Greetings everyone, welcome to this presentation where we will run through the results for Sandvik's second quarter results. As usual, we have our CEO, Björn Rosengren, and our CFO, Tomas Eliasson, here with us who will run through the slides. After that, we'll open up for your questions. Without further ado, Björn, please go ahead.
Thank you, Ann-Sofie, also I'd like to welcome you to this second quarter interim report presentation. It's starting up with the summary of the quarter, it can be seen as two sides of the coin. On the first one, we still see historically high demand levels. We do our second-best result in the history, we see a strong performance within SMT as well as in the mining business area. On the other hand, we see a weakening of the demand in the end of the quarter, driven by the automotive and general engineering market. We have a weaker result in the SMS business, driven by lower volumes. Based on this, we then have kicked in a number of efficiency measures that will be implemented during the half year, that's driven by our divisions in the way we do in a decentralized organization.
Also, if we look at the quarter, we have also taken an important decision, is to start separation within Sandvik of the SMT business area, also to investigate the opportunities for a separate listing. We have also presented and also actually closed two acquisitions, Newtrax as well as OSK. Come back to that a little bit later. Just to the cost program that we have initiated, this is, as you know, a decentralized driven structure, which means that based on the lower volumes that we saw in the end of the quarter, a number of these contingency measures have been kicked in by the divisions. If we summarize these activities, it's about reduction of approximately 2,000 people with an estimate saving of approximately SEK 1.4 billion. The cost for this program, around SEK 1.2 billion.
These savings will kick in later on during the second half of the year. To the demand picture. First, we can say that we can see a weakening in all three major segments, or first let's say the markets. Europe is down 10%, North America - 8%, Asia -6%. If we dig into these numbers a little bit more in detail, which I think is important, we can see Europe. It has different flavors here. If you look at SMS, which is important as a good indicator.
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We have the right cost structure moving forward. Tomas, maybe you can dig in a little bit in the financials. Thank you.
Thank you very much, Björn. I'll do my very best. Let's take a little bit of a dive into the numbers. We'll start with the financial summary. If we go to the upper hand right corner, we start with the top line. You can see the -5% in orders and flat on revenues, 0%. Currencies was +4%, both for orders and for revenues. Structure was -3%, both for orders and for revenues. Structure is, of course, a net of both acquisitions as well as divestments. The big divestment that we had last year was Hyperion. The buyer consummated the acquisition on July 2nd. This is the last time we have Hyperion as a negative in the numbers. Total -4% for orders and +1% for revenues. We move to the earnings.
Earnings was down in numbers 2% in the quarter, +2% for the six months, and the margin was 18.8% compared to 19.4% a year ago. As Björn mentioned here, this is one of the highest earnings numbers we've had in the history of the company and one of the highest margins we've had in the history of the company. That's history now. Now we have to take actions to continue to deliver strong earnings going forward. The finance net, we'll dip a little bit deeper into this time. It was SEK -387 million in the quarter, driven by a premature repayment of some facilities. More about that in 26%. You can see that the reported tax rate was 23.2%. That's impacted by a carve-out operation within Varel Oil and Gas where we had a capital gain on a carve-out, which was offset against a tax loss.
A capital gain without a tax effect that pushed down the reported tax rate. If you take that out, it's 26%, straight in the middle of the guidance of 25%-27%. Working capital was up to 25.9%. We have a slide on that as well. Cash flow, basically the same as a year ago, +28% for the six-month period. Returns 22%. Earnings per share flattish compared to last year. If we move a slide down and go to the bridge, you'll see on the organic side, the top line was flattish or a 0% +SEK 28 million and a leverage of close to minus or an EBIT effect of SEK -300 million. This is all from SMS. SMRT and SMT had both growth and improved earnings and improved margins.
