Earnings Call: Q2 2019

Jul 17, 2019

Greetings, everyone, and welcome to this presentation, where we will run through the results for Sandvik's 2nd quarter results. As usual, we have our CEO, Bjorn Rosengren and our CFO, Thomas Eliason, here with us who will run through the slides. And after that, we'll open up for your questions. And without further ado, Bjorn, please go ahead. Thank you, Anssi. And also, I'd like to welcome you to this Q2 interim report presentation. It's starting up with the summary of the quarter, and it can be seen as two sides on the coin. On the first one, we still see historically high demand levels. We do our 2nd best result in the history, And we see a strong performance within S and T 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. And we have a weaker result in the SMS business, driven of lower volumes. And based on this, we then have kicked in a number of efficiency measures that will be implemented during the half year. And 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, but also to investigate the opportunities for a separate listing. We have also presented and also actually closed 2 acquisitions, New Tracks as well as OSK. Come back to that a little bit later. So just to the cost program that we have initiated. And 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. And if we summarize these activities, it's about reduction of approximately 2,000 people with an estimate saving of approximately SEK 1,400,000,000 and the cost for this program around SEK 1,200,000,000. And these savings will kick in later on during the second half of the year. So to the demand picture. So we 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, minus 8% percent and 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, we have the right cost structure moving forward. So Thomas, maybe you can dig in a little bit in the financials. Thank you. Thank you very much, Bjorn. I'll do my very best. So let's take a little bit of a dive into the numbers, and we'll start with the financial summary. And if we go to the upper hand right corner, start with the top line, you can see the minus 5 in orders and flat on revenues, 0. Currencies was plus 4%, both for orders and for revenues. And structure was minus 3%, both for orders and for revenues. And structure is, of course, 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 2. So this is the last time we have period as a negative in the numbers. Total, minus 4% for orders and plus 1% for revenues. If we then move to the earnings. Earnings was down in numbers, 2% in the quarter, plus 2% for the 6 months. And the margin was 18.8% compared to 19 point 4% a year ago. But as Bjorn 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. But 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, but it was minus 3.87% in the quarter, driven by a repayment, a premature repayment of some facilities. About that, 26%. You can see that the reported tax rate was 23.2 percent, but that's impacted by a carve out operation within Varel Oil and Gas where we had a capital gain on the corvat, which was offset against tax loss. So a capital gain without a tax. In fact, that pushed down the reported tax rate. But if you take that out, it's 26%, straight in the middle of the guidance of 25% to 27%. Working capital was up to 25.9%, and we have a slide on that as well. Cash flow, basically the same as a year ago and plus 28% for the 6 month period. Returns, 23% and earnings per share flattish compared to last year. So if we move a slide down and go to the bridge, you see the on the organic side, the top line was flattish or a black 0, plus EUR 28,000,000 and a leverage of close to mine or with EBIT effect of minus SEK 300,000,000. This is all from SMS. SMRT and SMT had both growth and improved earnings and improved margins. This minus €300,000,000 also, we should bear in mind that around €100,000,000 in the bridge is because we had overproduction a year ago, and now we have reduced production volumes. It's just a mathematical effect out of that. So minus 1.1% in margin dilution organically, plus 0.8% from currency and minus €0.3 from structure and one off. So that's the journey from €19,400,000,000 to €18,800,000,000 percent. On the next slide, we have the finance net. And the most important line in the finance net is the interest net. The first one, it's gone down from minus 1.74 to minus €148,000,000 just as it should, as the debt is reducing. Then on the next line, you have a one off, minus €200,000,000 This is redemption or a premature repayment of 3 loan facilities during the quarter, totaling a little bit more than SEK 5,000,000,000. These were not traded bonds. These were bilateral bonds. So it was up to us to decide whether we want to repay it or not, and we did so. The real interest compensation was €300,000,000 but then we had a positive swap of €100,000,000 that we could release back into the income statement. So the net net is minus €200,000,000 This corresponds to about 20% of the gross debt and about 40% of the interest debt. So we'll have a nice reduction of the interest rate going forward. And as you can see in the table here, this €200,000,000 will repay itself over the next two quarters. So it really doesn't affect net the guidance on the finance net for the full year. On the next slide, we have working capital. If we move over then to the balance sheet. And 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 buildup, 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. So you can see that on the right hand side. It especially on the SMX 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. And 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 €4,000,000,000 and €6,000,000,000 That's what it is. The 3rd and the 4th quarter is always much, much better in terms of cash flow. And we will have the 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 10,000,000,000 of course, impacted, as always, by the dividend payout in May of €5,300,000,000 The total net debt, of course, is also impacted by an increase of the pension debt as the discount rate has gone down. So it's SEK 6,000,000,000 now. That's SEK 1,000,000,000 up sequentially and SEK 2,000,000,000 year over year. And the gearing is SEK 0.32 Given the cash flow ambitions we have, we still expect the financial net debt to melt down to basically 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 300,000,000 