Earnings Call: Q3 2013

Oct 24, 2013

On Sandvik's 3rd Quarter Results. My name is Magnus Larsson. I am Head of Investor Relations. And in just a minute, our Chief Executive will talk us through the results and the outcome our numbers in the Q3. After that presentation, the extended presentation this time will feature Professor Ole Vic, Head of Group R and D, who will tell us more about innovation, after which we will have the normal Q and A session. In total, we have an hour to our disposal. With that said, Olof, please go ahead. Thank you very much, Magnus, and welcome everybody who's present here in the World Trade Center and also all of you following our webcast here. I'll talk you through, as Magnus said, a bit of the results first before I hand over to Professor Wieke to talk about our R and D developments a bit in the group. If I'd like to characterize this report with one thing, I think it's the title here really stabilized demand. We have seen a number of quarters with a more negative trend with declining demands in several areas of the Family Group's portfolio and most notably in the mining area. But even that area has flattened out, it seems, at the current levels. So on the positive side, you can list out that Axiom Machining Solutions did see a year on year improvement of sales in the quarter. So there we actually do see a slight positive trends compared to where we were a year ago. Mining, which has been on a significantly declining trend over the last number of quarters, has now reached the point where they have a neutral book to bill in the Q3 here, which I also think is encouraging. So we're at low levels with mining, but the market seems to have been stabilized at some level currently here. The stable demand is also valid for Materials Technology and for Sandvik Venture. And the business area where we have the exception where demand is still actually declining for us and where we had a negative trend during the Q3 is our construction business. Our EBIT amounted to just over SEK 2.5 1,000,000,000 and we delivered an EBIT margin of 12.4%. I think that was a strong performance given the business volumes that we saw in the quarter. And the 3rd quarter is our seasonally normally weakest quarter in the year. And we also had significant currency headwinds during the quarter, SEK 250,000,000 affecting our result negatively. On top of that, we also had negative metal price effects affecting our Materials Technology business of around SEK 90,000,000. Our operating cash flow from the underlying business was just over SEK 3,200,000,000 which was also strong due to good continued net working capital management. The net working capital did decrease in absolute numbers for the Sami Group. On the other hand, we did make, as communicated earlier, a very significant payment to the Swedish tax authorities relating to a tax case that dates back actually to 2,005. So this payment was at SEK 5,800,000,000 and therefore our actual cash flow was negative for the quarter. Then also as we mentioned on our Capital Markets Day, we did make a number of very significant product introductions and even though we have a lot of focus on adapting our costs in the short term to the current market situations, the most important thing for me and the management is, of course, that we're laying the right foundation in the group for the future that we're developing the right product offering that sets us ahead of our competition and strengthens our market positions in our different areas. And both Mining, Machining Solutions and actually also construction have recently had very significant product launches, which I think is very, very encouraging for the future. Looking geographically how our sales developed around the world. One can see that Europe actually had a positive trend. The levels were quite low already last year for Europe, but we did have a slight increase in sales in Europe. Mining has influenced many parts of the world when it comes to negative sales development. And most notably, that is in Australia. And you can see we have a 27% drop in sales in Australia, mainly driven by the mining business. In Asia, our more industrially related businesses like Machining Solutions and Materials Technology actually saw some positive trends, but the net still became negative due to the decrease we're seeing in the mining sector. Also North America was heavily affected by changes in the mining industry. Looking then more specifically at our different customer segments here. The mining business is down quite significantly in sales compared to the previous year. Also general engineering and construction and consumer related products are down quite significantly year on year. But what is maybe more important is that we do see stable trends in most of our areas right now sequentially compared to the previous quarter. And in automotive, we even start to see a positive trend development here. The exception, as I mentioned earlier here, is our construction business where we still do see the declining market situation. Order intake was more or less on par with our sales came in at SEK 20,200,000,000 This was a decrease of 2% in comparable items compared to the same quarter last year. And this quarter included SEK 1,200,000,000 of mining systems orders. Our invoicing is now catching up with the lower order intake that we've seen in previous quarters and was down 9% in comparable items compared to the same quarter last year here. So but now order intake and invoicing are more or less meeting each other on the same level here. And when you look to our EBIT then, despite quite a lot of decreases in our sales and the currency headwinds we've had, we did report a quite healthy EBIT margin of 12.4%, which is clearly better a clearly better development than what we saw in the last downturn for the Samik Group. And our cash flow, I mentioned earlier, I'd like to really point at our investment levels, which we are managing and controlling at a much more, I think, long term sustainable and disciplined way than what we have seen in the past when we had if you look at the black line, very high rates of capital expenditure compared to our depreciation rates. And we have reviewed our guidance for the full year CapEx downwards towards SEK 4,000,000,000 for the full year 2013 