Earnings Call: Q2 2013

Jul 19, 2013

Ladies and gentlemen, welcome to the Sunday Conference. Today, I'm pleased to present Olof Vaksander, CEO and Magnus Larsson, Head of Investor Relations. For the first part of this call, all participants will be in listen only mode And afterwards, there will be a question and answer session. Magnus, please begin. Thank you very much. Good morning or good afternoon, everyone, and welcome to the call. I'm here with Ulf Akssander, and he will soon begin with the presentation. This hour will follow the usual procedure. The presentation will consist of 2 parts. First, the normal one and then the extended presentation, which is a dive into an area of our choosing and Olof will talk more about that later. As paranormal, this will be followed by the Q and A session. And with that said, Ulf, please go ahead. Thank you very much, Magnus, and welcome everybody to this call regarding the Q2 results for the Samik Group. If we turn to slide number 2, new presentation pack, we see some highlights for the quarter. Firstly, you can conclude that the market is stable, but tentative. We see unchanged market conditions for Sandvik Machining Solutions, Sandvik Materials Technology and Sandvik Ventures. So a stable market for these parts of the company. Also a fairly stable, but maybe more tentative market for sand and construction. While mining, we continue to see weaker demand in line with what we've seen in the previous quarters as well. That development has continued. Our EBIT came in at just below SEK 3,000,000,000 And if you adjust for one off items, it was just over SEK 3,000,000,000 and the EBIT margin was 13.7%. We had SEK 200,000,000 of non recurring charges related to a restructuring we're doing within our Diamond Innovations business. And we had negative currency effects in the quarter of about SEK 300,000,000 The return on capital employed rolling was 16%. I think a strength in this report was our operating cash flow, which improved compared to the previous year. And one big factor behind that is that we had unchanged inventory levels. So we did not build the inventory like we, for example, did last year in anticipation of the summer shutdown. If we then turn to the next slide, Slide 3, we can see the development in our various markets. Europe was more or less unchanged and that is of course Sandvik's biggest market compared to the same quarter last year. We then see a mixed picture across the world. The mining regions like Latin America and Australia have been affected in terms of drops in our sales. And especially Australia, we see a big impact of the reduction of activity in the mining sector. Africa actually had increased sales and that was driven a lot by good activity within the copper mining business within Africa. So that's a summary of our global picture here. China showed some weakness also here due to the lower growth rates that one is seeing in the Chinese economy now and tighter availability of funds to fund, for example capital and investment projects. If we then turn to the next slide, slide number 4. You can see that we have lower invoicing compared to last year, especially in our mining business, but also engineering and construction and consumer related businesses are lower compared to the same quarter 1 year ago. But we do have some slight increases in the Automotive, Energy and Aerospace sector compared to last year. If we look sequentially compared to the preceding quarter, most of Samvik's main segments moved sideways, so we had a similar demand pattern as we did in the Q1, the exception being mining where we saw some further weakening in the mining sector. We then turn to Slide number 5. Order intake. We reported an order intake of SEK 20,700,000,000. One should though recognize that we have an adjustment that we announced during the quarter of SEK 1,100,000,000 when we backed out a number of orders related to steam generated tubes to the nuclear industry here that were taken mainly around 2,000 1009. So that should be added back if you look and want to compare the numbers here in the correct way. The change in pricevolume terms was 16% compared to the same quarter last year. We then turn to the next slide, slide 6 on invoicing. Invoicing increased somewhat sequentially compared to the preceding quarter, but was down 6% compared to the previous year here. And the invoicing came in at just over SEK 23,000,000,000 for the Sandvik Group. Turning then to slide number 7. We report an EBIT margin of 12.8% Adjusted for nonrecurring charges, the EBIT margin came in at 13.7%. And I think that was a stable result for the group considering that we had headwinds both from currency and from metal price effects during the quarter here. And then if we turn then to slide number 8 with the cash flow, we came in with a higher cash flow than what we had previous year at just over SEK 2 point 6,000,000,000 and this was influenced a good net working capital management in the quarter in the group. Also we have been discussing previously about reducing our CapEx levels. And if you look at the black line, you can see that we have significantly reduced our CapEx in relation to depreciation over recent quarters over the recent couple of years compared to the peak levels we had before the financial crisis. We have