of Sandvik 2013. My name is Magnus Larsson, and you are very welcome to our day. In just a few minutes, Olof Axelsson will hold his presentation. I will just brief you on some practical information of importance. Firstly, safety first. You will hear a lot more about this day from all business areas managers, including Olof as well. In the unlikely event of an emergency, there are two main exits from this room. It's where you came in. It's also through that door, all the way through, follow the signs, and you will find your way out. The assembly point is the roundabout just outside, between the tent and the Pantera drill rig that I hope you noticed when you came in.
For those of you familiar with the concept, yes, the concept this year as well will be familiar. We will start with Olof. He will present for about 40 minutes, including a Q&A session, and then you will be divided into groups. You've got your material in your pack as well, so pay attention to which group you belong to. And then you will rotate between different rooms for most of the day, meeting each and every business area. We'll assemble here at the very end for a final wrap-up session as well, and to conclude your questions that you might have outstanding. Just important to know, to notice, just look in your paper, and you will see what group you belong to.
At the end of the session, you will see hosts with signboards with your group name. Just head for them, and you will be fine. We have representatives of the media as well. They will sneak out and have some interviews in between. You have particular interview schedules. If you have any questions or anything, just contact me or anyone on my staff or Pär Altan, who is probably your main point of contact here. I think this is it, apart from the fact that you have seen us sending out two press releases of acquisitions that we have made this morning. You will receive another press release in your devices at 10:20 A.M.
We have, to the best of our ability, tried to condense Olof's presentation into one and a half pages of press release, so it's supposed to be a summary with no news, apart from what Olof is saying. We haven't done this before. We think it's prudent to do, and that's pretty much it. So don't be alarmed or surprised when you hear the bling. All right? Olof, dazzle us.
So thank you, Magnus, and very welcome everybody to this year's Capital Markets Day here in Sandviken. We have a fully subscribed event and have had a lot of interest for this Capital Markets Day, which I and I know the rest of the management feels is very inspiring, that there's such a big interest in our company. And we have a lot that we want to share with you about what's going on in the company and where we want to take the company going forward. So let's see. We've themed the day Building an Even Better Sandvik, and that's really what we live and breathe every day, there are managers and there are leaders within this company. Building a Sandvik for the future and a better and stronger company.
I'd like to start with a few other things before I come in and talk about our strategy going forward. Firstly, I would like Mats to come up and just quickly introduce yourself.
Just briefly introducing myself, then I will take on the first with Torbjörn, the new CFO. My background is that I joined Sandvik in 2007 as heading M&A and business development for Sandvik Tooling. Took on the position as CFO for Sandvik Tooling in 2009, and continued in that position into the new organization with Machining Solutions. Before joining Sandvik, I had different financial positions with Ernst & Young, Boliden, Nordea, Outokumpu, and also as a general manager for a SEK 6 billion stainless steel business with Outokumpu. I will be giving presentations at the Machining Solutions station today, so you can ask all the questions you want during the day, then. So that's-
Good.
That's it.
Thank you, Mats. And I think you have for Sandvik a very relevant background for this job with both mining, the stainless steel business, and the Machining Solutions business. So I'm really looking forward to working with you going forward here, Mats. Good. Okay, then just quickly about the short-term outlook, because I know we have some questions and wonderings about that. And if you look at the Sandvik group and the sectors that we operate, we have a bit of a mixed bag with development in the various market segments. If we start with the mining sector, we had a clear shift in the sentiment in the mining sector last summer, and we've had a big decrease in order intake since then.
This weak market continues, and I think most independent analysts looking at mining look at that as being an extended period with lower capital expenditure in the mining sector. But we do feel that at this point in time, this drop has leveled off at a low level, but it's not on a negative trend anymore. When it comes to general engineering, I think we can say that we see tentative demand. We cannot really see any clear direction in this sector for Sandvik, either in the positive or negative here. Construction has continued to see a negative market development, and we see that really broadly across the globe, that it's a quite difficult segment at the moment also. On the other hand, the automotive sector is starting to show some positive developments here, which is encouraging.