compared to our previous guidance, which puts us more or less on par with our depreciation rate in the group when it comes to capital expenditure. Net working capital did increase as a percentage of sales for the Samik Group, but this was mainly driven by the lower top line that we're seeing in the company right now. In absolute numbers, our net working capital did continue to decrease and this then in turn influenced our operating cash flow in a positive direction. And despite this very significant tax payments we have made, we still have a 0.7% net gearing ratio in the Sandvik Group. And that was made possible by the good underlying cash flow that we saw in the company. If you look at our bridge analysis, I think also the negative EBIT margin development of 27% due to volume is a good development. It shows that we are managing our costs down to meet the lower top line. So we have about SEK 2,000,000,000 on our sales reduction, which is related to pure volume reductions and about a further SEK 1,000,000,000 which is related to the currency effect that we've seen then. So a net €3,000,000,000 change in the top line. But all in all, this resulted in an EBIT margin of 12.4 percent also including the negative currency effects of €250,000,000 that we saw in the quarter. Looking then more specifically at our various business areas. Sandvik Mining then for the first time in quite a few quarters saw a stabilization of the markets where we are seeing that our customers keep up production at the levels they have historically. So we don't see production decreases in the mines, but we do see a very big decrease in their capital expenditure rates. So the maintained production means that we have a fairly stable level of sales when it comes to our rock tools and our aftermarket business, which is of course driven by the operations that they're running on a day to day basis in the mines. While the capital expenditure driven parts of the company and especially the equipment business we have seen a very significant decline. Our EBIT came in at an EBIT margin of 12.3% and a total EBIT of SEK 858,000,000. And Samik Mining was a business area that was most heavily affected by negative currency effects within the Samvik Group and we have had SEK 140,000,000 negative currency effect affecting the results. We continue to adjust our capacity and our costs to the prevailing market conditions that we see right now. And we have this further program which will start to implement during the Q4 here that we announced around this well, earlier this autumn here, where we're aiming to get €500,000,000 to €700,000,000 of savings based on one off costs between €300,000,000 to €400,000,000 and these costs will come in the Q4. And we continue to launch actually quite a number of new different products, both underground, overground or surface mining products and also rock tools. And I think most notable is this Panthera line of drill rigs, which is modular design. And Mr. Olivier here will come back to and talk a bit about that product a bit later here in this presentation. But the mining industry seems to be now stabilizing at the level that we're seeing right now. So I think that's the main takeaway when it comes to mining right now. Machining Solutions. Here we actually saw some signs of improvement. And so sales were up somewhat compared to the preceding year. Also, Machining Solutions has been launching new generations of products. And this new insert grades that we launched earlier this autumn is very important and will really help us to continue to grow organically and move forward our positions in the markets. And we really now have the product in this new insert grades that helps to put us considerably ahead of our competition in terms of performance of the product. The EBIT for Samik Machining Solutions was nearly SEK 1,500,000,000 and we had a 21% EBIT margin. I should remember here that we did not ramp up inventories as much as we normally do in the Q2. So we did have seasonally higher production rates in Machining Solutions than what we maybe normally see as a seasonal effect. We had higher which means that we are absorbing costs more effectively in the business, which helped up the margins here in this business. We also made a smaller acquisition within Machining Solutions, a company called Precorp, which is specialized amongst other towards the aerospace industry, making diamond tipped drill bits and also tools in carbide. This is a niche business making very engineered tools for very specific applications. I think it's a very, very good and interesting complement to our product portfolio. Then looking at our 3 other business areas. First, Sandvik Materials Technology. The adjusted EBIT came in at EUR 265,000,000 8.2%. Materials Technology is the business area which is most heavily affected by the seasonality. We have significant stoppages during the holiday period in Sweden especially. And of course also many of our customers are on holiday during this period affecting the invoicing negatively. And we see continued high activity in oil and gas, which is maybe the most important sector for Materials Technology right now. And Materials Technology has been successful in continuing to reduce its inventory levels here. So I think in many ways good developments in Materials Technology. Sandvik Construction. Here we do continue to see weaker demands. We had a negative book to bill for the business area. And this is of course these low levels of activity is putting pressure on the results of Sami Construction, which came in at an EBIT margin of 4.3%. And here, I mean, this low market activity will, of course, continue to affect the business going forward. And we need to continue to focus now on how we can adapt this business to the prevailing market conditions. Our new Head for the business area, Mr. Dingwei Gao started the 1st October and he is of course now starting to look at these issues and how we should address the current business situation in the best way for Sami Construction. Sami Ventures came in just below SEK 200,000,000 in EBIT. And also Samik Venture made a smaller acquisition, which was a complement to our portfolio of businesses within our Process Systems business, where we're trying now to widen the product portfolio. We have a very strong market