also reduced our CapEx guidance for the full year and now expect to come in below SEK 5,000,000,000 in CapEx for the year of 2013. If we then turn to slide 9, we can see the net working capital development. In total, it increased somewhat. So inventory levels were stable, but we did have some reductions in prepayments since we're not booking as much orders into the Mining Systems business. And we normally work with a negative net working capital in that part of our business. And we also had some increases in receivables in the quarter due to higher invoicing levels. If we then turn to slide number 10 and look at the bridge analysis, we can see that we had about SEK 300,000,000 on the EBIT effect from currency. And net compared to same quarter last year, SEK 190,000,000 in one off items. The operating leverage is minus 56%, which is a bit on the high side compared to what it normally is. But that's affected by a very, very strong result from mining in Q2 last year and also the fact that when you compare to Q2 last year, we did have overproduction and we're building inventories in the group, while this year we had production more or less in line with our invoicing. If we then look specifically our business areas and move to Slide 11. In Sandvik Mining, we continue to see weaker demand and that mainly relates to the equipment and systems business. We had stable aftermarket demand for the business. The EBIT came in at just over €1,100,000,000 or nearly €1,200,000,000 compared to €1,800,000,000 the same quarter the preceding year. And the margin came in at 42.2%, which is lower than last year, but historically still a strong margin for the mining business area. And mining was affected by about SEK 150,000,000 of negative currency effect. The return on capital employed for the rolling 12 months was 32.4%. And net working capital increased as a percentage of sales to 29% mainly due to lower invoicing. If we then turn to Sandvik Machining Solutions. Here we and I think one should remember that even though we do see some negative market developments on Samvik Mining, the 4 other business areas in the Samvik Group are more or less seeing a stable market and that goes very much for Machining Solutions. So this is stable market conditions and actually actually some slight improvements in Europe even. And if we look at the invoicing from the insert sales in the beginning of Q3, we see more or less a flat trend compared to what we saw in the Q2. So we don't see any declines and but wouldn't really be able to read out any positive trends yet in those sales either. So stable situation there going into Q3 so far also. The EBIT came in at just over SEK 1,500,000,000 which was down from last year. And the EBIT margin was nearly 21% of the business area. Here we also had negative currency effects of SEK 150,000,000 and one should recognize that production rates where we normally build inventory were actually managed in the quarter more or less in line with sales. Return on capital employed for the rolling 12 months was 26% and due to good inventory management that we've had in the quarter, net working capital actually came in somewhat lower at 26% of invoicing. If we then turn to the next slide, Slide 13. Looking at 1st Sandvik Materials Technology, I think came in with a very strong results. Adjusted for metal price effects, we had nearly SEK 500,000,000 in EBIT. For Sammic Materials Technology corresponding to 12 point percent EBIT margin. So we see good continued profitability improvement. And Sandvik Materials Technology is showing profitability levels, which it hasn't for a very long period of time if you consider metal price effects and so. And as I mentioned earlier, we did the correction to our orders against the steam generator tubes for the nuclear industry and reduced the order backlog by SEK 1,100,000,000 as a consequence of that. Sami Construction came in with an EBIT of SEK 141,000,000 or 6.1 percent, which is also historically strong considering the invoicing levels that we are seeing for Sandvik Construction. We see tentative business conditions with stable markets in Europe and North America, while China has become more hesitant. So the positive trend that we were seeing in Q1 has been changed here for construction more into a stable or a more tentative market situation than what we see has seen in the past. We've also announced Thomas Ruhl's replacement, Dingwei Gao, who is a Chinese national. He's joining us from previously having worked within the MIN Group and has worked within a number of Western companies mainly in China, but also in Germany during his previous career. So I think he has an excellent background and experience to take on our Construction business area. And but also the growth here is related to the emerging markets. And that is good with his background and his knowledge of the Chinese economy. So I think he'll bring a lot to the construction business area there. And then Samik Venture reporting adjusted EBIT of SEK182 1,000,000 on an EBIT margin of 13.7%. We took a significant one off in the second quarter related to consolidation of our 2 production units within Diamond Innovations. We are closing our factory in Ireland and moving the production to our main facility in the U. S. Here. So long term, we're creating a better