This SEK -300 million also, we should bear in mind that around SEK 100 million in the bridge is because we had overproduction a year ago. We have reduced production volumes. It's just a mathematical effect out of that. - 1.1% in margin dilution organically, +0.8% from currency, -0.3% from structure and one-off. That's the journey from 19.4% to 18.8%. On the next slide, we have the finance net. The most important line in the finance net is the interest net. The first one, it's gone down from SEK -174 million to SEK -148 million, just as it should, as the debt is reducing. On the next line, you have a one-off, SEK -200 million. This is a redemption or a premature repayment of three loan facilities during the quarter, totaling a little bit more than SEK 5 billion.
These were not traded bonds; these were bilateral bonds. It was up to us to decide whether we want to repay it or not, and we did so. The real interest compensation was SEK 300 million, we had a positive swap of SEK 100 million that we could release back into the income statement. The net net is -SEK 200. This corresponds to about 20% of the gross debt and about 40% of the interest net. We'll have a nice reduction of the interest rate going forward. As you can see in the table here, this SEK 200 million will repay itself over the next two quarters. It really doesn't affect the guidance on the finance net for the full year. On the next slide, we have working capital. If we move over to the balance sheet.
Of course, working capital was up in the second quarter. Three factors, really. The first one, as it says here on the chart, seasonal stock build-up, as we always have. The second one is that we had heavy deliveries at the end of the quarter, giving us a lot of receivables. That will sort itself out within 60 days. It will just become cash flow before the end of August. The third factor here, of course, which has an impact on the working capital is the drop in volumes in June, which of course had an impact on inventories, which actually increased. You can see that on the right-hand side, especially on the SMS side. You can see here how inventories are going up at the end of the quarter. Cash flow, same this quarter compared to the same quarter a year ago.
Of course, if you look at the chart now, you can see that Q1 and Q2 seasonally in Sandvik in all these years is always on the low side. It's somewhere between SEK 4 billion and SEK 6 billion. That's what it is. The third and the fourth quarter is always much, much better in terms of cash flow. We will have a cash flow during the second half of the year, which is similar to what we had last year and in 2017. Our ambition is to actually be a little bit better on the cash flow for the second half of this year compared to 2018. Finally, net debt. The financial net debt ended at SEK 10 billion, of course impacted, as always, by the dividend payout in May of SEK 5.3 billion.
The total net debt, of course, is also impacted by an increase of the pension debt as the discount rate has gone down. It's SEK 6 billion now. That's SEK 1 billion up sequentially and SEK 2 billion year-over-year. The gearing is 0.32. Given the cash flow ambitions we have, we still expect the financial net debt to melt down to basically nothing before the end of the year, given that we don't do anything else. Now let's finish off with the guidance. First, looking at the Q2 guidance, we guided SEK 300 million in positive currency effects. Underlying currency effects, transaction translation, it ended at +SEK 455, the driver of that is, of course, the even weaker Swedish krona compared to the U.S. dollar. Total currency effect, minus SEK 390. Metal price effect, SEK 131. We guided SEK 100, basically in line.
For the third quarter, we got SEK 300 million in currency effects underlying, still the U.S . Dollar, metal price is basically on par, so - SEK 20. The full year guidance, cash CapEx around SEK 4 billion or below SEK 4 billion, as we have said before. Net financial items around SEK 1 billion. The tax rate, we keep the guidance of 25%-27%. We had 25% flat in the first quarter. We had 26% in the second quarter. The six-month tax rate is 25.6%, so we are well in range, actually in the lower half of the guidance. With that, Björn, I'll hand over to you again for summary and conclusions.
Thank you, Tomas. If we sum up this quarter, we can say that, yes, we've seen a quarter with good demands, slowing down in the end of the cycle, driven by the short cycle business that we have. We have, based on that, and that is the way we work, our divisions have taken the actions that they need to do to adopt their cost level in line with the demand and where the measures have been taken. We are planning to, during the second half of the year, reduce our manning with about 2,000 people. That is important. We have also, during this quarter, as you all know, taken the important decision to start the separation of SMT within Sandvik.
During the quarter, we have also presented our financial targets as well as our sustainability targets, these were presented during the Capital Markets Day in Tampere, Finland. As a last part, I say that we are, of course, as always, committed to these targets that we recently presented. By that, I think we end the presentation and go over to question and answers.
Yes.