position and we see this as a business that does have a lot of good potential to grow and develop going forward. So to summarize the Q3 for the Sandvik Group. We see in general a stabilized demand situation. The strong negative book to bill that we've seen especially in mining seem to have stabilized now at the new but lower level and we don't see the continued deterioration. And we do see signs of a slight positive trend in the year on year numbers when it comes to Machining Solutions. We've maintained our profitability level despite the market pressures that we see right now in a very good way. And we have made very significant product introductions, which over the longer term will help us to continue to strengthen our market positions and develop our relationships with our customers and support them in the best possible way. So with that, before I hand over for the question and answer session, I'd like to hand over to Professor Wiek here, who is our Head of Group Research and Development, and he will comment on some of the activities that are going on in this area within the Samik group right now. So Ulla? Thank you, Ulf. Good morning, everyone. It's nice to be here. My name is Ulf Wiekten. I'm, as Ulf said, Head of Samik Group R and D. And I will talk a bit about our R and D activities. And we used to say within Sandvik that new product development is a prerequisite for continued profitable growth of the company. This is the tradition within Sandvik. And if you look on the situation today, with the new sales ratio, it's around 30% as an average over the Sandvik Group. This varies, of course, between the different BAs depending on the character of the different businesses. This means that 30% of our annual invoicing comes from products introduced to the market during the last 5 years. And of course, as responsible for this, we need an ambition for the future. And we are aiming at the ambition is around 45% that we reach that level within a few years. And we have quite an extensive program going on within R and D, research and product development to reach these goals. And why are we doing this? Well, we know that newly developed product has a better generally a better profitability than the old common products. So we are doing a lot of actions now to fulfill this demand or these ambitions. And if you look on the R and D initiatives, some of them we have other initiatives also, but these are the big ones. Today forming centers of excellence where we try to utilize for the whole group the extreme expertise we have within certain areas. So we have formed a Center for Powder Metallurgy Materials Characterization and Computerized Modeling and Simulation of both processes and materials. We are also increasing our presence in the emerging markets Asia, India, where we are now building R and D centers on these markets to get a closer relation also with the customer on the customer side. We're also introducing career paths for our experts. And this is a way of keeping the top talents within the R and D organization instead of having them going out having a lot of reports to get the kind of the right status in their working career. We also make a lot of initiatives today to expand the core business. And this is based on a lot of activities regarding technical analysis, looking on trends around the world and the global network where we have specialists mapping the technical development, so that we can pick up innovations that we can develop further within the company. And also we are looking a lot on the intellectual property, try to strengthen that with a global network with IP people around the globe. I will now you have seen these two examples of products before, but this is a very limited time for me. So take it as a demonstration of how we work more than a presentation of the product. I think that's important to remember that. We have very many new introductions, but I will say a few words about the Panthera and then I will talk about the 4,327, the new coated insert grade from Machining Solutions. This is a drill rig, the Panthera rig, which was introduced this September to the market. This is based I mean, if you look on all the initiatives within R and D, we will not have a full result of that without changing our way of working. We need to change our way you're working. And this Panthera is based on a platform concept also including the Sika platform, which is actually a technology platform for the control systems of the machine. This platform is also giving guidance when we design the machine as such, trying to always trying to decrease the time to market in the development. This CCAP platform also makes it possible that remotely can track the performance of a machine to give advice regarding service and also get important input to the R and D organization, so that we can develop this equipment further. Another example, as I mentioned, is the newly developed insert 4,325, which also has recently been introduced. And this is about turning. You can see here on the left side, you can see a turning of a steel bar and you can see the nice golden colored insert, which has extreme demands, of course. It's high forces and high temperatures. And just to demonstrate, if you look on the temperature load on this piece, we make an animation here. Here you can see the dark red color is corresponding to temperature at the cutting edge of around 1,000 degrees C, meaning that if the tool as such doesn't last, the customer loses productivity. So this means it starts this is an animation showing some milliseconds, but you could see that instantaneously you get this very, very high temperature combined with high forces. And we have been a pioneer in developing surface coated inserts. And the last generation is this 4,325. And we can see here the surface coating is mainly alumina, which is aluminum oxide. And here you can see that the grains of alumina is a kind of we have succeeded in creating a kind of unidirectional growth of these crystals. The total thickness of this layer is around 50 microns, 15 millimeters, giving the properties of the product. So if we compare with some competitor material, at the moment when our tool still looks new, our competitors' material has actually broken down. I think that is and I talked about the way you're working. This