and more cost effective and rational structure for Diamond Innovations. And we're also merging Diamond Innovations with Sandvik Hard Materials to form a new product area within Sandvik Venture to have a business focusing on developing the markets for super hard materials into special applications here. Okay. And then if we turn to slide 14, I just wanted to comment a bit on what we have focused on so far within the Sandvik Group and how we see the focus areas going forward. And this is these are things that we will dig deeper into at our Capital Markets Day here in September. If we then turn to Slide 15. Firstly, we have, of course, had a lot of focus of putting the customer in the 1st place in the market. And when we did the new organizational setup, it was really to have a customer centric organization where we organized the company according to the various markets that we are servicing within the Sandvik Group. So Machining Solutions, the old tooling was focused into the business dealing really with metal cutting business primarily into machining solutions. Mining and Construction was split into 2 business areas to get 2 organizations focusing clearly on the markets and their customers here. We also have tried to focus our portfolio by, of course, ensuring that we have full ownership of the parts of the company which are our core business, for example, SecoTools within Machining Solutions. And we've also made divestments of noncore businesses like for example the medtech business. And I think that focus within Materials Technology has been one of the key areas for the successful development of the profitability and performance in that business area. We're also working a lot with mid market initiatives to broaden our market exposure and try to find enablers for growth within the Samik Group. Samik Machining Solutions have launched a new brand called Carballoy to target especially the Indian and Chinese markets and to service the mid segment or the value segments of those markets. Sandvik Mining is focusing on expanding its product offering both in the premium area, but also in the mid segment. And we have launched a number of products for example within drilling that are adapted to the Indian and Chinese markets here. And that we think will help us grow and expand our market shares in those parts of the world. In Sandvik Construction, we have made an acquisition of the Chinese crusher manufacturer, Shambao, which gives us an excellent platform into the mid tier segment of the crushing business here in Shambao, which is China's largest manufacturer of crushers. If we then turn to Slide 16, of course, having a sustainable profitability and reducing the volatility in our earnings have been key focus areas within the Sandvik Group also. We have over the last couple of years launched 2 restructuring programs, which are being successfully implemented in the company. The first program was completed already during 2012 and the second program will be fully implemented by the end of 2013. And in total, these 2 programs are targeting cost savings of SEK 2,000,000,000. In our 2 turnaround cases where we've had too low profitability, we have showed significant progress. Here, ceramic materials technology is really focusing on its core business and has achieved significant cost savings. And we can see a continued very positive development of the results within semiconductor technology. And ceramic construction have developed a more bespoke go to market model suitable for the customer base they are serving and also achieve significant cost savings. We have worked and continue to work with increasing flexibility in Sandvik Mining with higher flexibility in manufacturing and we're continuously reducing the number of production sites. If we then turn to slide 17, Another focus area which has also been really key for the Samik Group is to really leverage our scale and talent base in the whole company. So we worked with enhanced coordination and utilization of group resources. For me, the implementation of the R and D Board and now having a group Technical Director has been very important and that we're really trying to use our group wide R and D resources in the best possible way. And we are now trying to increase the number of group wide or multi business area R and D projects that we are running in the company. So we again leverage our scale and the full competence base in the Samik Group to really build for the future in the best way. Are working with global indirect purchasing. I think this is an area where we have significant opportunity for the future by coordinating and structuring this in a world class way. So we have been developing a central indirect purchasing organization and are implementing processes throughout the group to be more effective in our purchasing and of course achieve savings through that. We have outsourced our IT infrastructure and that project is ongoing. And that's also an area where we believe we can achieve cost savings going forward here. And we are in the beginning of outsourcing our financial services to shared service centers on a global basis. And this is also a level which will give savings. And then also when it comes to our talent base, I think the focus on diversity and actually using the full talent base we have in