Thank you. Please.
Let's do that. We'll start with a question from the conference call, please. Operator, would you put through the first question, please?
Our first question is from Klas Bergelind from Citi.
Hi, Björn and Tomas. It's Klas from Citi. The first one is on the cost savings. Could you talk more about the split between the divisions? The weak spot is in SMS, where we see the incremental volume weakness and also looking at the weaker margin. On the slide there, you say that you want to take out costs in all divisions. I would have thought that all the actions would be in SMS as we have the weaker drop through. Would you not focusing on entirely on SMS? Are you effectively saying that you feel confident there that you're in trough at a higher level and the under absorption is bigger this quarter? A lot of questions on the under absorption and drop through versus your confidence in the higher trough margin during the Capital Markets Day. Why not all the cost savings geared to SMS?
Is that the confidence level still very much being there?
Sure. A little bit first on the cost savings. You know the structure we work, each of the divisions are taking the actions that are being needed, then from central, I will just follow up that things are being taken. We have our contingency plans, that is what the divisions are delivering onto. These cost savings are in all divisions, or all business areas, not all divisions, but all business areas. It is correct that SMS is taking the biggest part of this. They have already, during this year, taken out over 500 people, which will start kicking in during the coming quarters. That has been done during the part, that has just been running on. They need, of course, to continue to initiate these actions to be able to deliver the numbers which they have committed to.
At the same time, we have seen on SMT side, on the short cycle business there, that the orders were in. They need to take actions there. On the mining side, yes, they have seen in certain areas that has been down a little bit on the equipment, they have also felt that they need to take these actions. This is the important thing, that in this decentralized part, the divisions are making these decisions. They are closest to the customers. They are feeling what they need to do. We are in, of course, an early stage of a so-called decentralized organization, as more these divisions learn how to act, I think they will be quicker also in taking decisions going forward.
I am happy with the numbers that we have presented, we have gone through it, I feel that this will have a good impact, both of the performance of SMS, but also for the top to Sandvik performance.
You said that you were surprised by the margin shortfall, was that more the June turning out much weaker or is the drop-through weaker in general than you thought? Obviously, we are getting [crosstalk] .
Yeah, sure. I can say that after two months, I was pretty satisfied with where we were and on the volume side. Then June became much weaker than we thought, then the drop through was there. On the other hand, we ran last year the business in a full speed upwards, as you know, we had a gearing which was around 65%-70% last year, there was a lot of on cost that came from powder business, which was record high and high performance, we never had these high profit margins. We are comparing to extremely high numbers. Sure, I'm not happy with the 23.3%. I had expected a little bit higher, not much higher, I had expected a little bit higher in that some of those measures that have been taken would have kicked in.
That's why also they are accelerating these actions going forward. It is a vertical integrated business. When you're coming and the volumes are slowing down, yes, it drops down. You have to adopt your cost structure. They were also taken by surprise a little bit in June that June was that weak.
Björn, I can comment a little bit on the drop through. Klas, we're talking about June here. We're talking about the end of the quarter here. We are fully committed to deliver what we said on the Capital Markets Day. The structure of the SMS income statement is that the material content is pretty small compared to the other businesses, and the value add is very high, which means that in a single month, all costs become fixed, both what we normally call variable and what we call fixed costs. That's why you had a pretty tough negative drop through from that. This will sort itself out, not by itself, but through actions over the quarter to come.
Yeah. No, I totally get it. My second one is on mining. I want to confirm here on the aftermarket if the year-over-year slowdown versus last quarter is just a comp effect year-over-year, that we're effectively flat quarter-on-quarter on volumes. Then on equipment, you said that June was very strong. Underground, however, is down year-over-year. Is this effectively the replacement cycle in underground now coming off, and that you still then see solid development in brownfield and maybe even in greenfield?
