Earnings Call: Q3 2014

Oct 27, 2014

This is the presentation of the 3rd quarter results 2014 for Sandvik. Very welcome. As normal, you will have a presentation first followed by the Q and A session, and that's how this hour is going to run. As of today, you have the option to ask questions either on from the floor, via the telephone or through the Internet as well. But firstly, the presentation. Thank you, Magnus, and once again, welcome everybody who's here physically in Stockholm and everybody who's watching us over the web. Firstly, maybe to summarize our Q3 for 2014. We continue on our strategic journey and have taken several steps forward on the path that we have drawn up for the company. We closed 1 further production units in the quarter of the initial 11 that we have ongoing closures for and expect a further 3 closures during the Q4 of this year. That program is developing according to plan. We also made a divestment of a noncore asset, our distribution business in Australia and New Zealand, which belonged to the Sandvik Materials Technology business area. The market has been relatively stable for the company during this quarter. North America and Asia stick out in the positive direction where we're seeing continued good strong business conditions. In Europe, we see more of a mixed picture where obviously the conflict with between Russia and Ukraine and the following consequences and the tension between the EU and Russia is having effects on the economic sentiments directly in Russia but also indirectly in markets like, for example, Germany. On the positive side in Europe, we also have some areas where we've actually seen very good and strong market situations like, for example, the U. K, a lot driven by the aerospace industry. The cash flow in the quarter was strong. We have a SEK 3,300,000,000 cash flow, and this was driven by, obviously, the underlying results but also a continued reduction of our inventories in the group. And this resulted in the net debt to equity ratio being reduced to 0.87. The EBIT for the quarter came in just short of SEK 2,500,000,000 and most affected positively by both currency and master prices. This slide we've used many times before, and it sort of outlines the strategic direction that we have in the Samik Group. And what we're trying to do is really to drive a strategy in Sandvik that shifts us more to higher growing markets, helps us to yield higher returns and also creates a business which has been better at dealing with the very significant volatility we see in many of our market segments. Some highlights and steps that we've taken in this quarter is to close our 1 production unit within Samik Mining, exit of a non core business within Samik Materials Technology, our distribution business New Zealand. And also we inaugurated an investment in Sammic Process Systems, which increases our capacity significantly in what Passama is, a highly profitable area where we think we can grow a lot more from what we stand today. We also are very glad to announce an addition to our group executive management, Thomas Neuordahl, who has been running Samik Venture. He has been offered a very good job within Boston Consulting Group, a global partnership role. So he will leave Sandvik at the end of this year. And the new person taking over his role is Jim Nixon, the CEO of Varel International. I think Jim brings with him a number of strengths, which are very important for Sandvik's future developments. He knows the oil and gas industry extremely well. He spent his whole life in that industry and brings a lot of competence and knowledge for this around this segment to us, which is a very important segment for Samik directly in venture but also in areas like, for example, Samik Materials Technology. Jim is also a very successful entrepreneur. He's built Varell from being a small business into quite sizable operation today. And that experience makes him, I think, a very suitable leader also for the other business units within Samik Vancher. It will be a good coach and support for the leaders we have for businesses like Samik Hyperion and Samik Process Systems. Looking more specifically at our various markets. You can see Europe year over year more or less a neutral picture, minus 1%, and that characterizes the weaker market developments that we see in the European markets. Asia actually grew quite significantly, up 11% compared to the preceding year, and we also see good growth in North America, up 6 percent compared to the preceding year. In the Southern Hemisphere, we see a bit of a mixed picture. In general, we see continued weakness based on the negative trends that we've seen over a long period of time within the mining industry. South America is up this quarter due to very strong invoicing in a number of mining systems projects. But in general, also we see quite a weak mining market in South America. Looking at our segments. And first, the year on year invoicing. We actually now have 2 segments this quarter, which are in positive territory, both the energy sector and the aerospace sector, which was in positive territory in the preceding quarter already. Mining continues to be down year on year in terms of IT invoicing compared to the preceding year. Looking at the arrows and the developments in the various segments, the picture of a stable market condition really prevails. So it's only really aerospace where we see a continued ongoing positive trends compared to where we were in the preceding quarter here. Looking more specifically at our invoicing and order intake. Order intake was down 5% in pricevolume terms compared to the preceding year. The main driver for this is not a weakening of really the market conditions. The main driver is that we hardly have any large orders when it comes to mining systems in the quarter. And this is actually quite normal. These large projects can fall into a quarter or into the next quarter. And in the underlying rest of the mining business, we did have