in positive currency effects. Underlying currency effects, transaction translation, it ended at plus 4.55. And the driver of that is, of course, the even weaker Swedish krona compared to the U. S. Dollar. Total currency effect, minus 3.90 dollars Metal price effect, SEK 1.31 million, we guided SEK 100 million, so basically in line. For the Q3, we guided SEK 300,000,000 in currency effects underlying, still the U. S. Dollar. And metal prices basically on par, so minus 20. Euros And the full year guidance, cash CapEx around €4,000,000,000 or below €4,000,000,000 as we have said before. Net financial items around 1 And the tax rate, we keep the guidance of 25% to 27%. We had 25% flat in the Q1. We had 26% in the 2nd quarter. The 6 month tax rate is 25.6%. So we are well in range, actually in the lower half of the guidance. And with that, Bjorn, I'll hand over to you again for the summary and conclusions. Thank you, Thomas. So if we sum up this quarter, we can say that, yes, we've seen a quarter with good demands but 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 a cost level in line with the demand and where the measures have been taken. And we are planning, too, during the second half of the year, to reduce our money with about 2,000 people. That is an important we have also during this quarter, as you all know, taken the important decision to start the separation within of SMT within Sandvik. And during the quarter, we have also presented our financial targets as well as our sustainability targets. And these were presented during the Capital Market Day in Tampere, Finland. And as a last part, I'd 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, let's do that. And we'll start with a question from the conference call, please. Operator, would you be through the first question, please? And our first question is from Klas Bailey from Citi. Hi, Bjorn and Thomas, 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. But on the slide here, 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 had the weaker drop through. And 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 to reverse your confidence in the higher trough margin during the Capital Markets Day. So 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. The structure we work, each of the division are taking the actions that are being needed. And then we from Central Italy, we just follow-up that things are being taken. And we have our contingency plans, and 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's correct that SMS is taking the biggest part of this. They have already, during this year, taken out over 500 people, which will be start kicking in during the coming quarters. So that has been done during the part, and that has just been running on. And now they need, of course, to continue to initiate these actions to be able to deliver the numbers which they have committed to. But at the same time, we've 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've seen in certain areas that has been down a little bit on equipment. So they have also felt that they need to take these actions. But 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. And as more these divisions learn how to act, I think they will be quicker also in taking decisions going forward. But I'm happy with the numbers that we have presented, and I we've gone through it. And I feel that this will have a good impact both on the performance of SMS, but also for the Talk to Sandvik performance. Because you said that you were surprised by the margin shortfall, but was that more the June turning out much weaker? Or is the drop through weaker in general than you thought? Obviously, we're getting more. No, not a yes, sure. I can say that after 2 months, we were pretty I was pretty satisfied with where we were and on the volume side. And then June became much weaker than we thought, and then the drop through was there. On the other hand, we ran last year the business in a full speed upwards. And as you know, we had gearing, which was around 65%, 70% last year. So there was a lot of on costs that came from powder business, which was record high and high performance. And we never had these high profit margins. We are comparing to extremely high numbers. But sure, I'm not happy with this, the SEK 23,300,000,000. I had expected a little bit higher, not much higher, but I had expected a little bit higher in that some of those measures that have been taken would have kicked in. And that's why also they are accelerating these actions going forward. But it is a decent I mean, it is a vertically integrated business. And when you come in and the volumes are slowing down, yes, it drops out. You have to adopt your cost structure. And they were also taken by surprise a little bit in June that June was that week. Charles, I can comment a little bit on the drop through, Claus. We're talking about June here. We're talking about the end of the quarter here. And I mean, we are fully committed to deliver what we said on the Capital Markets Day. But 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 have a pretty tough negative drop through from that. But this will sort itself out not by itself but in through actions over the quarters to come. Yes. No, I totally get it. My second one is on mining. So I want to confirm here on the aftermarket if the year over year slowdown versus last quarter, is just the comp effect year over year that we're effectively flat quarter on quarter on volumes? And 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. I mean, there are extension of the mines, which are kicking through in some parts. But 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. And if you're looking at the aftermarket, which, of course, is much more resilient to weaker markets, it is up 5%. And so and that is a combination of consumables as well as on the service business. And that totally is about 0. But it's SEK 4,500,000,000. So from my if you're looking at these numbers, these are extremely high numbers that we are comparing. So how does the market look like? Yes, it varies a little bit between different areas. And 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 are looked at today, about 6,000. And then we should know that the loss of the copper is not producing 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. So we don't really see a slowdown. On the other hand, we are down on