the whole Samik group is extremely important. And we now have an international and much more diverse management team. We've dealt with the significant succession issues that we had when I joined the company with a lot of very senior executives retiring in the not too distant future. And we've also increased I mean not only internationally, but also number of women in leading positions, which I think also is important for us when it comes to using our, of course, full talent pool in the company. So if we then go to Slide 18, I think our focus over the last 2 years have been very much on improving our cost base and setting up and laying a good foundation in terms of the structure within the group. I think our key focus areas going forward now would have to be on our supply chain efficiency and also how we can seek continued growth in the Samik Group in throughout all our business areas here. So these will be the key topics that we will be looking at going forward here for the Samikru. So if we then turn to slide number 19 and summarize the Q2 for 2013. We see more or less stable demand in 4 of our business areas. The exception is mining where we see a weaker market development. We have sequentially improved our earnings in the group compared to Q1. And I think we can be happy also with the strong operating cash flow we displayed in the Q2 due to good management of inventories in the company. And also going forward, we have then reduced our CapEx guidance and we are showing much more discipline on CapEx than we have in the past too. So with that, I end my presentation and hand over to Magnus in the Q and A. Okay. Very good. Thank you, Ulf. This will be very quick. I will just repeat what the procedure is. We'll open up for the questions very shortly. Keep your in order for everyone to be able to ask their questions, I please ask you to limit your questions to 1 with one follow-up. And then you can join the line later on if we have enough time. With that, operator, could we have some assistance please with the first question? The first question comes from Mr. Guillermo Peigne at JP. Please go ahead. It's actually Guillermo Peigne from UBS. Just a question regarding aftermarket operations in mining. You mentioned that rock tools are unchanged in terms of demand, which is surprising to me regarding the fact that the production rates at the mining, the mining measures has been going up year to date over the last 6 months. And then Western Spares in a way softer or weaker. And I wonder what's going on there. Is it competition? Is it just basically more efficiency at mines? Thank you. Well, I mean, well, the business is as we look, we don't really believe in our customer base that we have seen increase in production in production rates, so more or less unchanged production rates lately. We did see some destocking during the aftermarket. But and that level has continued now into this year. So we have not seen the pickup at the end of sort of this destocking here. But overall, right now, we see as we see it from Sammis perspective a fairly stable aftermarket business. Thank you. Thank you very much. Next question please. The next question comes from Mr. Markus Almerud of Morgan Stanley. Please go ahead. Hi, Markus. Almerud here at Morgan Stanley. Can I just ask on well, on China, what are you seeing in China in terms of underlying sequential improvement? And then if I may just also ask about just continue on Guillermo's questions on the wear of spares, where you say you see weakness, if that is the destocking you're talking about or if it's prices of volumes where you see signs of weakness? Thank you. Well China, I think the view that the growth rate in China is becoming slower and that the availability of financing in China is becoming tighter is affecting the development and the growth rate in China. Like for example, in our Construction business, we do see effects of this tighter availability of financing. But I mean, China is still the world's 2nd largest economy and is expected to continue to have a growth rate. So we should probably not exaggerate the changes there. And then in the aftermarket sorry, yes. Yes. But in terms of trading conditions sequentially, is it the same thing? Or are you talking mainly year on year? That is, do you see flat environment sequentially from Q1 or a deterioration from Q1? Well, I would say in construction probably we see we have somewhat more negative deal on the Chinese market. I mean, mining in China is also weak and other areas, I would say, more flattish type development. When it comes to the aftermarket, I don't think I should exaggerate that there is a weakness in this area. We see a fairly stable demand in aftermarket and that's our current view of the market there. So we don't see any negative trends. I believe that we see any negative trends in the aftermarket currently. Okay. Thank you. The next question comes from Andreas Willey at JPMorgan. Please go ahead. Yes. Good morning. The first question is again on the aftermarket because if we use the percentage that you give for your invoice sales as share of the total of the division, we do get quite a material decline in the aftermarket business in Q2. Obviously, currency and so may play a role. But it still looks like that it's not flat, it's down. And in