is based on a lot of thermodynamic modeling, a lot of modeling of the cutting process and a lot of experiments made by our expert in the R and D organization. Then the last thing I will talk a bit about is the future. We see today some emerging technologies coming. And regarding this additive manufacturing or 3 d, it's a kind of hype in the world. Everyone is talking about that. Even in the cultural programs on TV, you can hear about this. It will change the world. And we have a more down to earth attitude to this. We are using this technology already today in the prototyping where we make prototypes in plastics. So we have a fundamental knowledge of the technology. But when you turn into metals, the problem is much more complicated. So what we will do here is to also demonstrate a kind of example of how we work within Sandvik R and D. We will start a broader program in this during 3 to 5 years to look on this fundamentally on metallic materials, meaning that 12 to 15 engineers, including design engineers, will work with this full time and also utilize the network with experts that we have in the R and D organization. That's not a business development project. It's an R and D project. After that, we can say, is it something for us? Is it anything for our present products or new products? I think it's too early to say. What we can say today is we don't think that this will set in our present production technology. It might be a complement in the future. That's what we think today. Yes. And then the last slide here, We actually were ranked 1 of the most innovative companies in the world recently by Thomson Reuters. And this was the 3rd year in a row that we got to this very honorable position actually. We are, of course, very, very proud of this, but actually we are not satisfied with this. I hope I've demonstrated. That is my message to you. We are not satisfied. We are honorable, honored, happy, but not satisfied. That was my last slide. Thank you. [SPEAKER JACQUES VAN DEN BROEK:] Thank you, Olof as well. And now let's continue with To summarize, I think, a couple of comments after Olof's presentation here. I mean we will need to live on we talked about ever increasing competition in the world. We need to the best way for us to be successful going forward is to continuously launch the next generations of our products. We will be copied. We'll be chased. But I mean they cannot copy the products that we're just about to launch or so on. And this is what keeps Sandvik ahead of its competition. In mining, this modular design is extremely important since it is a low volume business. If you're building excavators, you have very, very large series of the products even more so with cars. But mining equipment is actually quite short series. So we need to have modularity to quickly be able to upgrade and develop our machines here and drive down R and D costs. And continuously having inserts that are clearly ahead of our competition that really deliver productivity for our customers. That is also what's going to make machining solutions successful in the future. Out in Sandvik, already in the 70s, they were talking about the insert market now has matured and we had invented everything that could be possible. But here by this new generation, we're really showing that we can continue to launch products which are 20%, 30%, 40% better than our competitions. So a very focused R and D effort on the right things. And this journey has not reached the end point. It's still continuing with new generations coming out continuously. So sorry, now we open up for questions here then. Very good. Thank you for those extra comments, Olof. Let's move to the question and answer session. And just to remind you, we're going to alter between the floor here in Stockholm and the virtual audience. Please keep your questions to 1 at a time, and let's hope that we can fit all within the hour that we have. Otherwise, you can call myself or Oskar after the call. Very good. May I have the first question from the floor? Yes. Thank you. Yes, Peter Prodho from Handelsbanken. A limit to one question. Okay. Working capital, you mentioned that you managed to take it down. And all those sales or demand at least that seems to be stabilizing. Could you share some thoughts on what you're aiming at here? What are we actually going to do to get the working capital down from the 31%? And even more importantly, what price are you willing to pay in terms of affecting the operating profitability during this journey? Well, I mean, we're not prepared to pay any big price in terms of operating profits with net working capital, of course. I mean, if we take steps that seriously damage our profitability, that doesn't make sense for all of you as shareholders in our group. But there is still a lot of potential to become more efficient when it comes to net working capital. Mats Backman, our CFO here, is thinking a lot about this, how we can drive this going forward. But the key thing is, of course, that we review our processes, find more efficient ways of working, maybe reduce the number of stocking points and take these kind of measures that can sustainably lower the amount of net working capital. And we're not happy at 31 percent. And we have and still maintain that target of 21% in the group 25% sorry of net working capital to sales from the 31% where we are now. I'll take the line. Thank you. Yes. Good morning. Andreas Koski from Nordea. On mining, is it really fair to say that the mining demand has stabilized when the order intake was supported by €1,200,000,000 of major orders within mining systems. If we exclude them from the order intake, we are at 5.8%, which is 10% below the order in Q2, which didn't have any major orders in the mining systems. So do you expect these orders to be repeated in Q3 in Q4 and Q1 and that we should stay at €7,000,000,000 order intake? We believe and said that our aftermarket on the level that we saw in Q3 has stabilized at that level. We will continue to see a certain mix shift towards mining systems from equipment. And as you point out, equipment is still under pressure. So even though the total order intake has stabilized, we will continue to see a shift towards somewhat more Mining Systems. But so far, I mean, the Mining Systems order intake is continuing