Ladies and gentlemen, welcome to the Sandvik conference. Today, I'm pleased to present Olof Faxander, 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, welcome to the call. I'm here with Olof Faxander, and he will soon begin with the presentation. This hour will follow the usual procedure. The presentation will consist of two parts. First, the normal one, then the extended presentation, which is a dive into an area of our choosing, Olof will talk more about that later. As per normal, this will be followed by the Q&A session. With that said, Olof, please go ahead.
Thank you very much, Magnus. Welcome everybody to this call regarding the Q2 results for the Sandvik Group. If we turn to slide number two in your 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 Venture. A stable market for these parts of the company. Also a fairly stable but maybe more tentative market for Sandvik Construction. While mining, we continue to see weaker demand in line with what we've seen the previous quarters as well. That development has continued. Our EBIT came in at just below SEK 3 billion, if you adjust for one-off items, it was just over SEK 3 billion, and the EBIT margin was 13.7%.
We had SEK 200 million of non-recurring charges related to a restructuring we're doing within our Diamond Innovations business. We had negative currency effects in the quarter of about SEK 300 million. 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. One big factor behind that is that we had unchanged inventory levels. We did not build the inventory like we, for example, did last year in anticipation of the summer shutdown. If we turn to the next slide three, we can see the development in our various markets. Europe was more or less unchanged, that is, of course, Sandvik's biggest market, compared to the same quarter last year. We 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. That's a summary of our global picture here. China showed some weakness also here due to the lower growth rates everyone is seeing in the Chinese economy now and tighter availability of funds to fund, for example, capital and investment projects. We turn to the next slide number four, 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 one year ago.
We do have some slight increases in the automotive, energy, and aerospace sector compared to last year. We look sequentially compared to the preceding quarter, most of Sandvik's main segments moved sideways, we had a similar demand pattern as we did in the first quarter. The exception being mining, where we saw some further weakening in the mining sector. We turn to slide number five, order intake. We reported an order intake of SEK 20.7 billion. One should, though, recognize that we have an adjustment that we announced during the quarter, SEK 1.1 billion, where we backed out a number of orders related to steam generator tubes to the nuclear industry here that were taken mainly around 2009. That should be added back if you look and want to compare the numbers here in the correct way.
The change in price volume terms was 16% compared to the same quarter last year. We turn to the next slide six on invoicing. Invoicing increased somewhat sequentially compared to the preceding quarter, but was down 6% compared to the previous year here. The invoicing came in at just over SEK 23 billion for the Sandvik Group. Turning to slide number seven. We report an EBIT margin of 12.8%, adjusted for non-recurring charges, the EBIT margin came in at 13.7%. I think that was a stable result for the group, considering that we had headwinds both from currency and from negative metal price effects during the quarter here.
We turn to slide number eight with the cash flow, we came in with a higher cash flow than what we had previous year at just over SEK 2.6 billion, this was influenced by a good net working capital management in the quarter in the group. We've been discussing previously about reducing our CapEx levels, if you look at the black line, you can see that we have significantly reduced our CapEx, in relation to depreciation over recent quarters of 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 billion in CapEx for the year of 2013. We turn to slide nine, we can see the net working capital developments.
In total, it increased somewhat. 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. There we normally work with a negative net working capital, and that's part of our business. We also had some increases in receivables in the quarter due to higher invoicing levels. If we then turn to slide 10 and look at the bridge analysis, we can see that we had about SEK 300 million on the EBIT effect from currency, and net compared to the same quarter last year SEK 190 million in one-off items. The operating leverage is -56%, which is a bit on the high side compared for what it normally is.
That's affected by a very strong result for 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 at 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 SEK 1.1 billion or nearly SEK 1.2 billion, compared to SEK 1.8 the same quarter the preceding year, and the margin came in at 14.2%, which is lower than last year, but historically still a strong margin for the Mining business area.
Mining was affected by about SEK 150 million of negative currency effects. 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, even though we do see some negative market developments on Sandvik Mining, the four other business areas in the Sandvik Group are more or less seeing a stable market, and that goes very much for Machining Solutions. It's a stable market conditions and actually some slight improvements in Europe even. If you look at the invoicing from the insert sales in the beginning of the third quarter, we see more or less a flat trend compared to what we saw in the second quarter.