terms of the restructuring in mining, when you approach that topic, do you think this will be a multiyear downturn like we have seen in the 1990s, which probably would require more dramatic cutbacks also into areas maybe like sales footprint? Or is this more for you just the shorter term adoption of manufacturing and assembly capacities with the view that maybe in 1 or 2 years you get an upturn and you don't want to cut too deep into your capabilities in the sector? I mean in the aftermarket we did see some declines in the second half of last year. But beyond that, we still have the view that we have a fairly stable business for the Samvik Group. When it comes to mining, well, I mean, I think all of you read the same reports as we do. And I mean, most analysts fall in the mining sector expect several year lower investment in CapEx level and the CapEx level in the could you mute your line? Several year lower CapEx level in the mining sector. We will of course continuously review our structure and review what measures we feel are necessary to deal with this new market situation. But as I said, I mean, the aftermarket, we expect as long as there are, of course, not significant production cuts with the miners should remain stable. But you can see also in this quarter that the share of equipment sales is decreasing as a consequence of the lower order intake in these areas. When it comes to our Mining Systems business, we have a longer order backlog. And many of these projects are multiyear projects. So it's going to take longer time for the lower order intake to have an impact on sales in Sandvik's Mining Systems business. Thank you. Yes. We have a question from Mr. Andre Kukhnin at Credit Suisse. Please go ahead. Good morning. My question is on inventories. We've seen a reduction in cash terms in Q1 and a very little one in Q2. What are your plans for the rest of the year and maybe looking into 2014? And then just a follow-up on mining. You mentioned that there is copper strength from miners copper miners in Africa. Gold is your primary exposure. Could you comment on how gold is going in Africa, Canada and maybe generally? Well, the inventory I mean, we still have our target of 25 percent inventory to our sales or net working capital to sales. And we still have that target to move above that target. So we still have an ambition to continue to manage our inventory levels downwards. In Q3, it's seasonally a weaker quarter for the Samik group. And we normally have production rates below sales rates due to the vacation periods and so that we see in Europe. When it comes to mining, gold has previously been holding up better. But earlier this year, I mean, also the gold price turned down. And there we have seen effects of lower activity investment levels in the gold sector also. So gold was not what helped us in the Q2 really in Africa. It was more the copper market. So the gold miners now with the shift that we're seeing in the gold price have also become more restrictive with their CapEx levels. And levels. And sorry and on production side in gold, are you seeing any evidence of cuts because we're hearing many stories of these players, especially smaller players disappearing? Well, not anything that we believe is material yet when it comes to gold from a Sandvik's perspective. But I mean, it's difficult for us to judge maybe just on a quarter or so how the trends are changing. Great. Thank you. The next question comes from Mr. Ben Maslin of of America. Please go ahead. Thank you. Good morning, Olof. Firstly, just on Materials Technology. The comment in the release talks about price pressure and the impact of the Japanese yen. Can you give a bit more clarity on that? Do you actually see that happening, yen competitors using the currency? Or are you just flagging this as a risk? And I think you say that they could benefit. That's the first question. Thank you. Well, we see an increased activity level from the Japanese and they're using their I mean S and T has competitors in Japan and a number of their key niche areas. And we see that they are based on their lower cost level now being more active and more aggressive in the market. And we saw this trend also in the Q1. And is that already reflected in the tougher pricing environment in the margin performance of Materials Technology? Or is that weaker pricing in the backlog and yet to feed into numbers? Well, we don't believe that we've had a negative pricing trends for Materials Technology in the quarter. But I mean, I said this has been going on now for 2 quarters. So we've already seen those effects. Then what they will be in the future is of course difficult to judge. But we've already seen effects of the Japanese being more aggressive based on their better competitive position we live at which, yes. Thanks. And then the follow-up on mining. When you look at the current level of tendering, where do you think what level of demand does that support? Is it fairly stable at the Q2 level? Or do you think like Atlas that maybe Q3 orders can still sequentially trend down? Thank you. We don't give forward looking guidance from Sandvik's side here. So but we saw some further weakness in Q2 compared to Q1 for our mining business. Then of course, we've had a significant negative book to bill for a number of