roughly at this level. And we have an order of over SEK 650,000,000 that we actually announced today that will come into Q4. So we are the market is very weak, but it's not totally dead and we are booking certain amounts of orders here. So this absolute number of order intake as the market stands here and now today, we still think it's at a level where it has stabilized up. But we will in our sales, the shift to somewhat more mining systems going forward. Thank you. Thank you very much. Let's shift to the virtual audience. May I have a question please, operator? We have a question from Mr. Markus Almerud at Morgan Stanley. Please go ahead. Hi, Markus Almerud here at Morgan Stanley. Can I continue on the path of the mining? And if I look at the numbers that you released, it looks like our mining aftermarket sales actually fell in the quarter both year on year and quarter on quarter. If you can just elaborate a little bit on that and then what's behind that? Yes. The biggest part of that effect is currency. So our top line is by the stronger Swedish kronor and the strength against certain other currencies affecting our top line negatively. So the volume underlying volume is more or less stable. Then we did have a decrease in Q2 when it came to the spare parts and services market order intake. And we are now invoicing at that level in Q3. But we feel that order intake is in line with this level of invoicing that we're seeing in Q3 for that part. And the rock tools have again in volume terms been stable. So the main driver of the decreased top line is currency effects. Thank you very much. Operator, may I have another question? We have a question from Mr. Ben Maslin of Bank of America. Please go ahead. Thank you. Good morning, Olof. Just another follow-up on mining and the idea that it's bottoming. Just back to the mix of orders, can you just say what that will mean in terms of margins going forward? Do you think margins have stabilized also? Or do you think that kind of mix effects running into Q4 and next year can keep putting downward pressure on them? Thank you. Yes. We will have 2 effects which will put downward pressure on margins in mining. 1, the increased share of Mining Systems where we have a single digit EBIT margin on this part of the business. That will, of course, mean that the total margin for the mining business area will be affected negatively by that mix shift. Secondly, the continued decrease in production rates of equipment will, of course, also mean that we will have bigger problems with under absorption of costs and so going forward. We have used the flexibility in terms of outsourced production, temporary labor. And so when we're now getting to a point where it is more costly and more difficult for us to quickly adapt cost levels to the declined volumes of equipment there. So that will be another challenge that we have going forward here. Thanks. And maybe a follow-up. I guess against that you've got the SEK 500,000,000 to SEK 700,000,000 of cost savings coming in. And you take the charge for that I think in Q4. At what point will you start to get the benefits coming through at the EBIT level? Thank you. Those will come gradually during 2014. We won't have any effect in the Q4 of this year from those measures. Got it. Many thanks. Yes. Thank you. Very good. Let's again shift the attention to the floor in Stockholm. Anders Rooskloan, Swedbank. I have a question regarding the relation between Machining Solutions and Venture. Venture came up very strongly. And could it be a buildup of inventories in Bergbauer or explaining part of the strong margin performance? Well, I mean, APT price has moved up, which helps Wolfram. We have had a good fairly good business development for Process Systems also, which is helping that part of the business. And just another question about Machining Solutions. The demand pattern seems a little bit more positive than just for example, you're starting to say that Europe is On a positive, yes. On the positive side. And also Asia, could you elaborate a little bit about China and Japan there? I mean China and Japan when it comes to Asia are the main drivers when it comes to Machining Solutions. And I think sectors like, for example, automotive are driving that. Plus Japanese industry is, as we see it, clearly becoming more active. So that's driving sales in a positive trend. And then in Europe, I mean it's a slight improvement. Europe was already the same quarter last year on a low level. So we're coming from low levels. But it is a slight uptick compared to what we saw 1 year ago here. But sequentially, is Europe also better in the Q3 compared to the 2nd? Or is it last year? Well, I mean you do have a significant seasonal effect. So the Q3 is always difficult to judge, but it's really September that really counts there. But I mean the net has led to an increased sales level compared to the same level that we saw last year. And going into the Q4 compared to the levels and sales rates that we saw in the Q3, we expect to be roughly at the same rates here. So that's what we see so far into the Q4. Okay. Thank you very much. Do we have another question from the floor in Stockholm? Not at this point. Operator, may I have one from the international audience? We have a question from Mr. Guillermo Pinje at UBS. Please go ahead. Hi, good morning everyone. It's Guillermo Pinje at UBS. A question on the SMS provision dissolution. Can you quantify that? Sorry, I didn't hear that. The SMS? Provision dissolution, you mentioned on your release that there is some provisions being dissolved in on the profitability. So I was wondering if you have a quantity or number for that? Net these positive effects have driven margin by roughly 1 percentage point in the positive direction. But we had as I mentioned earlier, we had somewhat higher production rates seasonally than what we normally see since we didn't build inventory as we have been doing previous years during Q2 in the same way. And then we had these slight effects from these provisions affecting the third quarter here then. And can you quantify the over absorption, if I may, on the margins in the quarter? [SPEAKER JOSE RAFAEL FERNANDEZ:] Well, the net effect of this, we believe, lifted the margin by roughly 1%. So is can I just assume that there is a 