We don't see any declines, but wouldn't really be able to read out any positive trends yet in those sales either. Stable situation there going into Q3 so far also. The EBIT came in at just over SEK 1.5 billion, which was down from last year, and the EBIT margin was nearly 21% for the business area. Here we also had negative currency effects of SEK 150 million, and one should recognize that production rates where we normally build inventories, 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 the 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 13.
Looking at first Sandvik Materials Technology, I think came in with a very strong result. Adjusted for metal price effects, we had nearly half a billion SEK in EBIT for Sandvik Materials Technology, corresponding to 12.5% EBIT margin. We see a 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 on. As I mentioned earlier, we did do a correction to our orders against the steam generator tubes for the nuclear industry, and reduced the order backlog by 1.1 billion SEK as a consequence of that. Sandvik Construction came in with an EBIT of 141 million SEK, or 6.1%, 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. 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 have seen in the past. We've also announced Thomas Rohd's replacement, Dinggui Gao, who is a Chinese national. He's joining us from previously having worked within the MAN Group, and has worked within a number of Western companies, mainly in China, but also in Germany during his previous career. I think he has an excellent background and experience to take on our construction business area. A lot of the growth here is related to the emerging markets, and that is good with his background and his knowledge of the Chinese economy.
I think he'll bring a lot to the construction business area there. Now Sandvik Venture, reporting adjusted EBIT of 182 million SEK, on an EBIT margin of 13.7%. We took a significant one-off in the second quarter related to a consolidation of our two production units within the Diamond Innovations. We are closing our factory in Ireland and moving the production to our main facility in the U.S. here. Long term, we're creating a better and more cost-effective and rational structure for Diamond Innovations. 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. 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 these areas 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 first place in the market. 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. 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 two business areas to get two 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, Seco Tools within Machining Solutions. We've also made divestments of non-core businesses like, for example, the MedTech business. 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 Sandvik Group.
Sandvik Machining Solutions have launched a new brand called Carboloy to target especially the Indian and Chinese markets and to service the mid segments 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. 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. At Sandvik Construction, we have made an acquisition of the Chinese crusher manufacturer, Shan Bao, which gives us an excellent platform into the mid-tier segment of the crushing business here. Shan Bao is China's largest manufacturer of crushers. If we 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 two 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. In total, these two programs are targeting cost savings of SEK 2 billion. In our two turnaround cases where we've had too low profitability, we have showed significant progress here. Sandvik 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 Sandvik Materials Technology.
At Sandvik Construction, have developed a more bespoke go-to-market model suitable for the customer base they are serving, also achieved significant cost savings. We have worked and continue to work with increasing the cost flexibility in Sandvik Mining with higher flexibility in manufacturing, we're continuously reducing the number of production sites. If we turn to slide 17. Another focus area, which has also been really key for the Sandvik Group, is to really leverage our scale and talent base in the whole company. We've worked with enhanced coordination and utilization of group resources. For me, the implementation of the R&D board and now having a group technical director has been very important in that we're really trying to use our group-wide R&D resources in the best possible way.
We are now trying to increase the number of group-wide or multi-business area R&D projects that we are running in the company. We, again, leverage our scale and the full competence base in the Sandvik Group to really build for the future in the best way. We 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. 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 is also an area where we believe we can achieve cost savings going forward here.
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. 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 Sandvik Group is extremely important. We now have an international and much more diverse management team. We have 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. We have also increased the, not only internationally, but also the 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.
If we then go to slide 18, I think our focus over the last two 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 will have to be on our supply chain efficiency and also how we can seek continued growth in the Sandvik Group throughout all our business areas here. These will be the key topics that we will be looking at going forward here for the Sandvik Group. If we then turn to slide number 19 and summarize the second quarter for 2013. We see more or less stable demand in four 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 second quarter due to good management of inventories in the company. 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 year. With that, I end my presentation and hand over to Magnus on the Q&A.
