment we have. It's a very high volatility when it comes to Mining Systems because we have very big kind of single orders, and it always depends on where we get it between the different quarters. I think it's no change when it comes to the market environment in that then.
Got it. Thank you. Actually, if I may, just one more question.
Yes, please go ahead.
Thank you. On pricing, there's been quite a few comments. If I just dare to summarize and run through it, and if you could tell me what I've got wrong, that would be great. What I've got is positive pricing in SMS, that was clear, negative pricing in Venture, in oil and gas, in mining new equipment, and rock tools in aftermarket, then negative pricing in SMT. My read is that elsewhere is more or less kind of in line flat. Does that make sense?
Just to stress, when we talked about mining, we talked about the flat pricing overall for mining.
Okay, overall flat, with pressure in rock tools, kind of implying better elsewhere in aftermarket and flat in OE, something like that.
Yeah.
Great. Thank you very much.
Thank you. We have a final question, please, operator.
Thank you very much. That question comes from the line of Peter Testa from One Investment.
Hi, I'm sorry to come back on this SMS question on Europe again. If you look at the year-on-year local currency order numbers, they go from minus one, zero to minus four, and this is a year-over-year number, not a seasonal number. I really would appreciate if you could help us understand how the new product introductions are phasing in, the extent to which these are supporting business or whether there's some other individual year-over-year factors which are playing through in Europe.
When you're looking kind of year-on-year, we have had a kind of a development before the third quarter. I think that's more kind of due to the comps. Looking on the sequential development, again, I would say more kind of flattish adjusted for seasonality in what we can read in the quarter. Our order intake is really supported by introduction of new products, and we can see that as a kind of a positive in the new sales ratios as well. We are supported by new products, but in this more kind of difficult market situation, it's always kind of more difficult with introducing new products as well in terms of productivity, when productivity might not be the kind of the main issue for customers. Looking on the underlying, we are definitely supported by the introduction of new products, yes.
Okay. Thank you for the answer.
Yep.
Thank you. Thank you all for joining us today. Before we finish off, I would just like to remind you all that regarding the CMD, we have postponed it. It was originally planned for the 16th of November. We're pushing that into 2016, and we'll come back with a new date as soon as we can. Have a good day. Thank you.
Thank you.
Ladies and gentlemen, that has concluded our conference for today. Thank you very much for your participation. You may now disconnect your lines.