2%, let's say, not extraordinary, but abnormal margin lift in Q3 on your SMS margins? No, 1% margin. Okay. Thank you. Very good. Thank you. Operator, do we have another question? We have a question for Mr. Alexander Vogel at Berenberg. Please go ahead. Yes. Hi, good morning, gentlemen. Just a quick one on order strength in Europe, I guess. Just wondering if that's all automotive in SMS. And then if you can comment on the order strength in SMT in Europe as well that would be great. Thank you. Well, automotive is one driver where we start to see a positive trend in the automotive sector really on a global basis not just related to Europe. But I mean it's a general slight pickup in activity level in Europe compared to what we saw 1 year ago that is driving this positive sales. And SMS is, as I guess to your point, it's just very dependent on Europe. I mean, it's over half the sales from SMS are coming from Europe. For SMT, possibly some flights positive signs on activity there also, but I think it might be more pronounced for Machining Solutions. Okay. Very good. In Stockholm, do we have more questions? We have one over here. Yes. Peter Frillingen again. Oil prices, I have not talked that much about it. Maybe just to share the pricemix contribution in group and more detail maybe talk about the prices on mining, the different revenue streams, I. E. Consumables, spare parts and equipment and systems? Thank you. Net, we have not seen any downward pricing trends in any part of the company. So it's been neutral to possibly slightly positive in some areas. So but the net effect is, I would say, less than 0.5 percent in a positive direction when it comes to pricing. So flat to maybe slightly positive. And on mining more in detail? Well, I would say you can consider that we've had more or less flat pricing development in the mining business. Amit, typically, we have seen a positive price mix within Machining Solutions for the last 2000 years or so. Would that imply that that has continued and we should look at the net as a function of mining? Well, I mean most of the companies have had a neutral. I mean SMS now towards the end of the 3rd quarter launched this for example new grade, which of course will be priced higher. And normally how we increase prices when it comes to Machining Solutions is that new generation of products are priced at the higher points than the old generation. And with the customer shift, that's driving a net price increase. And that's maybe the most important price driver here. So if we now drive up the new sales ratio, that will help us to drive net pricing in a positive direction for the company. Okay. Thank you. Thank you very much. Do we have another question from the floor? Not at this point. Operator, may I have your assistance again please? We have a question from Mr. Lars Broersen at DNB. Please go ahead. Yeah. Thanks. Good morning, Olof and Magnus. Just two quick ones, if I could. I follow-up on Machining Solutions. What did you say that the solution of the provisions related to within in the quarter? And should we expect any more provision releases to come here? Well, it was related to certain incentive programs mainly that we have specifically within Machining Solutions. So it was more of a one off type dissolution of a provision. So nothing repetitive over coming quarters that you should expect there. Thanks, Rolf. And second, if I just could, on your manufacturing footprint program announced at the Capital Markets Day, are you in a position to provide some near term guidance here, say, on 2014 in terms of what should we expect to come up? Yes. Well, this is a program that we anticipate will develop over the next 3 to 4 years in the group, affecting 25 manufacturing sites as we talked about. We expect that during the Q4, we will be able to shed more light on the first wave of this program in terms of taking the provisions, but also being clear on the anticipated savings from that program. So that's the time line we're working on right now. Thanks. Yes. Okay, very good. Operator, may I have another question? We have a question for Mr. Andre Kuechner of Credit Suisse. Please go ahead. Thank you very much. I just wanted to double check on the CapEx guidance decrease. Is this kind of a new level that we should be thinking of going forward? And what was the project or reasons for going for 4 instead of 5 kind of quite late in the year? And then I had just a quick follow-up on the demand comments in Europe in the Let me first maybe here. Okay. As far as the this year, I mean, we see in general a lower demand. So I mean that reduces our need to increase capacity in many areas of the company. This does not relate to one single big project or so that we were planning to do that we postponed, but rather a more general tighter routine when it comes to approving smaller projects around the company. Going forward, I mean, investing in line with our depreciation for a steady state situation in the company is, I think, reasonable. However, we will, for example, when it comes to our supply chain transformation, need to take certain investments when it comes to moving production from maybe 1 manufacturing site and creating that capability in another manufacturing site. So example, this kind of program will drive a certain amount of capital expenditure to be able to realize the realignment of our footprint. Got it. Thank you. And just a quick follow-up on your comment on demand in Europe and machining. How much of that would your best guess be as a result of the truck end market ramping up into sort of the pre buy? Well, the only area we've pointed to where we see a more pronounced positive trend is automotive sector. So and that, I would say, relates, as I see it, more to personal cars and commercial vehicles. Great. Thank you. Thank you very much. Operator, do we have another question? We have a question from Mr. Martin Wilkie at Deutsche Bank. Please go ahead. Yes. Good morning. It's Martin at Deutsche Bank. Just a question on machining in North America. You mentioned I think a little bit weaker there than expected and you talk about distributors. I mean are you able to comment if that is a destocking that you've seen? Or if not, I mean can you give us a bit more guidance as to which particular end markets in North America