Okay, very good. Thank you, Olof. This will be very quick. I will just repeat what the procedure is. We will open up for the questions very shortly. In order for everyone to be able to ask their questions, I please ask you to limit your questions to one 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 Pena at JP Please go ahead.
It's actually Guillermo Pena 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 majors has been going up year-to-date over the last six months. Then wear and 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, the business is as we look, we don't really believe in our customer base that we have seen an increase in production rates, more or less unchanged production rates lately. We did see some de-stocking during the second half of last year, which led to somewhat depressed levels of sales in the aftermarket. That level has continued now into this year, we have not seen the pickup at the end of this de-stocking period. Overall, right now we see, as we see it from Sandvik's perspective, a fairly stable aftermarket business.
Thank you.
Thank you very much. Next question, please. Yeah.
The next question comes from Mr. Markus Almerud at Morgan Stanley. Please go ahead.
Hi, Markus Almerud here at Morgan Stanley. Can I just ask on China, what are you seeing in China in terms of underlying sequential improvement? Then if I may just also ask about, just continue on Guillermo's questions on the wear spares, where you say you see weakness, if that is the de-stocking you're talking about, or if it's prices or volumes where you see signs of weakness. Thank you.
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 tight availability of financing. China is still the world's second largest economy and is expected to continue to have a growth rate, so we should probably not exaggerate the changes there. Sorry, yes.
In terms of trading conditions sequentially, is it the same thing, or are you talking mainly year-over-year? That is, do you see a flattish environment sequentially from Q1 or a deterioration from Q1?
Well, I would say in construction, probably we have a somewhat more negative view on the Chinese market. Mining in China is also weak. In other areas, I would say more a flattish type development.
Okay.
When it comes to the aftermarket, I don't think one 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. We don't see any negative trends, believe that we see any negative trends in the aftermarket currently.
Okay. Thank you.
The next question comes from Mr. Andreas Willi at JP Morgan. Please go ahead.
Yeah. Good morning. The first question is again on the aftermarket, because if we use the percentages 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. In terms of the restructuring in mining, when you approach that topic, do you think this will be a multi-year 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 a shorter-term adaption of manufacturing and assembly capacities with the view that maybe in one or two years you get an upturn, and you don't want to cut too deep into your capabilities in the sector?
Aftermarket, we did see some declines in the second half of last year. Beyond that, we still have the view that we have a fairly stable aftermarket business for the Sandvik Group. When it comes to mining, I think all of you read the same reports as we do, and most analysts following the mining sector expect a several year lower investment CapEx level. Could you mute your line? A several year lower CapEx level in the mining sector. We will, of course, continuously review our structure.
Hello?
-necessary to deal with this new market situation. As said, the aftermarket, we expect, as long as there are, of course, no significant production cuts with the miners, should remain stable. 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. Many of these projects are multi-year 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.
Yeah.
We have a question from Mr. Andre Kukhnin at Credit Suisse. Please go ahead.
Good morning. My question's 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? Then, just a follow-up on mining. You mentioned that there is copper strength from copper miners in Africa. Gold is your primary exposure. Could you comment on how gold is going in Africa, Canada, and maybe generally?
Well, inventory, we still have our target of 25% inventory to our sales, or net working capital to sales. We still have that target, and we're above that target. We still have an ambition to continue to manage our inventory levels downwards. In Q3, it's seasonally a weaker quarter for the Sandvik 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. Earlier this year, also the gold price turned down, and there we have seen effects of lower activity investment levels in the gold sector also. Gold was not what helped us in the second quarter, really, in Africa. It was more the copper market.
The gold miners now, with the shift that we're seeing in the gold price, have also become more restrictive with their CapEx levels.
Sorry, and on production side in gold, are you seeing any evidence of cuts? 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. It's difficult for us to judge maybe just on a quarter or so how trends are changing.
Great. Thank you.
The next question comes from Mr. Ben Maslen at Bank of America. Please go ahead.
Thank you. Morning, Olof.
Morning.
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? 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. SMT has competitors in Japan and a number of their key niche areas. We see that they are, based on their lower cost level now, being more active and more aggressive in the market. We saw this trend also in the first quarter.