I think there's not too many greenfield projects and hasn't been during this upturn, to be honest. There are extension of the mines, which are kicking through in some parts. To give you a little bit of a flavor of the quarter for the mining industry, we are comparing to the highest quarter during last year. It was very, very high on that part. If you're looking at equipment side now, overall, we are actually 8% down. If you're looking at the aftermarket, which of course is much more resilient to weaker markets, it is up 5%. That is a combination of consumables as well as on the service pieces. That totally is about zero. It's SEK 4.5 billion. If you're looking at these numbers, these are extremely high numbers that we are comparing. How does the market look like? It varies a little bit between different areas.
Yes, you can say that in certain places, decision making is taking a little bit longer time. On the other hand, we don't see any downturn, and there are no mines really not making money on these levels. The gold prices are the highest in a very long time. Copper prices I looked at today is about SEK 6,000. We should know that most of the copper is not produced in a dollar currency. That means that the dollar is extremely high, so still making good money, with the iron ore on record levels and so on. We don't really see a slowdown. On the other hand, we are down on equipment compared to that. It's more probably leveling off in a more normal level that we see. Some actions I think is adequate also for the mining business to adopt to this situation.
Definitely no slowdown yet. Thank you.
Thank you very much, Klas. We have some questions put through online here. Here's one from Henrik Moberg at Danske Bank.
Yeah.
He wants to know more about production levels in SMS in the third quarter. Are you going to lower them in order not to build inventories?
Yeah. Of course. I think that is pretty clear. The production levels are- we deliver our products in 24 hours. If volumes are lower, you feel it immediately. Yes, we are not going to see any inventory build up that has been promised. I hope that will be executed in the right way. They will run their production levels. Normally now, summer period, they do not run as much anyway because we have built inventory during the previous quarter. It is normally a pretty low quarter for SMS, then it normally kicks back a little bit in September and that part. We will see on what levels that will be. Sure, they are adapting and they are not going to overproduce and so on. Volume levels are down.
If you look at July, we normally give you a little bit an indication how is July developing compared to the previous quarter that has been, and it is only two weeks, so it is a little bit early yet. We do not see those big drops as we see in June. We see about the same level as average we have seen down. Around 5%- 6%, around there is the levels that the orders are popping in during July. Not as dramatic as June, but of course it is lower than the last year, and that is what we need to take actions for.
Thank you. Just a follow-up from Henrik regarding, you mentioned Varel.
Yeah.
No news release this quarter. How is that progressing?
Yes. Maybe I should have mentioned that in my presentation. I think the project is running according to plan. We are now in the ending phase where some of our interests are looking closer into the company. We do expect and hope that we can do a close it here during Q3. I think that sounds a reasonable timing.
Thank you. Then we go back to the conference call. Operator, would you put through the next question, please?
Our next question is from Graham Phillips from Jefferies. Please go ahead. Your line is open.
Thanks, Björn and Tomas. My question first on mining and rock. If you look at the 5% organic growth in service aftermarket, do you expect that to sort of continue now into the sort of remaining period? Because obviously we've got some tough comps. You'd expect it to be more in line with underlying levels of production. Sort of related to that, why has the drop-through margin come down since the first quarter? There's a higher mix of service and aftermarket, which is on higher margin. I would have thought instead of sort of the mid-20s, it could have been something more like the mid-30s we had been seeing.
No, I think the drop-through is positive during the quarters. I mean, I don't really get what you are referring to. If you look at the mining part, we have improved our performance compared to previous year, but also compared to previous quarter. I think that is going through. We have a leverage actually of 26%, and that might be somewhat lower than we said. Around 30% is normally what we say. I don't think that is on any worrying level there. I think they're getting this through. I think it's moving in a good way. There's always some mix between what kind of equipment is going out to the customer, what has been invoicing, and so on. The aftermarket is, if I recall right, about 62% of the total sales.
Still a lot of equipment is being invoiced, and a lot of equipment being invoiced, it has, of course, a lower margin than our aftermarket. I think for me, I'm quite happy with this development. I have no complaints to the mining business.
26% is quite okay. We shouldn't draw too many conclusions.
Yeah. No, I think from my perspective, I think we are moving quite good. We have, of course, a very competitive quarter that we are competing with last year.
The underlying level of service and aftermarket growth, is that the normal sort of level, mid-single digit, 5%?