were weaker than expected? Thanks. I think that's a general picture, Same. I should remember that we had a very, very strong invoice in North America 1 year ago. So we're still seeing North America as a high performing market in the business. So there could be a certain element to destocking with distributors in that. But yes, I don't really want to speculate too much into exactly the share of those two parts what is sort of business activity driven and what's destocking driven. Okay. Thank you. Thank you very much for that question. Operator, may we have the next one? We have a question for Mr. Sebastian Grittel of Societe Generale. Please go ahead. Yes, good morning. The first question will be on your comment about the production rates and the challenge mining will face regarding lower production rate on equipment. Just I understand, do you mean that you overproduced over the last few quarters and you're sitting on inventories? Or do you say that comment because you think that demand will come down further going forward and you need to adjust further the production on equipment? That would be my first question. Yes. I mean this is this mix shift I was talking about where mining systems where we actually don't have much of the manufacturing ourselves, this is a project business where we do engineering service for our customers, We've become a somewhat bigger share of our invoicing as we expected now going forward, while equipment is still on a somewhat decreasing trend. So that means that we need to manufacture it at lower rates. And we've built quite a lot over the recent years of flexibility into our mining systems. We've outsourced a lot of the family and other different types of production to really deal with the growth that we've seen since the financial crisis in the mining sector. Now that sort of outsourced production is of course what we've cut first, but now we're coming into really the need of dealing with bringing down cost in our own structures since our own factories will not be utilized to a full extent here. So this means that we have a more challenging environment to bring out costs where we're not dealing with outsourced production, but our own Sandvik factories here. And the driver of this is the mix of lower equipments, the lower utilization and equipment factories. And that will be to some extent compensated by mining systems here. Okay. And just regarding the inventories at mining, are you satisfied with the current level of finished goods inventory? Or do you think you need to take the inventories lower going forward? I think in the group, we need to continue to work on our processes with developing our supply chain and finding more efficiencies in terms of our inventories. And for example, the manufacturing footprint plan that we have going forward will help us to reduce our inventory levels since we simply will be manufacturing at fewer locations, need to stop parts and machines and so at fewer locations as one example here. So we still believe going forward that there's a good potential to reduce net working capital in the Sammic Group from the point where we stand today. And just a final one quick one on the R and D. What is the investment you have to make in R and D to get to 45% of new of sale from products introduced less than 5 years ago? Do you think it's safe to step up R and D? In some areas, we may increase our R and D costs somewhat. So we foresee that potentially in areas like Machining Solutions. But the key thing is the focus in our R and D. I mean we spent today already a lot of money on our research and development, but we haven't been churning out products in the rate that we need to. And if we spread ourselves too thinly or working on projects that have too small market potential, for example, and so we're not delivering the things that will get us to this 4% to 5% new sales ratio. So I think a lot is about discipline in what projects we run, that we make sure that we have a very clear picture of what product range do we need to have in the next coming years and that we have the R and D projects running to deliver that product range. So I think this focus and development of our R and D processes is a key step to be taken here, not necessarily increasing the total cost to achieve this. Many thanks. Yes. Thank you very much. Operator, do we have another question please? We have a question from Mr. Alan Smiley at Barclays. Please go ahead. Hi, guys. Yes, it's Alan at Barclays. Just one question really on receivables. They're broadly stable year on year as a percentage of sales, but I'd be interested if you've seen any material changes in your receivable days on a regional basis. Some of your peers have noticed a deterioration, for example, in receivable terms in China. No. I wouldn't say we have a material effect. I mean, our receivables came down. That was mainly driven by lower business volumes here. But on top of that, we also had further inventory reductions in the Samvik Group, which were both affecting our net working capital in a positive way helping to reduce it. Okay. So you haven't seen any evidence of customers pushing out receivables just in an attempt to conserve cash? We have no mandates in the Samik Group, no. Okay. Perfect. Thank you. Thank you very much. May we have the next question please? Next question comes from Mr. James Moore at Redburn. Please go ahead. Yes. Good morning, everyone. Hi, Olof. Please can I get back to the question about mining orders and the EUR 1,200,000,000 versus €4,800,000,000 question earlier? I think you mentioned in the statement that Sandvik saw several major orders totaling €1,200,000,000 in the quarter. You referred to those as major orders in the statement. Then on the call you mentioned €1,200,000,000 of systems orders. I just wonder if I could clarify if major orders are the same as system orders or if it's just a coincidence that the two numbers are the same? No, no. Those are the same it's the same thing we're referring to And has it always been the same thing? You never have major orders in the equipment business for example? Well, I can take that. Normally, it is the same thing, but not necessarily. If we get a lot of equipment orders that at one go, it is per se a major order. So you can't say that it's a 1 on 1 always. Okay. And so when