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 trend for Materials Technology in the quarter. As I said, this has been going on now for two quarters, we've already seen those effects. What they will be in the future is, of course, difficult to judge. We've already seen effects of the Japanese being more aggressive based on their better competitive position with the weak JPY.
Thanks. Then the follow-up on mining, when you look at the current level of tendering, 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 decline?
We don't give forward-looking guidance from Sandvik's side here. We saw some further weakness in Q2 compared to Q1 for our mining business. Of course, we've had a significant negative book-to-bill for a number of quarters now. That will, of course, gradually work into effect on invoicing as our order books become smaller. We had no big orders for mining systems in Q2, which I think is also a sign of the weaknesses in the markets here right now.
Okay, got it. Thanks very much.
The next question comes from Mr. Lars Brorson 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. 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? 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?
When and if we have plans and decisions that are finalized, we will, of course, communicate them as we did in November, when we launched a quite significant restructuring program November last year, which is still ongoing during this year. I don't have anything quantifiable to give you at this point in time.
On purchasing as well?
Well, again, we haven't communicated any external targets, but we believe over the coming years, by creating more efficient and centralized processes here on indirect purchasing, that we do have a potential within the Sandvik Group, but we have not chosen to externally communicate the targets regarding that.
Okay, fine. Just on the restructuring charges I think you had guided to in Sandvik Mining, I think you have still some SEK 180 million to come. Is that something we should expect to come through in the second half?
Yes. This ongoing cost-saving program of SEK 1 billion 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 loss regarding your restructuring program, you're targeting cost savings of SEK 2 billion at the end of this year. 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, while 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 there, and did that a lot by reducing temporary labor and so on. They got through with their cost savings very quickly in Construction.
We should not expect any further cost savings in Sandvik Mining or Sandvik Construction during the end of this year from those restructuring programs.
Sandvik Mining, it's not 100%, we have implemented a big share of that. Sandvik Materials Technology and Sandvik Machining Solutions still have their cost savings ahead of them.
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 personal reduction, or can you do something else to adapt the cost structure?
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. Aron Edison at Goldman Sachs. Please go ahead.
Yes. Hi there. Thank you. Good morning. 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. As Andreas Willi mentioned, this is obviously impacted by currency, but we're still looking at something like 30% down. When you're talking about stable, I assume you're talking about sequential, where it's up a little bit. 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?
I just wanted to, as a follow-up to that, see if you would agree with me that if I say that mining equipment and systems orders were 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.
Well, as 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. 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. Is there any seasonality involved, or should we take the 14% of SEK 1.4 billion last year in rock tools and compare it to the 12%, which is about 980-
We had 11% last year in rock tools.
In Q2. Okay.
Last year we had 33% in customer services and spare parts, and now we have 36%. 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.
Yeah. Okay. If that's okay with you, maybe you can.
Yeah. Aron, we'll sort it out afterwards.
Okay. It says 11% in your release, but okay. Thank you.
Yeah. That's correct. Not 14. No.
Okay. Thank you.
Yeah.
Yeah.
The next question, 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, that I fully understand all the moving parts. Obviously, you had uncharacteristically weak margins in Q4 and again in Q1. Could you just talk us through what the main moving parts are that have led to the return to 20-plus% 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 had different effects over different quarters here. I think the big difference is that we had very sharp inventory reductions in the previous quarter. We had underproduction and under absorption effects there. This quarter actually also, if you compare to last year, we had an overproduction and built inventory levels in the second quarter of 2012, which we did not do in the same way this year. Here we had production more or less in line with sales in the second quarter of 2013. I think the production rates in relation to sales is, and the one-offs are the big numbers in this comparison.
Great. Thank you very much. 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, of course, generating price increases in this environment is quite tough. I think we don't see any declining pricing trends at this point in time.
Just to be clear, 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. Nonetheless, you saw a slight positive pricing trend. Is that fair to say?
In mining, yes. In construction, we maybe had a neutral to maybe slightly negative pricing trend.
Thank you.
The next question comes from Mr. Martin Wilke at Deutsche Bank. Please go ahead.