We've had, during many years now, over 10%, which is much higher than the mining market is growing. If you recall what I've said before, the output from the mines is normally growing with 1%- 2% per year also in downturn. I mean, if you can have double as high as that, I think it's quite good levels. I think 5% for service and consumables is quite a good level from my perspective.
Okay, thank you. Just on machining, the comment about - 2% in cutting tools, when you strip out the other effects in there. Again, what's sort of happening with sort of pricing, mix on round tools versus inserts and holders? Is there anything we can draw there about an impact to margins and what's likely to be happening in the second half?
No, I don't think it's correct that I think round tools has been somewhat better than inserts during the period. I don't think it's anybody. The volumes is down, I think the effects on the margin was what we've seen in June and not before, As I said, I felt pretty comfortable after two months and was expecting a walk-through in the June and was taken a little bit from surprise there. I'm also happy that they've been quite quick with individuals to kick in these actions that needs to be done sooner, not later.
Thanks. Just finally, the materials technology business, that's still on track. There was obviously a report out last night that there was dissension amongst the board about whether that would still be spun out.
No. From my perspective, we don't see any disagreement in the Board. The whole Board is in line with the decisions that we have been made and been taken, that is to separate SMT within Sandvik and to explore the opportunities for SMT for a separate listing. The final decision of that will be taken later on, of course, when we feel comfortable about SMT performance and that they will be able to stand on legs. We don't have any disagreement that I know in the board. I read it also this morning.
Okay. Thank you.
Thank you, Graham, for asking that question. We could at least kill one elephant in the room. We'll have the next question, please, operator.
Next question is from Lars Brorson from Barclays. Please go ahead. Your line is open.
Hi. Thanks. Hey, Björn, Tomas, Ann-Sofie. Björn, just on SMS. You didn't take material cost out in 2018. Just last quarter, we heard you say you were in growth mode. That's obviously in contrast to most leading indicators, at least that I follow. It's been slowing down for over a year. You've had a tough three-ish quarters in automotive. I'm struggling a little bit with why this cost program is coming now. I appreciate June was weak, there's also some volatility from fewer working days. I wonder what it is that you're seeing underlying that makes you believe you have to take more meaningful cost out now into 2020.
I think this is decided by the people who are close to our customers, looking at demands, looking at performances, and what they need to deliver. That's the beauty of a decentralized organization. I think that is what it's based on. As I mentioned to you, we were pretty happy during the first two months during the quarter. At the same time, we have seen quite a weakening or a very flat market during Q4 and Q1, especially in China and in Germany. That, of course, accelerated during the last quarter. We've seen a stronger U.S. in both fourth quarter and third quarter, now U.S. was down to, I think for SMS, 4% up, which is smaller than double digit that we have seen before. Yes, I think we feel that this is the correct decision.
To be honest, we are putting it together here centrally, the initiatives is of course coming from the divisions and where they feel it's necessary. In the end, we need to protect our margin. We need to make sure that we don't get a negative leverage on SMT that could destroy our targets.
Just on your U.S. business, if I can be allowed to follow up. We've heard some of your U.S. distributors talk about also a weaker June, more destocking, and now having to claw back some of the tariff-induced gross margin pressure they've seen of late. What are you doing there from a price action standpoint?
I think on the pricing side, I'm pretty happy. If you look at the businesses, we are keeping the pricing up for the group. We are close to 2%, which I think is good, and that has not deteriorated in our businesses, which I think is important, and that needs to continue. Yeah, U.S., I think the automotive was down there also now, and I think automotive have been down, and I can agree with you. We've been a little bit surprised that we've been spared from losing volumes at an earlier stage. On the other hand, we saw strength in other segments part which were maybe flattened out a little bit during this period. We also saw a little bit of down in the end of the month when it comes to general engineering.
Yeah, if you look at it, it's not much that is looking extremely bright going forward. I think we have to fight at these levels going forward, and that means running the productions a little bit less, and keeping our cost under control, and making sure that we are lean and mean.
Helpful. Thank you.