a book to bill of around 1, so for the equipment sales, the rock tools and aftermarket business. So the mining market does display a stable market condition. Looking at the invoicing, it was up 2% compared to the preceding year. Our EBIT came in just short of SEK 2,500,000,000. We had some positive effects from currency, plus SEK 80,000,000, and we do start to see continued currency tailwinds for the Sandvik Group right now. And our expectation, given the currency exchange rates that we had at the end of the quarter, is that we will have a positive effect of even as much as EUR 200,000,000 in the Q4 of this year. Metal price effects were also positive during the quarter and boosted results by SEK 171 1,000,000. This trend is, however, changing, and we do expect where we stand here in October that we might have or are likely to have a slight negative effect for metal prices coming into the Q4. Our cash flow was very strong. This is due to continued somewhat more restrictive approach to capital expenditures, and we now expect CapEx in the group to come in just shy of EUR 5 €1,000,000,000 for 2014. But we also did a good reduction of our net working capital, which enhanced the cash flow in the quarter. Looking then compared to our financial targets. Well, we saw very good growth in the quarter, in part helped by currency but also structural effects driven by the Varel acquisition and the underlying 2% price volume change that we saw in the company. Our ROCE is still below our targets, was actually annualized in the quarter somewhat higher than what we saw for the rolling 12 months. And we continue to work with improving our profit margins and especially, I would say, mining and construction to move towards our target of 25%. Our net debt to equity ratio improved significantly during the quarter and is now 0 point 87%, which is not far off from our long term target to be below 0.8. So that was my brief initial summary. With that, I'd like to hand over to Mats Backman to talk a bit more about some of the other aspects in the quarter. Okay. And starting with a brief summary of the supply chain optimization program, where we have initiated closures of 11 units, and we are targeting cost savings of about SEK 800,000,000 in full run rate and 20.15. In the Q3, we closed one additional unit, and that was a smaller production unit for mining down in South Africa. Going forward, this is the phase you can expect for the remaining closures. We will take another 3 in the 4th quarter and then the remaining in the in 2015. All in all, this program is running according to plan, and we are now detailing the plans for the next step of the program, and we'll get back with more information related to that in early 2015. Looking at the net working capital, we are quite pleased with the development in the quarter. We managed to reduce the value with some SEK 900,000,000 But more importantly, we had destocking across all business areas, and we reduced volumes with some SEK 1,200,000,000 in the quarter. We managed to keep the relative net working capital flat comparing with the Q2, and that is, from a seasonal point of view, really good. I mean, normally, we have a seasonal effect of 2% to 3% units higher net working capital in the Q3 comparing to Q2. Looking on the development for the different business areas. We are continuing to be on target level for Machining Solutions, and we have actually managed to reduce the volatility in net working capital for Machining Solutions, which is important also from a profitability point of view with us. For Mining and Constructions, we delivered according to plan. And the only disappointment looking on the networking capital in the Q3 was actually related to Materials Technology, but we need to speed up the destocking now going into the Q4. And looking into the Q4, what you can expect is destocking in 4 out of 5 business areas with Machine and Solutions being the only one that we are planning to produce according to demand. Net debt. As you probably remember, we increased the net debt with some with close to SEK 10,000,000,000 in the second quarter due to the closure of the Rell acquisition, but also due to the payout dividend. And we ended up with a net debt to equity ratio of 0.96 in the second quarter. We managed to decrease this to 0.87 in the 3rd quarter, and that was due to a strong cash flow, definitely driven by inventory reductions, and that will continue now in the Q4 as well. And we are selective when it comes to investments. And like Olof said, we are changing the guidance for the full year to be below 5,000,000,000 dollars So all in all, we are working on reducing the net debt further in the Q4, and we are aiming for our target of 0 point 8 net debt to equity by end 2014. So I'm leaving for you to follow-up the summary. Okay. Ben, just briefly to summarize before we open up for the question and answers. We continue our journey, the strategic execution of our strategy in the company, and I think we're well on track with the programs that we've drawn up in the Sandvik Group. As Mats mentioned, we're on track with our program to optimize our supply chain, and the closures are running according to plan within that initiative. We saw strong cash flow in the quarter. We continue to reduce net working capital and also that was helped by underlying earnings, and we have a tight approach on capital expenditures also in the group. And overall, in the market, we do see a stable demand picture. So with that, I suggest we open up for your questions. Magnus, can you lead us? Yes, we will. As we mentioned in the beginning of the call, we have questions either coming from the floor through the telephone or via the Internet as well that you can write in your questions. Please limit your questions to 1 at a time as well. That is of convenience for all. Operator, do we have any questions at this point in time? Yes. We have a question from Mr. Lars Brorson at Barclays. Please go ahead. Thank you very much. I