Good morning. It's Martin Wilke 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 sign of improvement? 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 the main contributor to maybe a slightly positive development is, as we comment in the report, the aerospace industry in Russia. When it comes to our Aftermarket, when it comes to equipment, normally around three quarters of orders, stock or delivery time, but now that's getting clearly shorter, and for some areas, I would say down to one quarter now. Mining systems, we're probably at something like one and a half years order book or so, since these are long projects that take many years to complete. Aftermarket businesses, more day-to-day sales, so we have a shorter than one quarter order stock there. That's more a consumable business where we have a continuous business and not really an order stock in that sense.
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. 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. Sebastien Goutelle at Societe Generale. Please go ahead.
Hi, good morning. First question will be on the mid-market initiative. What is the size of the mid-market initiative as a % of sales today, and what could be a realistic target in three years' time? That's the first question. I have a follow-up on the P&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 went up quite a lot year-on-year. Could you also give us some color about these numbers? Thank you.
Well, firstly, with the mid-market, it's not a material part of sales today. Of course, we're planning to gradually develop that part of the business. 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. We're, of course, establishing a new brand in the market there. When it comes to Mining, there we are expanding our product portfolio under our own brands and creating equipment which is more tailored for the specific markets that we are servicing. One of our key efforts also within Mining has been to have a much shorter time to market, so we more quickly can develop new adapted equipment to our customer needs.
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. Let's see, other operating income and expenses. It's a mix of smaller items, including some currency effects. This line there is between quarters here.
For depreciation, the big step-up year-over-year?
Well-
Is it related to the charges in the venture division?
What you're referring to, we do have a writedown there in the SEK 200 million restructuring charge from Diamond Innovations.
Okay. That's depreciation, I mean, impairments. Okay. Thank you.
Yes. Impairment.
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. It's 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, typically they're seasonally weaker, Q3 versus Q2. 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? Secondly, on the currency side, it looks like the transactional impact was around SEK 130 million negative in the quarter. Can you confirm, firstly, that's roughly correct? Secondly, what we should expect from a transactional perspective in Q3 within the negative SEK 150 million guide you've given?
First, seasonality in SMS. Here, we do have the summer shutdowns for our factories in Europe. Normally we have an underproduction, which we expect to also have this year compared to sales. 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, so we expect normal seasonality as we've seen previous years. The two business areas that are most affected of the seasonal effects are our materials technology business and our machining solutions business. Sorry, your question on currency was-
I was just trying to break out-
[inaudible] on the effect on invoice sales in Q3?
Yeah. Was the impact on the transactional impact on earnings in the third quarter within that?
Okay. We don't separate that out.
I could say that the vast majority of the guidance would be the transaction part.
Okay.
Yeah.
Thanks. Great.
The next question comes from Mr. Andreas Willi at J.P. Morgan. Please go ahead.
My question has been answered. Thank you.
Good.
We have a question from Mr.-
Yes, continue. Yes.
We have a question from Mr. Peder Sjolen at Handelsbanken. Please go ahead.
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 not overproduce. Obviously, it is also about the demand, 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 seasonality in Q3, basically saying that you will underproduce in Q3 still, even if you did not overproduce in Q2. Could you please explain this? Thank you.
Well, we have a number of initiatives where we are trying to manage our net working capital. One area where we have been working with a lot is within Seco Tools, which had a higher net working capital than other parts of the Sandvik Machining Solutions business. We have initiatives within Coromant and other brands as well to try to create more streamlined and effective processes. Distribution is one area where we are looking at integrating and creating more efficiencies, also using common distribution centers out into the market.
Okay. That is fair. 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 hundred is what we normally see. Were there any at all affecting the order intake in Q2?
There were smaller orders, but no large orders that we normally press release. 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? 100, a couple of hundred, or less than that?
Well, I think ballpark a couple of hundred is a good figure to use.
Okay. That makes sense. Okay, I think that's it for me then. It's 11:00. Thank you.
Thank you very much. I think we need to wrap up. It is 11:00 A.M., as we just heard. Thank you for the attention, and by that, we conclude the call.
Thank you very much, everybody.