Thank you. We'll have the next question please, operator.
Our next question is from Gael de-Bray from Deutsche Bank. Please go ahead, your line is open.
Thanks very much, and good afternoon, everybody. Can I have three questions, please? The first one is on the automotive side of SMS. One of your peers mentioned this morning that his automotive business was actually pretty flat in June, and that there was now some hope at the end of the tunnel there. I'd like to get your thoughts on this because it seems to be pretty much at odds with what you've suggested it was. Still talking about SMS, I think you mentioned to the press that SMS growth in July was comparable to that of Q2. What does that mean exactly? Does that mean that the underlying cutting tools business is now down around 4%, or is it still around minus 2%? Just to get a sense of the direction here. Is July actually better than June, or not for SMS underlying business?
The final question I have is on the timing of the SEK 1.4 billion savings. It seems that you intend to deliver the full run rate of these savings by the end of 2020, which seems to be fairly quick in terms of the payback. Can you perhaps try to explain to us why the process is going to be so quick, perhaps by detailing in which kind of functions you intend to take out these costs and people? I guess, and that'd be great if you could confirm or not, but that there's not going to be really any structural changes to the manufacturing footprint. Thanks very much.
Very good questions. Let's start with the automotive part. I think I read also what you said, that was related to some improvement in China. We have not seen any of those improvements, but I would be very happy if that is true. As you know, we work with the everyday customers, we supply in a very quick mode, so we get the indications there. In the end, we see China continue to be on a weak level. I think I mentioned the China levels before, China was down presently as -9%. I'm not saying that it had worsened during the quarter, but it's still on a very low level. To be honest, from our perspective, we maybe saw in April an improvement in China.
We came first quarter, we had it good in April. It went down again in May, it continued on a low level in June. We were a little bit optimistic there in April, unfortunately, that did not follow through the coming months. I think from our viewpoint, I would be very glad if the automotive would pick up, we don't see that yet in our businesses. SMS, giving you a little bit on the July and June situation. What I actually said is that we don't see that huge drop that we saw in June coming through in July. We are more seeing a level on the average around 4%- 5% down compared to last year in July.
I think that was important for us that we didn't see, because June was, as you know, much more severe during June in the drop. For us, it's only two weeks yet, but I think that's for us a little bit a comforting sign that it's not totally collapsed there. When we come to the savings, SEK 1.4 billion, that will start kicking in by the end of the year, and then we will see much more during the first quarter during that part, and fully implemented by end of 2020 when you see the full year on that part. I don't think that is too quick. I would probably like to see a little bit quicker, but we follow the rules and the regulations and the way we do these kind of adoptions.
What you probably will see also during the fall is that we will initiate a number of structured programs that have been a little bit on the waiting list. That meaning closing a number of smaller factories, some factories, and doing that program that we have been working now on for more than four years. We've been closing more than 25 factories, and that work will probably be intensified a little bit here during the second half of the year. There are measures, but all of this is driven by the divisions, and that's the beauty of a decentralized structure, that we have 30 business leaders that are driving efficiency going forward.
Thank you so much.
Yeah. Just as some compliment on that one. Of course, the 2,000 people we talk about, that's not really structural. That's adjusting the cost base, really. It's tough, sad, of course, but it's fairly quick, and you have a quick payback on it. There's no shutdowns, et cetera, in that number. That will come, as Björn mentioned here, and that is more complicated and takes more time and is more costly, et cetera.
Right. Okay. Understood. Thanks very much.
Thank you. We'll take the next question, please, operator, from the conference call.
The next question is from Markus Almerud from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, good afternoon. Markus from Kepler Cheuvreux. My first question is on SMS and the margin there. I think you said on an interview, which you had on your website, that you're not happy with the delivery. Just wondering what you mean by that. Would you have wanted to see the divisions acting faster? Do you think they could have, and are you working in that case to get them to do that? Or are you simply referring to the margin level?