had a few, but I'll restrict myself to one please. Just on the CapEx guidance, Olaf and Mats, when you say, Mats, that you're being selective with regards to investments, can you talk to us about where specifically you're being selective or whether rather this is perhaps a matter of either canceling certain investment projects or pushing investment in 20 15? And also to the €5,000,000,000 level that we are running at in 2014, should we expect that level to continue over the next couple of years, particularly in relation to the manufacturing footprint realignment that has seen sort of a step up in CapEx levels? Thanks. I think the SEK 5,000,000,000 CapEx level is a reasonable number to assume going forward for Sandvik. We should, in a steady state situation, obviously, be able to be somewhat lower than that, but we do need to do certain investments when it comes to moving production on to new manufacturing locations. We're looking in general at all the capital expenditures we're doing. I would say the changes we've seen are not necessarily related to larger strategic projects, but a tighter view on the continuous underlying maintenance capital expenditure that goes on in the group. Thanks. Thank you very much. Operator, may we have the next question? We have a question from Mr. Andre Kuchten at Credit Suisse. Please go ahead. Good morning. Thanks for taking my question. I just have a broad one on machining reinvestment cycle that we have talked about before. Could you tell us where we are right now? So there was a run rate over the last couple of quarters? Are we at the required level in terms of things like R and D to sales or investment in presence or brand? Or do you need to ramp it up further as a run rate from the current levels? And if you do, then could you give us an idea of order of magnitude? That's a very good question. And we have been investing during this year quite significantly actually in these kind of activities within ceramic and chain solutions. And that has led to certain cost increases. And for example, in the Q3, we had a very large fair at IMTS fair in the U. S. Where we had a strong presence from the Sandler Group. My view is that we are at the correct level as we see it right now. So we're not planning to see further cost increases in these areas, but that the current level of investment that we're doing into sales and marketing activities and so is adequate to take us forward for the foreseeable future. Thank you. Thank you very much. May we have the next question from the floor, please? Yes. Pieter Fillingham, Hans Bank, Kepler Markets. A follow-up on that, the leverage question for machining, a little bit differently. Once again, we have organic growth, but sort of negative leverage on that. With reasonable levels of front end investments, what type of organic growth do you need to have a positive leverage next year? Obviously, 4% is not enough as we speak today. I think looking on the Q3, it's a little bit special considering the results we had in the Q3 last year. But we were helped to some extent by some provision releases last year related to incentive programs within Machine and Solutions, and I would say that was probably between 1% to 1.5% on the margin. So that is one aspect that we will not kind of see that in the comparison going forward. Secondly, I would say that, I mean, we still have I mean, compared to last year, we had the investment in R and D and in front line related to Machine Solutions. And I mean, as said, I mean we are probably on the right level there. So it sounds like with the 4% organic growth next year, we should be able to expand EBIT. Yes. Absolutely. And I as Matt said, I'd like to stress that this leverage that we see Q3 last year to this year is not really a representative comparison because we have certain issues like, for example, this dissolution of provisions that we had in Q3 last year that's distorted comparability. So you should expect normal leverages for us. And we've also, as I said in the previous question, now reached the point where we should have adequate levels in terms of sales and marketing activities to drive future growth in the business. I'm sorry, the price mix on MS this quarter? The price improved. Overall for the group, we're talking about around 1% price improvement mainly driven by Sandler Machine and Solutions. Thanks. Very good. I could tie into that one with a question from the Internet as well from Erik Karlsson. What do you see sequentially in the Mining division for equipment and for aftermarket, respectively? Well, we see roughly a stable price development when it comes to the mining side of the business. We don't see deteriorating prices, but we also don't see the historic positive prices evolution that we saw. And that's, of course, due to the much tougher market conditions that we see today than a few years back. Thank you very much. May we have the next question from the floor, please? Yes. Anders Schulz from Swedbank. Some more questions regarding Machining Solutions. How do the outlook or production rates at the beginning of this quarter? And also, you mentioned that this was the only division where you're not taking down how the sales have seen looked so far into October, we see stable development compared to the levels that we saw in September. So we don't see any negative trends or so due to recent uncertainties in the sales. And then market share development. Well, I think we are holding our market share well. We are trying to address when it comes to the mid markets how we can actually increase our share in that area where we haven't historically had a presence. And in my mind, we see good growth rates in brands like Promet and Carboloy that we're using to address the mid market business. And then production levels? Production, sorry, yes. That should be on normal levels as Mats showed. We have, I think, succeeded very well in Sandvik Machining Solutions to have a much more stable inventory development than we've