quarters now. So we that will of course gradually work into effect on invoicing as our order books become smaller here. We had no big orders for mining systems in Q2, which I think is also a sign of the weakness you see in the markets here right now. Okay. Thanks very much. The next question comes from Mr. Lars Larsen at DNB. Please go ahead. Thank you very much. Good morning, Olof. Good morning, Magnus. Just a question on restructuring initiatives, Olof. I appreciate it's probably something you want to talk about at your Capital Markets Day in September. But on your comments in the presentation about significant cost saving potential in supply chain and purchasing, can you give us some sense of the order of magnitude that this might represent? And on manufacturing footprint, again, can you give us a sense for what kind of potential you see here, where it might come and what kind of cost savings we may expect from that? I mean when and if we have plans and decisions on that are finalized, we will of course communicate them as we did in November, I mean, when we launched a quite significant restructuring program November last year, which is still ongoing during this year. So I don't have anything quantifiable to give you at this point in time. And on purchasing as well? Well, again, I mean, we haven't communicated any external targets, but we believe over the coming years, we by creating more efficient and centralized processes here on indirect purchasing that we do have a potential within the Sami Group, but we have not chosen to externally communicate a target regarding that. Okay, fine. Just on the restructuring charges, I think you had guided to in mining. I think you had still some €180,000,000 to come. Is that something we should expect to come through in the second half? Yes. I mean this ongoing cost saving program of SEK 1,000,000,000 that we announced in November should reach full effect by the end of this year. And the restructuring charges will come during this year as we implement these cost savings. Thanks. The next question comes from Mr. Andreas Koski at Nordea. Please go ahead. Yes, good morning. Thank you. I have a follow-up question on Lars regarding your restructuring program because you're targeting cost savings of SEK 2,000,000,000 at the end of this year. But can you tell us what kind of run rate you were at in the second quarter? Mining has already achieved a significant proportion of their savings. The plans that we have in Materials Technology and Machining Solutions are yet to come during the year. Construction had already implemented their savings during the end of 2012 or so and did that a lot by reducing temporary labor and so. So they got through with their cost savings very quickly in construction. Okay. So we should not expect any further cost savings in mining or construction during the end of this year from those restructuring programs, but Mining is it's not 100%, but we have implemented a big share of that. Material Technology and Machine and Solutions still have their cost savings ahead of themselves. And you had a book to bill ratio 0.82 in Sandvik Mining. And I suppose you will have to take further initiatives to adapt the cost structure to the lower invoicing level we will see in coming quarters. What kind of initiatives can you take there? Is it only personnel reduction? Or can you do something else to adapt the cost structure? Well, I don't have any more details or plans to share with you at this point in time. Okay. Thank you. The next question comes from Mr. Aaron Edesen at Goldman Sachs. Please go ahead. Yes. Hi there. Thank you. Good morning. I'm still and apologies for coming back to the aftermarket in mining. And I'm trying to understand what it is you're saying here because if we look at your year over year disclosure, the declining, say, rock tools, for instance, looks quite dramatic. And as Willi mentioned, this is obviously impacted by currency, but we're still looking at something like 30% down. So when you're talking about stable, I assume you're talking about sequential where it's up a little bit, but is this a run rate which you think is sustainable going forward? Or is there a seasonality in here that we have missed out because of the strong growth and then the sharp decline? And then I just wanted to as a follow-up to that, see if you would agree with me that I if I say that Mining Equipment and Systems orders are down roughly 50% year over year, can we assume basically that the aftermarket bit flows through directly from order intake to sales intra quarter, so to speak? Thank you. But well, as I said, we did see some decline in the aftermarket business in the second half of last year. The share of rock tools and consumables has increased in our invoicing as has the share of customer services and spare parts. So I don't really recognize the numbers, but I suggest that you maybe contact Magnus after the call and you can maybe in more detail run through your numbers and discuss them with him there. Okay. But is there any seasonality involved? Or should we take the 14% of EUR 1,400,000,000 last year in rock tools and compare it to the sort of 12%, which is about EUR 988,000,000,000 We had 11% last year in rocktubs. Okay. In Q2. Okay. And last year, we had 33% in customer services and spare