Yeah. I think, one, they connect a little bit, I think, from my perspective. No, what I said is that I expected a little bit better margin. Now I think June drop-through was more negative than I expected. I was, as I mentioned before, pretty happy with the SMS performance until end of May. Then a week in June, there was a bigger drop-through, which actually pulled down the margin a couple points, which was negative. Not a lot, but it affected negatively, and that was not what we had hoped. Yes. In the end, all the divisions, according to our contingency plan, they have committed themselves to deliver certain numbers with certain weakness in the demand. I do expect that that is what we're going to fulfill going forward, and that's what we will make sure that the division implement these kind of actions.
It is what it is. That's a little bit why we're speeding up the actions a little bit going forward.
Okay. Then if I can just ask about the end markets, which were weakening. Am I correct to assume that it's mainly talking about general engineering, which weakened in June, or was it also an acceleration in automotive? If you can talk a little bit about the difference in different geographies in just June, particularly in general engineering.
I think where we saw weakening during the part is that U.S. was much stronger during the previous quarter, and it went down somewhat. We also saw Germany weakening during the end of the quarter. I think the whole quarter, if you look at SMS in Germany, we're - 13%. This is pretty big numbers for SMS, so that's definitely weakening. Then there are some parts of the general engineering that went weaker and pulling down some of these numbers. Some of these general engineering, there can be a lot of different, it can be related to oil and gas, it can be related to the automotive industry because it could be sub-suppliers selling to distributors and so on. It can be actually related to the automotive in one way or another. Anyway, we saw this change from previous quarter, and that's what we need to act on.
Okay. Then if I can just finally ask about that automation in mining, you say that portfolio keeps growing quite nicely. How big are those sales, roughly?
Of?
What kind of revenues [audio distortion]
Oh, the automation. Yeah, of course.
Yeah.
Now you're coming closer to my heart. Yes. This is an exciting part of the mining business. As I said so many times, this differs from previous upturns and situation. The technology is there. Sandvik has a good offering there with the AutoMine, OptiMine, and My Sandvik, and so on. We did a lot of presentation on this during the Capital Markets Day. We have approximately 45 mines today that have autonomous loaders and trucks operating, but also drill rigs. We have numerous of installation on the OptiMine, which is an operation system to run the mines more efficient. This is accelerating and growing in a very high pace. That, of course, also drives equipment deliveries because you need to have the latest equipment, which is what we call intelligent products, which is what we call automation-adapted equipment for this.
This is exciting, and we will be seeing a lot of growth in this coming forward. Absolutely.
Okay. Thank you very much.
Thank you, Markus. We have one question from the online questionnaire, where we have Sebastian at RBC who is sticking to the automotive tune here, and wants to know if the downturn that you're seeing, is at all related to the growth of electrical vehicle fleets, and how much cutting tools does an electrical vehicle require compared to a normal combustion engine car?
I still think that the electrical vehicle part is a very small part of this change. I think this is more, we've had a very high automotive production during many, many years now. I think the world has been producing close to 100 million cars per year, very high in China. Of course, when it comes to electric vehicles, it might be that people are hesitating buying something now because of seeing what's happening in political decisions and so on. It could also be trade problems between China and U.S. It can be a lot of stuff, we've seen a weakening of the automotive industry during quite a long time, and we don't think it's absolutely not only to the electric vehicle side.
It's correct that on electric vehicles, you need less inserts, especially for the combustion engine, which is a big off-take of these inserts. Yes, if you only have electric cars, it would be less inserts. That's pretty clear.
Thank you. We'll take the next question from the conference call, please, operator.
The next question is from Alexander Virgo from Bank of America. Please go ahead, your line is open.
Thanks very much. Thanks for squeezing me in. Good afternoon, Björn, Ann-Sofie, Tomas. Quick one on SMS again, I'm afraid. I just wanted to clarify, if Asia was down eight, China down nine, obviously non-Asia up a little bit. Just wanted to clarify that that's fair, and if so, any particular end markets that you can call out there? Then on SMS, I think you also mentioned that you noted customers reducing inventory. I'm wondering if that is something you see as temporary or that's more to go, and whether that is both gen eng and auto, or one more than the other. Thank you.