equipment compared to that. So it's more probably leveling off in a more normal level that we see. And some actions, I think, is adequate also for the mining business to adopt to this situation. But definitely no slowdown yet. Thank you. Thank you very much, Klas. And we have some questions put through online here. Here's one from Henrik Mubari at Danske Bank. He wants to know more about production levels in SMS in the Q3. Are you going to lower them in order not to build inventories? Yes. Of course, I think that is pretty clear. The production levels are I mean, it's we deliver our products in 24 hours. So we if volumes are lower, you feel it immediately. And yes, we are not going to see any immature buildup. That's been promised. I hope that will be executed in the right way. So they will run their production levels. Normally now, summer period, they don't run as much anyway because we have built inventory during the previous quarter. So it is normally a pretty low quarter for SMS. And then it normally kicks back a little bit in September, in that part. You will see on what levels that will be. But sure, they are adopting, and they are going they're not going to overproduce and so on. So volume levels are down. And if you look at July, I mean, we normally give you a little bit of an indication how is July developing compared to the previous quarter that has been. And it's only 2 weeks, so it's a little bit early yet. But we don't see the big drops as we see in June, but we see about the same level as average we've seen down. So around 5%, 6%, around there is the levels that the orders are popping in during July. So not as dramatic as June, but of course, it's lower than last year. And that's what we need to take actions for. And just a follow-up from Henrik regarding you mentioned Varel. How no news released 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. And we have we are now in the ending phase where some of our interests are getting closer into the company. And we do expect and hope that we can do it close it here during Q3. And I think that sounds reasonable timing. Thank you. And then we'll go back to the conference call. Operator, would you put through the next question, please? And our next question is from Graham Phillips from Jefferies. Please go ahead. Your line is open. Thanks, Bjorn and Thomas. 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. And sort of related to that, why does the drop through margin come down since the Q1? There's a higher mix of service and aftermarket, which is on higher margins. 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 quarter. So 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 quarters. So I think that is going to we have a leverage actually of 26%, And that might be somewhat lower than you said, around 30% is normally what we say. But I don't think that is on any worrying level there. So I think that they're getting this through. So 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 don't recall if I can recall right, about 62% of the total sales. So 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. So 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 on Yes. No, I think it's from my perspective, I'm think we are moving quite good. And we have, of course, a very competitive quarter that we are competing with last year. Okay. And so 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. And if you recall what I've said before, the output from the mines is normally growing with 1% to 2% per year also in downturn. So I mean, if you can have a double as high as that, I think it's quite good levels. So I think 5% for Service and Consumables is quite a good level from our perspective. Okay. And just on machining, the comment about minus 2% in cutting tools. So 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 Randalls has been somewhat better than in Search during the period. But I don't think it's any part the the volumes is down, and I think the effects on the margin was what we've seen in June and not before because, as I said, I've felt pretty comfortable after 2 months and was expecting a walk through in the June and was taken a little bit from surprise there. And but I'm also happy that they've been quite quick within divisions to kick in these actions that needs to be done sooner, not later. And just finally, the Materials Technology business, that's still on track. There was a report out last night that there was dissension amongst the board about whether that would still be spun out. No. No, from my perspective, we don't see any disagreement in the board. We have all the whole board is in line with the decisions that we have been taken, and that is to separate S and T within Sandvik and that to explore the opportunities for S and T for a separate listing. But the final decision of that will be taken later on, of course, when we feel comfortable about S and T performance and that they will be able to stand on their on legs. But we don't have any disagreement that I know in the board. But 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 Poorson from Barclays. Please go ahead. Your line is open. Hi, thanks. Hey, Bjorn, Thomas, Anssi. Bjorn, 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, has been slowing down for over a year. You've had a tough 3 ish quarters in Automotive. I'm struggling a little bit with why this cost program is coming now. I appreciate June was weak, but 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 and looking at demands and looking at performances and what they need to deliver. And that's the beauty of a decentralized organization. So I think that is what it's based on. But as I mentioned to you, we were pretty happy in during the 1st 2 months during the quarter. But we saw at the same time, we have seen quite weakening or a very flat market during Q4 and Q1, especially in China and in Germany. And that, of course, accelerated during the last quarter. We've seen a stronger U. S. In the both Q4 and Q3. And now U. S. Was down to, I think, for SMS, 4% up, which is it's smaller than double digit that we have seen before. So yes, I think we feel that this is the correct decision. I mean to be honest, I mean we are putting it together here centrally, but the initiatives is, of course, coming from the divisions and where they feel it's necessary. And in the end, that's we need to protect our market. We need