had historically in the business. And therefore, production levels should be in line with sales also in the Q4 here. And we're happy with the net working capital ratio that we have in Sanofi Solutions. Okay, thanks. Thank you very much. Operator, may we have the next question, please? We have a question from Mr. Alexander White at JPMorgan. Please go ahead. Good morning, everybody. It's Alex at JPMorgan. Just had a question around the mining division, if I could. Just trying to better understand the Q3 results there. The sales look strangely strong given the order trends that you've had. I guess, FX helps a bit, but was there a large like project completions? I guess and did that have an impact on the mix positively or negatively? We did have quite a good invoicing for Mining Systems in the 3rd quarter. They are below the average 9% EBIT margin rate that we saw in the Q3. So that has a somewhat diluting effect with this large amount of mining systems that we have in the business. And then within that 9% EBIT margin, was there a portion of the provision reversals that you talk about at the group level on Page 3 of the release? Was some of that within the mining division? For the whole group, we had about EUR 80,000,000 of provision releases in the 3rd quarter and about half of that relates to mining having a positive effect on results there. Okay. And then if we just look at like looking ahead in mining, can you help us understand how much in sort of incremental savings we should be thinking about over the coming 12 months? And also, I mean, the drop through was very high, which I guess is partly impacted by the project completion. But when should we start to see that drop through getting back down to more normal levels? Well, we have looking into the Q4 in a positive direction, we have continued savings. As you see, many numbers are coming down in the business there, both for the group as a whole and very specifically for mining. So that would work in positive direction for mining margins going into the Q4. But then we won't have things like, for example, these provision releases that we saw in the Q3. And I would say they're roughly on a similar level in magnitude, those two effects when looking at the 4th quarter. Okay. That's helpful. And one last question, if I could, on mining, and then I'll get off the line. Can we just consider the business excluding the large orders? So around $5,500,000,000 of orders this quarter, dollars 5,800,000,000 or so last quarter excluding the large orders. So it's clearly a deterioration sequentially when FX, I imagine, was a tailwind. I understand you'd described the underlying market as stable, but can you help us understand within services or within equipment, which of those two areas saw the decline in orders sequentially? Now actually for both of those two areas see, I would say, a stable market condition compared to the preceding quarter. We see somewhat we have a bit of a seasonal effect in Q3, but no material changes in terms of how the market is performing. And both of them are close to 1 when it comes to book to bill, both the equipment side and the aftermarket and consumables part of the business. Okay. I thought like given customer services is strongest in the back half of the year, I would have thought that the seasonality in the order should have been positive. I'm just trying to reconcile the decline in orders with stable market. Well, as I said, we do see stable market condition and nothing out to the normal. And you should expect that we are stable when it comes to these underlying parts of the business, when it comes to our rock tools aftermarket service business and also the equipment side. What has affected the numbers this year or this quarter is both the high end margin that we had with the money systems and a very low order insets. Okay. Thanks for your answers. Thank you very much. Operator, may we have the next question, please? We have a question from Mr. James Moore at Redburn. Please go ahead. Yes. If I could just follow-up on the Mining business. I see that your orders have been quite low, but the invoicing high as we just talked about. And I guess that's had some help to the margin. But on the other side, I think you say in the statement that there was something like EUR 600,000,000 of destocking in the quarter in mining. Is that the case? And could you say what sort of impact that destocking had on the mining margin? I would say a rather low impact because I mean the major part of destocking within mining was actually related to parts. So we don't kind of struggle with under absorption in that respect. So a rather low impact from destocking in Mining in the quarter despite the high volume reduction. And just switching topics on to restructuring. Your picture for 2015, could you help us a bit there? You obviously took quite a lot of charges about a year ago and you gave a range for what restructuring could look like and that would leave us with something between EUR 1,000,000,000 of restructuring charge coming in 2015 or EUR 2,100,000,000 of restructuring charge and 2015 is quite a big range. I wondered if you could help us where we will be in that range. And will it all be booked in the Q1 of 2015? I think there was some suggestion in the past it would come in the Q1. I mean, we are still kind of detailing the plans for the second step, and we will come back with more information early 2015. I mean, I guess that's what we can say right now. Yes. But that does not mean that, that's the final step. And that's I mean, this is a 3 to 4 year program that we're talking about. So it's not necessarily so that the announcements in beginning of next year will take us all the way to the completion of the program. Okay. And sorry, just stepping back to mining. If we've got the positive from the higher invoicing and we've got a small negative here from the destocking and you talk about the savings coming through. In simple terms, because there's a lot of moving