parts and now we have 36%. So can I suggest you take that offline with Magnus? Maybe you can run through the numbers in more detail. Actually the share of rock tools increased as part of our business compared to Q2 last year. Okay. Okay. Yes. Okay. But if that's okay with you maybe you can yes, Aaron will sort it out afterwards. Okay. It says 11% in your release, but okay. Thank you. Yes. That's correct. Not fortunate. Okay. Thank you. The next question comes from Mr. Colin Gibson at HSBC. Please go ahead. Hi there. Good morning everybody. Quick question on Machining Solutions. Obviously, pretty gratifying to see a return to better profitability this quarter there. I'm not sure given what's in the release, so I fully understand all the moving parts. Obviously, you had uncharacteristically weak margins in Q4 and again in Q1. Can you just talk us through what the main moving parts are that have led to the return to 20 plus percent profitability in Q2 please? Thank you. Well, we've had some one off items which we didn't have in this quarter. We have currency effects that have different effects over different quarters here. But I think the big difference is that we had very sharp inventory reductions in the previous quarter. So we had underproduction and under absorption effects there. And this quarter actually also if you compare to last year, we had an overproduction and built inventory levels in the Q2 of 2012, which we did not do in the same way this year. So here we had production more or less in line with sales in the Q2 of 2013. So I think the production rates in relation to sales is the one offs are the big numbers in this comparison. Great. Thank you very much. And if I could ask just a follow-up. Could you just comment a little bit on the environment for pricing for your equipment in both mining and construction please? Well, we had a slight positive pricing trend in the quarter, but of course generating price increases in this environment is quite tough. But I think it's not we don't see any declining price in trans at this point in time. Just to be clear, that's on the mining side, that's price rather than mix. Is that because I guess you would expect with less OE and more MRO a mix improvement anyway. But nonetheless, you saw slight positive pricing trend. Is that fair to say? In mining, as in construction, we may be at a neutral to maybe slightly negative pricing trend. Thank you. The next question comes from Mr. Martin Wilkie at Deutsche Bank. Please go ahead. Good morning. It's Martin Wilkie at Deutsche. Just a couple of questions. Firstly, you talk about some signs of improvement in Europe. Is that mainly driven by your automotive customer base? Or is it a broader based signs of improvement? And the second question, I realize you don't give forward guidance, but just to help us out, could you give us the sort of weighted average duration of your backlog in mining? Just to give us some sort of sense as to what the average delivery time is, just to give us some sort of sense as to when your current order book will be reflected in revenue? Thank you. Well, in Europe, more or less we saw stable demand from our main sectors. What's the main contributor to maybe slightly positive development is as we commented in the report the aerospace industry in Russia. When it comes to our aftermarket, I mean, we're when it comes to equipment, normally around 3 quarters of orders, stock or delivery time. But I mean, now that's getting clearly shorter and for some areas, I would say, down to 1 quarter now. Mining Systems, we probably have something like 1.5 years order book or so since it's a long project that take many years to complete. And aftermarket businesses, I mean, more day to day sales. So we have a shorter than 1 quarter order stock there. So that's more consumable business where we have a continuous business and not really an order stock in that sense. And just a follow-up to that. In terms of the cost saving plan that you announced at the end of last year, Do you feel that's enough given where the book to bill ratios are just now? Or is that something you may readdress and perhaps increase if order levels don't improve from current levels? Well, we're of course continuously monitoring the market. And if we deem it necessary, we will of course, consider taking further steps. But when and if such decisions are taken, we will, of course, communicate them externally as quickly as we can. That's very helpful. Thank you. The next question comes from Mr. Sebastian Goetel at Societe General. Please go ahead. Hi, good morning. First question will be on the mid market in 3 years' time? That's the first question. And I have a follow-up on the P and L. You show quite a big positive number in other operating income and expenses. Could you give us some color on this number and also on the big step up in adjustment for depreciation? The depreciation amortization impairment losses is went up quite a lot year on year. Could you also give us some color about these numbers? Thank you. Firstly, with the mid market, it's not a material part of sales today. But of course, we're planning to gradually develop that part of the business. And for Machining Solutions, we're doing currently an organic initiative with a new brand where we're developing a distributor