to make sure that we don't get negative leverage on S and T that could destroy our targets. Just on your U. S. Business, if I can be allowed to follow. I mean, we've heard some of your U. S. Distributors talk about also weaker June more destocking and now having to pull 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. Yes, I mean, U. S, I think the automotive was down there also now, and I think automotive has 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. But 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. So yes, if you look at it, it's not much that is looking extremely bright going forward. So I think we have to fight at these levels going forward. And that means running the productions a little bit less and keeping our costs under control and making sure that we are lean and lean. Helpful. Thank you. Thank you. We'll have the next question please, operator. And 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. I mean one of your peers mentioned this morning that its automotive business was actually pretty flat in June and that there was now some hope at the end the tunnel there. So 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. And then still talking about SMS, I think you mentioned to the press that SMS growth in July was comparable to that of Q2. So 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? And the final question I have is on the timing of the €1,400,000,000 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. So 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? And I guess and that'd be great if you could confirm on that, 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, and 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. We are I mean, as you know, we work with the everyday customers, and we supply in a very quick mode. So we get the indications there. So I mean, in the end, we see China continue to be on a weak level. I think I mentioned the China levels before, and China was down for SME as minus 9%. So that's the I'm not saying that it had worsened during the quarter, but it's still on a very low level. To be honest, I add, from our perspective, we maybe saw in April an improvement in China. Became 1st quarter. We had a good in April, and then it went down again in May, and it continued on a low level in June. So we were a little bit optimistic there in April, but unfortunately, that did not follow through the coming months. So I think for our viewpoint, I would be very glad if the automotive would pick up, but we don't see that yet in our businesses. SMS, give you a little bit on the July June situation. And 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 percent, 5% down compared to last year in July. And 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. So for us, it's only 2 weeks yet, but I think that's, for us, a little bit a comforting sign that is not totally collapsed. When we come to the savings, SEK 1,400,000,000, that will start kicking in by the end of the year, and then we will see much more during the Q1 during the 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 this is we follow the rules and the regulations and the way we do these kind of adoptions. What you probably will see also the fall is that we will initiate a number of structural programs that has been a little bit on the waiting list. That's meaning closing a number of smaller factories or some factories and doing that program that we have been working now on for more than 4 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. So there are measures, but all of this is driven by the division. So that's the beauty of a decentralized structure that we have 30 business leaders that are driving efficiency going forward. Yes. So I mean, just as a some just compliment on that one, the 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, etcetera, in that number. But that will come, as Bill mentioned here, and that is more complicated and takes more time and it's more costly, etcetera, etcetera. Okay. Understood. Thanks very much. Thank you. And we'll take the next question please, operator, from the conference call. And the next question is from Markus Albro 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. So I think you said on an interview, which was which you had on your website, that you're not happy with the delivery. And just wondering what you mean by that. Would you have wanted to see the divisional business divisions acting faster? Do you think they could have? And are you working in that case to get them to do that? Or is it simply are you simply referring to the margin level? Yes. I think one day, you're connecting a little bit, I think, from my perspective. Now what I said is that I expected a little bit better margin. Now I think June drop through was more negative than I expected. And I was, as I mentioned before, pretty happy with the SMS performance until end of May. And then a weak June, there was a big drop through, which actually pulled down the margin a couple points, which I was negative. Not a lot, but it affected negatively, and that was not what we had hoped. Yes, I mean, in the end, all the divisions, according to our continued plan, they have committed themselves to deliver certain numbers with certain weakness in the demand. And 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. So it is what it is. But and that's a little bit why we're speeding up the actions a little bit going forward. Okay. And 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? And if you can talk a little bit about the difference in different geographies in just June, particularly in general engineering? Yes. And I think where we saw a 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 minus 13%. This is pretty big numbers for SMS. So that's definitely weakening. And then there are some parts of the general engineering that went weaker and pulling down some of these numbers. Some of these general engineering, that can be a lot of difference. 