parts that are hard to understand on the upside, what sort of clean margin should we think about for mining next quarter? Well, we're not that specific and don't give forward looking guidance. But we have a number of things that we're working in a positive direction this quarter and other things which won't come in the Q4 and other things like cost savings coming through in the 4th quarter. So net net, those are roughly of the same magnitude. Okay. Thank you. Thank you very much. May we have the next question from the floor, please? And please remember to limit your question at one at a time. No questions from the floor at this time. Operator, may we have the next question? We have a question for Mr. Ben Maslin of Bank of America. Please go ahead. Yes. Good morning, Olof. Good morning, Mats. 2 on SMT, please. I think you raised some of the prices in SMT over the summer following the rise that we saw in the nickel price. I just wonder if that was having any negative impact on demand for standard products now that nickel is coming back again. Do people wait for prices to come down to kind of buy new inventory? That's the first question. And then on oil and gas, are you seeing any sorry, do the first one. Yes. Well, obviously, in the Standard Products, there's a more a larger element of distributor related sales and inventory speculation than what we have on our niche products. So if there will be a sharp continued decline on nickel price that could potentially have a negative impact on standard products within Sandvik Materials Technology. I mean, we see a general fairly, I mean, stable but weak markets in Europe, and that's what we've seen really during the Q3 as well. How that will develop into the Q4 now, we'd have to see. But I mean, right now, nickel has been declining a bit going into October. Got it. Thank you. And then the follow-up was within SMT, obviously, in weaker oil and gas prices, more uncertainty in those markets. Does that have any impact on demand for your umbilical products? Thank you. It has not to date had any impact whatsoever. Then I think one should remember that when the oil companies are looking at these kind of large investments, they have, of course, a very long term perspective. So short term drop in oil price does not necessarily have any impact on completion of products. Then we are also into technical areas, which are more and more needed within the oil and gas industry. So the type of products that S and T are developing and producing are in areas that are growing faster than the overall underlying demand in the oil and gas sector here. And part of them are also related to getting a longer life out of existing wells like certain umbilical installations and so can be. So they can be more related to this sort of smaller ongoing CapEx and not necessarily only demand, these large new projects to create demand. Got it. Thank you, Orest. Yes. Thank you very much. We will switch to a question from the floor in Stockholm. Yes, How should we think of this? Are How should we think of this? Are you still getting your head together what to do with this? Or what are you waiting for in terms of trying to costs? We have ongoing very significant cost cutting programs within construction. Manning was down quite significantly in the Q3. And we have a big site closure, which is still ongoing, swaddling coat in the UK related to our mobile crusher business. And that site is one of the 3 that we expect to close during the Q4 of this year. So that's not yet completed that step, and that's quite a material impact that individual site. It's quite a large one from construction's perspective. And demand is still struggling or still tough out there when it comes to construction, mainly due to China and so forth. Should we expect sort of adjustments to current demand situation on top of the, how do you call it, supply chain optimization for a specific division? Well, we're seeing a fairly stable market environment for construction we stand right now. So what we're doing is more related to actually adapting the longer term cost structure of the business and short term adaptations to a weak market. So structural long term improvements in the underlying margin of the business. Okay. That's it. Thank you. Thank you very much. We have another question from the floor in Stockholm. Yes. Anders Schulzmann again. Coming to Venture, it seems that excluding Varell, the result was relatively poor, some €160,000,000 versus some €218,000,000 in the Q2. What is the normal level there? Well, I mean, Wernsey does see some varying results. We right now have seen some drops on prices, for example, or tungsten prices and so which do affect results negatively there. So but you're right in that underlying, excluding Varell business, there has been a certain drop in profitability compared to the preceding year. Sequentially, on the other hand, Varell did see very good profitability development Q3 compared to where they've been earlier this year. So that, I think, was very positive development, Antonio. What about the Q4 for the remaining Fancia business? Well, we actually see a fairly good market situation for both Process Systems and Sandvik Hyperion. Thank you very much. Operator, please provide us with the next question. We have a question from Mr. Felix Dahl of UBS. Please go ahead. Yes. Hi, good morning, guys. It's Fredrik here from UBS. On SMS, talked a bit about your investments and the impact on margins there. But I'm more curious about the revenues. Have you seen the impact from your efforts in your growth and your market shares? And if you haven't yet seen the full impact, when should we expect that to come through? Thank you. Well, we have gradually been putting in efforts during this year. We also have had a number of very significant new product launches, which have been gradually rolling out during this year. So we continue to have a high ambition with these efforts, which should help us to have good growth rates going