network and that will take a number of years before we really build up significant sales in that area. And we're of course establishing new brands in the market there. When it comes to mining, there we are expanding our product portfolio under our own brands and creating equipment with which is more tailored for the specific markets that we are servicing. So one of our key efforts also within mining has been to have a much shorter time to market. So we quickly can develop new adapted equipment to our customer needs. So that's about expanding our product portfolio to support our growth going forward, which we are gradually doing and mainly having focus so far in the drilling part of the market. Then let's say other operating income and expenses, it's a mix of smaller items including some currency effects. So this line there is between quarters here. And for depreciation, the big step up year on year? Well Is it related to the that in the Venture division? What you're referring to is we do have a write down there in the €200,000,000 restructuring charge from Diamond Innovations. Okay. That's okay. That's I mean impairments. Okay. Thank you. Yes. I could perhaps add to the other operating income and expenses that we have a positive effect from the closing of the hedge related to the nuclear adjustment as well that falls under this line. Okay. Thank you. The next question comes from Mr. Alan Smiley at Barclays. Please go ahead. Hi. Thanks for taking my question. This is Alan at Barclays. Just two quick ones really. Firstly on seasonality within Machining Solutions. Can you give us a sense for how you think it will map out next quarter? For volumes and margins, Septiclative is even weaker, Q3 versus Q2. But the fact you didn't overproduce at a group level this quarter, does that have implications for how we should think about the sequential volume and margin trends for MS in Q3 versus what is typical? And secondly, on the currency side, it looks like the transactional impact was around €130,000,000 negative in the quarter. Can you confirm firstly, that's roughly correct? And secondly, what we should expect from a transactional perspective in Q3 within the negative €150,000,000 guide you've given? Well, 1st seasonality in SMS. Here, I mean, we do have the summer shutdowns for our factories in Europe. So normally we have under production, which we expect to also have this year compared to sales. And we do not expect that to deviate from preceding years during this Q3 in 2013. Also of course sales are normally affected due to that our customers also implement certain summer shutdowns and so which so we expect normal seasonality as we've seen in previous years. And the two business areas that are most affected of the seasonal effects are our Materials Technology business and our Machining Solutions business. And then sorry your question on currency was Yes, I was just trying to break it out. Analysis about on the effect on invoice sales in Q3. Yes. It was the impact on the transactional impact in earnings in the 3rd quarter within that? Yes. Okay. We don't separate that out. No. But I could say that the vast majority of the guidance would be the transaction part. Okay. Thanks. The next question comes from Andreas Willey at JPMorgan. Please go My question has been answered. Thank you. And we have a question for Mr. We have a question from Mr. Peter Schallen at Handelsbanken. Yes. Good morning, gentlemen. Just a question on the tooling business or the MS business. You mentioned that the improved inventory control has led you to sort of not overproduce. Obviously, it's also about the demand. But could you please explain what this improved inventory control is? What have you done? And how sustainable is that? You mentioned in the last question here that you expect normal seasonal in the Q3. So basically saying that you will under produce in Q3 still even if you didn't over produce in Q3. Could you please explain this? Thank you. Well, we have a number of initiatives where we're trying to manage our net working capital. One area where we've been working with a lot is within Seco Tools, which had a higher net working capital than other parts of the Machining Solutions business. But I mean we have initiatives within Coromant and other brands as well to try to create more streamlined and effective processes. And I mean distribution is one area where we're looking at integrating and creating On mining, you mentioned large project orders. Were On mining, you mentioned large project orders. Were there anything at all in the quarter? Normally, I think sort of a base of a couple of 100 is what we normally see. Were there any at all affecting the order intake in Q2? Yes. There were smaller orders, but no large orders that we normally press release. But I mean we have still booked some orders of course in terms of the base of smaller orders. Any rough estimate what they could amount to accumulated? I mean 100, a couple of 100 or less than that? Well, I think ballpark a couple of 100 is a good figure to use. Okay. That makes sense. Okay. I think that's it for me then. It's 11. So thank you. Thank you very much. I think we need to wrap up. It is 11 as we just heard. I thank you for the attention. And by that, we conclude the call. Thank you very much, everybody.