we go back to the Q2, can you tell us what the system order was in the Q2 or the major product order was in the Q2? Just to clarify, was it 0? And we've gone from 0 to EUR 1,200,000,000? Euros? We had a couple of €100,000,000 in systems orders. We had a slightly elevated level of cancellations also that partly mitigated, but we had a couple of €100,000,000 yet. Okay. So if you did €6,700,000,000 last, €6,500,000,000 excluding that and we've gone to €5,800,000,000 So when we think about that drop of €700,000,000 on the non major orders, is the driver of that principally organically just equipment? Or is there also some aftermarket order decline in that? Principally equipment. Okay. Thank you very much. Just wanted to clarify. And currency, I might add as well. That's a good point. Yes. So it was the 800, how much do you think is FX? It is a part of it. I think Magnus can help you with the details on that, James. But I just wanted to comment on I mean, we sometimes talk about major orders in other business areas as well, but that's quite rare. Really only our Mining Systems business where we get this SEK 500,000,000 or SEK 1,000,000,000 type of projects normally. But we can sometimes have them within Materials Technology or within the equipment part of the mining business. And so there can be instances when we've talked about major orders in the other parts of the company. But normally their business model is not such that we get orders of that kind of magnitude into the other business areas and other parts of the mining business. That's clear. And one other, could you just say something about gross margins in the mining division? Just trying to understand whether the move in EBIT margins is at the gross level too or whether there's something going on in SG and A and R and D? Sorry. Well, I mean, the latest cost saving program that we announced, that is going to focus very much on SG and A costs, this reduction of €500,000,000 to €700,000,000 So I mean we are as the business volumes are coming down, we're not just dealing with our production footprint and costs, but also our overhead costs and reducing them to the new sort of business volumes that we see and that we also expect will prevail for a considerable period of time going forward. Sorry. No, that wasn't my question. I was just thinking that your margin fell 4 points or so roughly year on year in the mining business. Is it that the gross margin fell 4 points or that your fixed costs ended up going up because the revenue is down? I'm just trying to understand the gross margins have declined or not. Well, the gross maybe you can take that question directly with Magnus after the call here, and he can talk through the details of that. But I mean, of course, overhead costs or SG and A costs, as a percentage of sales, we're losing business volume, will go up because I mean we don't normally succeed in bringing down our overhead costs and our sales costs and R and D costs in the same pace as sales drop. And actually, we're quite focusing now on in absolute terms maintaining our R and D costs of on the level where they are because we feel it's an important investment for the future here. Thank you very much. Thank you very much for that. Do we have a question on from the floor in Stockholm? Not at this point. We have a few questions left from the virtual audience. May we have the next one, please? The next question comes from Mr. Guillermo Pina at UBS. Please go ahead. Hi. Just wanted to ask a follow-up regarding the backlog margins on SMT going into 2014. Do they look as weakening to you? I think there were some, let's say, cautious comments during the Capital Markets there and I want to sort of confirm that. So the SMT margins are weakening? On the backlog as on your backlog. No. I don't think there's any reason to believe that. And the important thing in S and T is a mix of I mean, umbilical orders in these very high margin products that we have. But I mean, we've continued to see good activity in the energy sector. So we don't see the shift of umbilicals and so in our general product mix effect in the margin negatively going forward. Thank you. And regarding mining, if we again talk about the split between systems and equipment, have equipment on your view as you stated with stabilizing demand, have equipment orders stabilized as well or they continue to deteriorate under the current environment and the systems just coming back? Yes. I mean, rock tools and customer services and the spare parts, this is stable market situation. Equipment is still decreasing somewhat, while mining systems is going to fill a bit of that space. But the net of all of these shifts, we will expect to be roughly neutral with order intake you see today, yes. [SPEAKER JACQUES VAN DEN BROEK:] Thank you. Thank you very much. May we have the last question from the virtual audience, please? We have a question for Mr. Lars Brorson at DNB. Please go ahead. Thanks. Just on your order intake in construction, Olaf, clearly quite weak on what was a very easy year over year comparison. Can you remind us how much of your business here is indirect in Europe and North America and give us an assessment of where you think we are in the distributor destocking cycle here particularly in Europe? Well, I mean distributor destocking can of course be one effect of this. And we have a fair share of sales through distributors in our construction business. I don't think we've given exact any splits here. But compared to mining where we have a very direct sales model and we interact directly with end customers, most a large share of constructions business does go through distributors. So if they are destocking, that does affect us negatively. But I don't really have a clear picture on what proportion of that really is affecting our sales. As I said, these are not our own duties. If you take Caterpillar, they can be very clear on what's happening in their distribution network, but they're much closely linked to the company than what our distribution network is in construction. Thanks. Thank you very much here in Stockholm and also to all of you out there. This concludes our hour and our presentation. If you have further questions, please contact myself or Oskar at Investor Relations. Otherwise, we'll see each other in the quarter again.