forward. But as I said, we're not increasing the investment beyond where we stand today. And for example, Europe is, I would say, a bit more uncertain today than where we stood 9 or 12 months ago. So we should start seeing your the benefits hopefully then over the next few quarters? Absolutely. That's our expectation, yes. Thank you. Thank you very much. Operator, the next question please. We have a question from Mr. Colin Gibson at HSBC. Please go ahead. Thanks very much. Good morning, everybody. Two questions, if I can, and I'll ask them 1 by 1. First of all, I wanted to ask you about your worldwide market share in cemented carbide tooling. I think the new strategy at Machining Solutions is very much designed to try to win back share. So do you feel yourselves that you have any evidence so far that you're actually starting to achieve that yet? Not in any big way. We talk about something like, if you look at the whole market, 20% global market share roughly for the Sami Group. But we do have efforts both in terms of entering into the mid market, which has been a fast growing segment of the market where we have not really had an offering in the past. We're driving organic growth into that area. We're also negotiating a potential joint venture into that area to support our growth when it comes to the mid markets. Then when it comes to the premium markets, we have a very strong focus on our research and development right now, and that is absolutely key when it comes to moving forward our positions in that market. For example, GC4325 insert within Samikoromans is a very important step in terms of creating a product that puts us ahead of competition. And these kind of steps are laying a foundation for us, which will make it easier for us to grow and take market shares going forward. I'd also like to add in the premium area that we are doing certain selective investments into technology areas, but we see very, very good growth potential. And last year, we bought out the remaining share of a company called Precorp. They make diamond tipped drills for the aircraft industry mainly. And this business is growing very fast. We're talking something 30%, 40% growth rates in what is today a small business but has potential actually to support Samvik's position in this fast growing, very attractive area going forward in a very, very good way. Thanks very much indeed. And then one follow-up question, if I could. Just looking at the return on capital employed performance, notwithstanding some pretty good performances on the margin and some pretty good performances on working capital. You still have a huge hill to climb in terms of reaching your return on capital employed target. So would you agree that to reach that target, it will depend on restructuring you haven't yet announced? Or do you would you, on the contrary, argue that you can achieve that ROCE target within the frame of everything you've already announced? Well, with the mining where it currently is in terms of it's on market situation. So that's, of course, quite a big gap, and mining is one of the big profit drivers in the Samik group. So obviously, we need to continue to build margins in our existing businesses, but probably need some tailwinds in the market to achieve something like growth in the group. Okay. Thank you. We have another question coming from the Internet, and it's from Erik Colson again. What do you think we need to see in the environment to see an uptick in mining demand? Where in the division would you look for an improvement first, equipment orders, services, consumables or mining systems? That is, I think, a very good question. And I mean, mining is a market with several different dynamics. And it is clear, I think, that the expansion related large CapEx projects, they're going to take several years until they come back. The mining industry is not looking for big grand scale investments right now. But from where we are today, there is a good potential that you will see the OpEx related spend increase over the coming 1, 2 years in the mining industry because production rates at the mines are still very high and actually have been increasing. And at the same time, I'm not cut even in OpEx related areas, trying to destock, trying to maybe use machines a bit longer than one have used them in the past. But in the longer run, that becomes a productivity problem. And the miners, I believe, will actually need to increase their OpEx spend going forward to maintain these very, very high production rates that they have. So the likely development that you will see going forward is that you will first see a pickup in OpEx related spend. And then maybe a bit longer into the future, you will see the more expansion related CapEx coming back in the industry. So it would be more related to spare parts and equipment sales actually starting to move in the positive direction, which are the first signs that we start to see this OpEx related improvement in the mining industry. The CapEx related, well, that you need to look at when there are new big new mines being announced and so which I think will still take a few years until we start to see that development. Thank you very much. Operator, may we have the next question? Our next question comes from Mr. Lars Broson from Barclays. Please go ahead. Yes. Thanks. I just had a quick follow-up question. I'm sorry to belabor the questions around mining demand. But when you talk about normal fluctuations in the demand pattern, again, iron ore price is down some 20% since your Q2 results, down 40% year to date. I'm surprised that given we're at close to sort of $80 a tonne, that incremental drop in iron ore price not a catalyst for lower spending among your customers, particularly for your systems business where iron ore from memory is about 60%, 70%. I guess the question then arises for me is what kind of visibility do you have here in terms of what really is normal business conditions for your Systems segment? Thanks. It's