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. So it can be actually related to the automotive in one way or another. But anyway, we saw this change from previous quarter, and that's what we need to act on. Okay. And then if I can just finally ask about that automation in mining. You say that portfolio keeps growing quite nicely. How big is how big are those sales roughly? Of what kind of revenue Of automation. Yes, yes, yes, yes, of course. Now you're coming closer to my heart. Yes, this is an exciting part of the mining business. And as I said so many times, this is this differs from previous upturns and situation. The technology is there. Sandvik has a good offering there with Alta Mine, Opti Mine and Sandvik and so on. We did a lot of presentation on this during the Capital Market Day. But we have approximately 45 minutees today that have autonomous loaders and trucks operating, but also drill rigs. And we have numerous of installation on the Opti mine, which is an operational 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 adopted equipment for this. But 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. And we have one question from the online questionnaire. Well, we have Sebastian at RBC, who is speaking 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 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 100,000,000 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 the expecting seeing what's happening in political decisions and so, but it could also be trade problems between China and U. S. And it can be a lot of stuff, but we've seen a weakening of the automotive industry during quite a long time. And I don't think it's related only to the absolutely not only to the electric vehicle side. It's correct that on electric vehicles, you need less inserts for especially for the combustion engine, which is a big outtake of these inserts. So yes, it will be if you only have electric cars, it will be less inserts. That's pretty clear. And then we'll take the next question from the conference call, please, operator. And the next question is from Alexander Vargo from Bank of America. Please go ahead. Your line is open. Thanks very much. Thanks for squeezing me in. Good afternoon, Bjorn and Steve Thomas. Quick one on SMS again, I'm afraid. I just wanted to clarify if Asia was down 8, China down 9, 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? And 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 GenEng 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, I mean, 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 holding producing at a little bit lower level during the summer period. So there is probably I mean, 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. But at the same time, we think we'll see this during the summer period. So if a factory if there is less demand out there, as we've heard, then you might close another week or you might run that in lower during the summer period. And that might be affected partly. I think it will be very important to see when the demand the higher demands are coming back in September on what levels these will become. And then it would be easier to make a conclusion. Is it temporary? Or is that going to kick up back again? So that, we need to see. But in the meantime, we just need to face the situation where it is and take these necessary actions. So I think that's important. If things change too much better, yes, then we might have to reconsider things. But the actions is based on the lower volume going forward. Okay. And non China or Asia? No. I think both of them are down. Both down. Okay. And then 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. Still, just on the line, it's still very good numbers in U. S. Because we've seen growth there for a long time. So we are not down in low numbers. It's still growth numbers. Very clear. Thank you very much. And if we're quick, we can squeeze in one more question as the final one. Please, operator? And the next question is from Guillermo Peigneux from UBS. Please go ahead. Your line is open. Thank you so much Guillermo Peena. It's a pleasure to have the last question. Can I ask about 2 things? I think first, with regards to the different brands in SMS, Walter, Secco, Coromant, is there any discrepancy 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. And I have a follow-up afterwards. Yes. I think the brands are falling pretty much in 9, and that's, of course, a good way to see how things indicate. It varies a little bit between the brands. Some are maybe doing 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 and so on. So it varies a little bit. But I think the main trends are pretty much the same. Also, on the round 2 side, yes, round 2s have gone stronger than we've seen on the inside side. That is correct. Okay. And then the second one is on the cost savings. I guess, looking at SMS mostly. Over the course of the last 4 years, I guess, you became leaner and meaner. At the same time, obviously, you highlighted the need of R and D on the division. So I wonder whether you could explain us which actions in terms of cost savings can you implement and which those actions would be the focus of them, I. E. Is it manufacturing only? Will it be sales and unlisted expenses? Or are we also talking about lower R and D expenditure as well? I think these are the divisions that are taking part, it is both blue color and white color in all different areas. It will be it is correct that we're doing a lot in R and D, and we have extended these costs during the last 3 years. In addition to these SMS, these 2 new divisions, we have 2 new divisions, one related to software development, where we are investing a lot of money and also to additive manufacturing parts. So totally there, we are spending approximately 300,000,000 dollars without any profit side, which is just on a cost that we have increased during these 3 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. But I think SMS has grown a lot during the last years, and we are a lot of people within. We're close to 20 1,000 people. So it's a huge organization. And they need to make sure that we adopt us where we need to do and take out costs at that time. They've been very successful. I mean, maybe you remember when we go back to 2014, 2015 2016 there, I think they did a fantastic job in adjusting the cost structure. We had big volumes down at that time. Then 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. So they are very efficient when they take on different actions. So I feel very comfortable about their performance moving forward. Thank you so much. Thank you. Have a nice summer. Thank you. And I think we'll all just repeat what Bjorn just said. Have a nice summer. Thank you. And we'll see you in about a quarter's time. Bye bye. Thank you.