I'll start with the last one when it comes to inventory side. What we are referring to, and we've been discussing this a little bit. Yes, customers during the summer, if demand in the automotive sector is lower, yes, then it is that they might have too much components. They may be closing factories a little bit longer time and hold the producing at a little bit lower level during the summer period. There is probably, it needs to be verified fully, but we definitely believe that the customers are pulling down some inventory, which affected in June. That's pretty clear. At the same time, we think we'll see this during the summer period. If there is less demand out there as we'd heard, then you might close another week or you might run at a lower during the summer period, and that might affect a part.
I think it will be very important to see when the higher demands are coming back in September, on what levels these will become, and then it will be easier to make a conclusion. Is this temporary or is that going to kick up back again? That we need to see. In the meantime, we just need to face the situation where it is and take these necessary actions. I think that's important. If things change to much better, then we might have to reconsider things. The actions are based on the lower volume going forward.
Okay. Non-China Asia?
No, I think both of them are down.
Both down. Okay. Just to clarify, you answered one of the questions earlier on with respect to demand in the U.S., saying somewhat down. I'm just checking that when you say that you mean it's lower growth, or was it actually down in June as well?
No, no, lower growth.
Lower growth. Okay. Thank you.
Still, just to underline, it's still very good numbers in U.S. because we've seen growth there for a long time. We are not down in low numbers there. It's still growth numbers.
Very clear. Thank you very much.
If we're quick, we can squeeze in one more question as the final one. Please, operator.
The next question is from Guillermo Peigneux from UBS. Please go ahead. Your line is open.
Thank you so much. It's Guillermo Peigneux, and it's a pleasure to have the last question. Can I ask about two things? I think first, with regards to the different brands in SMS, Walter, Seco, Coromant, other than end market related, is there any discrepancy in the performance of the different brands that you see? Or in other words, for example, is round tools still outperforming premium cemented carbide inserts? That will be the first question. I have a follow-up afterwards.
Yeah. I think the brands are falling pretty much in line, that's of course a good way to see how things indicate. It varies a little bit between the brands. Some of them maybe do a little bit better. Some of them have a bigger focus in North America, some have a little bit bigger focus in automotive, some is more distributor sales, so it varies a little bit. I think the main trends are pretty much the same. Also on the round tool side, yes, round tools have gone stronger than we've seen on the insert side. That is correct.
Okay. Thank you. The second one is on the cost savings, I guess looking at SMS mostly. Over the course of the last four years, I guess you became leaner and meaner. At the same time, obviously you highlighted the need of R&D on the division. I wonder whether you could explain to us which actions in terms of cost savings can you implement, and those actions, would it be the focus of them? Is it manufacturing only? Would it be sales and general administrative expenses, or are we also talking about lower R&D expenditure as well?
I think these are the divisions that are taking, but it is both blue collar and white collar, in all different areas. It's correct that we're doing a lot in R&D, and we have extended these costs during the last three years. In addition to these SMS, these tooling divisions, we have two new divisions, one related to software development, where we are investing a lot of money, and also to additive manufacturing parts. Totally there, we are spending approximately SEK 300 million, without any profit side, which is just on a cost that we have increased during these three years, which is of course part of the profit levels. We will continue to invest in these areas to secure future revenue streams going forward. I think SMS has grown a lot during the last years, and we are a lot of people within, we're close to 20,000 people.
It's a huge organization, and they need to make sure that we adopt just where we need to do and take out costs at that time. They've been very successful. Maybe you remember when we go back to 2014, 2015, and 2016 there, I think they did a fantastic job in adjusting the cost structure where we had big volumes down at that time. They were not coming really from these huge growth areas, so they were more on a softer way at that time, but they really managed low volumes at that time with over 20% EBIT margin. They are very efficient when they take on different actions. I feel very comfortable about their performance moving forward.
Thank you so much.
Thank you. Have a nice summer.
Thank you. I think we'll all just repeat what Björn just said.
Yeah.
Have a nice summer.
Thank you very much.
We'll see you in about a quarter's time.
Bye-bye.
Thank you.
Thank you.
Bye.