a very good question. And as you say, iron ore is a big driver of our Mining Systems business. Our main exposure is with the large mining companies like BHP Billiton, Rio Tinto, Mala when it comes to mining systems projects. And I actually just visited Australia, the other waste, and they are completing these large projects. And Rio, for example, has been very clear on that they view themselves as the lowest cost producer. If anyone is going to have to give in the market, it's going to be the higher cost marginal iron ore producers. And we've seen some effects, for example, in Sweden of these small mine investments that are actually going bankrupt now in tire and ore, down the Moa and Northland, and so big financial troubles. But Samvik's exposure to these higher cost iron ore producers is actually very limited. And as long as BHP and Rio Tinto, as examples, continue their strategy of being market leaders and having a cost base, which rightly is lower than even the current prices and most of its competitors. I think there's good room for at least continued seeing that they will replace equipment and continue to make certain selected investments into the Pilbara, for example, in Australia. Thanks. Thank you very much. There are no further questions from Stockholm at this time. Operator, may we therefore have the next one from you? Our next question comes from Andreas Koski from Deutsche Bank. Please go ahead. Yes, good morning. Thank you. A quick question on group activities. It was a negative impact on EBIT by EUR 264,000,000 in the quarter compared to EUR 342,000,000 in previous quarter. I think you've earlier guided for a level of €300,000,000 to €400,000,000 per quarter. Is this still the guidance? Or should we expect a lower level going forward? I mean around EUR 300,000,000. I mean we have a high volatility in between quarters and looking on group common or group activities. So I mean somewhere around 300, I think, is a fair number. Perfect. Thanks. And then on Mining, did you have any major orders at all in the quarter? Or was it 0? No, we didn't have any major orders within Mining this quarter. We had only one larger order that we've highlighted, and that was into the nuclear segments where and that you can take actually is quite positive sign. We booked the SEK 200,000,000 order within Samik Materials Technology. Good. And then lastly, if you could clarify, should we expect the second phase of the Zane Optimization Program to be announced in the Q1? Or can it come later in 2015? You should expect that definitely in the first half of next year. Okay. So maybe in Q2? Yes. That would present into the second half of the year actually. So I would say probably earlier than that. Okay. Thanks. Thank you very much. Operator, the next one please. Our next question comes from Mr. Andre Kuegne from Credit Suisse. Please go ahead. Yes. Hi, it's Andre again from Credit Suisse. Just a couple of follow ups. One, again, a broader one on Asia. Your message is very solid there. Could you just help us with breaking it up a bit between countries, how that mix is looking and maybe between your business segments as well? And if you could comment on kind of longevity of that strength because some of your peers have been obviously talking a bit more conservatively on the region. So any color would be much appreciated. Well, when we look at Asia for us in the Q3, it's, I would say, especially Japan and China that have shown some better strength for us Now we can talk about the automotive sector, general engineering as well as positive markets in Asia. Year on year, we had a quite good increase, as I showed earlier, in terms of our sales in Asia. So but it's especially, I would say, these two markets have been the positive drivers. Got it. And maybe one for Matt as well. The guidance you gave on where you'd want the net debt to equity to be at the end of the year implies another €3,000,000,000 odd cash generation quarter in Q4. Would that be correct math? Or are there any other moving parts within that equation? No. I mean, we are aiming for the 0.8% level by end 2014. And I mean, definitely, I mean, we need to have a high contribution of cash flow coming into that number. We also have SEK 400,000,000 coming in from the divestment of the Summit Materials Technologies distribution business in the 4th quarter. Got it. That's helpful. Thank you very much. Thank you very much. Operator, please help us with the next one. The next question is from Mr. James Moore from Redburn. Please go ahead. Thanks. I've got a follow-up on the SMS margin. And it looks like sales were largely unchanged in the Q3 against the second, but the clean EBIT margin is down about 1% if we adjust for the small share of provision release in the business. And I think last quarter you talked about a 50 to 100 basis points of negative margin impact from underproduction, which would suggest that the sequential clean margin has dropped more like 1.5%, 2%. Now I know that there's been a bit of seasonal production decline and you talked about some select and R and D. But equally, I see your headcount is down in the business. Is there anything else that's affecting the margin on the downside in the MS division? Is there some mix there? Is there something else? Or do you see this as a more reflective of the sustained key margin deterioration going on? No. I would say I mean, looking on the margin development in the Q3 for Machine and Solutions, it's pretty much according to what we said in after the Q1 or after the second quarter then. I mean we have a seasonality going into the Q3, but we talked about maybe 50% of enormous seasonality going into Q3 this year due to kind of the net working capital situation. And I mean, that's really what we see. So no surprises from that point, we will say. Okay. And in terms of your construction business, you talked about exiting the non core business. Can you just clarify that it isn't possible to sell the whole of construction because it's very interlinked with mining and that what we're really talking about here is mobile crushing and screening? Construction is very difficult to just chop a block sell as a whole business area within Sandvik because many parts of the business, the crusher business, the tunneling, drill rigs and so, have quite strong ties to the other parts of Sandvik, yes? So that's correct. And is it in particular mobile and crushing and screening, which is an industry suffering at the moment where you think you can separate that piece? I don't want to comment specifically on any potential exits within construction, but mobile is one of the lesser integrated parts of our construction business compared to others. Breakers is also such an example in that business area. And just one follow-up there. Just on the mobiles, is that a heavy loss maker at the moment? Or is it in the black? It is a challenging financial performance in mobile. And yes, we have been losing money in that business. Thank you very much. Thank you very much. The next question comes from Peter Landmark through the Internet. And it runs, how was auto production during last Christmas holidays versus normal amount of stock days, etcetera, especially in Europe? It is not announced yet for this year, but what is your best guess today given auto sales momentum, auto inventory levels, etcetera? I think this question relates to our customers' production. Yes. Well, I mean, when we look at Automotive from Sami's perspective and what we see right now, we see fairly good markets in North America and in Asia. And we as several other companies have talked about, have seen certain weakness in terms of production and planned production within the European automotive industry. So that gives you roughly the picture that we see. So and the potential weakness related to auto right now is mainly centered around the European producers. Very good. I think the question also was related of if we have an opinion today where automotive manufacturers' Christmas plans look like? That's a question I don't want to go out and comment, but I think should be directed directly to the automotive suppliers. Thank you very much. Operator, the next question please. Our next question comes from Mr. Alexander Leski from Societe Generale. Please go ahead. Yes, hi. Good morning. Couple of follow-up questions on mining, please. One shorter term and another longer term. Shorter term, just provisions for stock obsolescence in mining. Sorry, I might have missed some comments here, but it sounds like it's relatively small in the quarter. Can we assume a similar level going forward? Are we pretty much done with that now? And I guess also just on that side, if you have any more color around the destocking and the spare parts in mind that you referred to? Was that any particular area? 1st, when it comes to obsolescence, I think you can expect the level we saw in the Q3. I mean, no major impact from obsolescence. And we are continuing to address the inventory of CBD mining, and I think that's the best way to deal with obsolescence going forward, getting down the inventories. When it comes to the destocking, I mean, yes, we are expecting a destocking going into 4th quarter as well, to some extent, related to parts in the 4th quarter. We don't expect any kind of major there's an element kind of destocking in the mining in the 4th quarter. Okay, great. And then just a longer term question. Mining traditionally very conservative industry in terms of embracing technology change. But given the persistence of a weak demand environment, just whether you feel we could now see an acceleration in the adoption of new more productive technologies, particularly around mechanical rock excavation. Just wondering if you've seen any changes in customer interest there in terms of pushing that forward? How you see yourself positioned for that change? Or do you ultimately think going to be a bit of a slow burn still? Thanks. I think it's a very good question. And I mean in the period, we saw very, very strong growth in mining that we saw after 2012. There was very little or quite limited interest in trying new technologies. It was the core thing was to get new capacity as quickly as possible and normally taking very low risks. Today, in this environment, all miners are looking at productivity, cost savings, more than actually increased production. So I think we will see an acceleration in technology development. I think things like automation are going to drive a lot faster. The mines want to get people out of the mines to create a safer environment and of course, reduce costs. We see increasing interest into electrical vehicles, and Samik is developing several new products into this area for economic reasons and also for environmental reasons, which are driving many of the mining houses. So I think it's likely over the coming years that you'll see an acceleration in technology developments within the mining industry. Okay, great. Thanks. Thank you very much. Operator, may we have the next question, please? Our next question comes from Mr. Nick Wilson from BSI. Please go ahead. Hello, good morning. It is just a quick one on SMT. I know your strategy talks about exiting non core businesses. And obviously, we've seen the disposal of the Australia, New Zealand distribution business. Can we expect further disposals from this business going forward? Or was that mainly the business that you had earmarked for disposal? Thanks. No. We put it up on our list with our strategic agendas I showed earlier here, and we will continue to look within S and T but also in other areas of Sandvik at noncore assets, which we feel the company will be strengthened and more focused by divesting. So over the years to come, we will continue to have that focus here within the group. Thank you. Thank you very much. We have no further questions at this time, which means that we conclude this session. And I thank you for your attention. Have a good day. Thank you.