And the energy sector is remaining at a high level, and that has been a sector for Sandvik that has been very strong throughout the financial crisis and also through this Euro crisis that we've seen in recent years. So that's just a quick picture about how the market sentiment looks in the different areas where Sandvik operates today. Then when it comes to the guidance, we have not changed anything, SEK 125 million negative effect in metal price effects, financial items, CapEx below five, except for the currency effect. That's a new number here, and we have increased the number of our expected currency headwinds in the third quarter to SEK 300 million. So that's an updated guidance number for the Sandvik group as we stand right now.
So enough about maybe the short-term things, and now I'd like to speak a bit more about the future and where we're taking the company from where we stand today. And we started out, I mean, Sandvik is today a world-leading, high technology engineering group, and we have a fantastic platform to build from. But we have also our challenges, and when I came into the company, we clearly had a need to become much more globally competent, more globalized organization. A lot of the growth is happening in markets which are not our traditional home markets in the company. We've worked a lot over recent years with innovation and on R&D processes.
We had, I think, a bit of a lack of focus on our innovation, and of course, we need to have a focus there to develop the right product offering for the future, and that's what's gonna lay the right foundation for Sandvik to be a successful group going forward. And in many areas, we were not efficiently using our resources in the best possible way, and we've also had a number of steps taken to improve our performance in these areas. Looking forward now, we've taken many steps to lay this foundation over the last two years. But looking forward, key will be to continue to focus on exposing the group towards high growth sectors and markets around the world. To, of course, yield higher returns as a company and reduce our earnings volatility.
We're exposed to very cyclical businesses, and, to be successful in those businesses, it's of course, important that we can deal with that cyclicality and reduce the volatility in our, earnings through the cycles that will always happen in these markets. So I'll touch on these themes through my presentation and how we're going to address them and deal with them going forward. If we then just first recap what has happened in Sandvik over the last two years, what have we been addressing? What have we been focusing on? Well, first, we set the company up in a customer-centric organization. We went from three business areas into five, and these are based on the markets, that they're serving. For me, it is very important that an organization reflects the customer perspective.
So mining and construction serve totally different markets and need to address those markets in different ways, as an example. We've also done some steps to refine our portfolio and to... Well, we bought out the, the minority of Seco Tools to bring that in as a fully owned, owned business within the SMS portfolio. And we also divested our MedTech business as a part of really, trimming SMT into what it should really be focusing on, and that's especially the tubular business within materials technology. We've launched two restructuring programs in a total of SEK 2 billion, and, the bulk of those savings have been delivered. I think the best example that we can show of what we have achieved here is the achievements that we've seen in Sandvik Materials Technology.
In the second quarter, Sandvik Materials Technology actually displayed the best underlying EBIT margin that we have on record. I think that has been a big success. We're working a lot with operational excellence, how we use our resources, how we make the company more efficient. R&D is, for me, the most important of these areas. We have appointed a group technical director who's coordinating our R&D processes, and we're working a lot with the product management and looking at what portfolio of products do we need to address our markets in the future. But we also have a number of initiatives within finance, IT, HR, and indirect sourcing, in terms to get the full value out of being one company within Sandvik. The group has always focused a lot on increased diversity.
We have the first non-Swedish members in our group executive, actually, the first in our 150-year history. And when I took over, we had zero women in our group executive, and now we have three. So we've taken a lot of steps in terms of diversity, and for me, that is about recognizing the full talent pool we have in the whole company... We have 75%-80% of our employees outside of Sweden, and we need to recognize that talent pool and take them on board. And then we're focused on growth. We have launched the Carboloy brands within Machining Solutions, and we have also taken a number of steps into the mid-market within mining. We've launched new products, for example, towards the coal industry in India.
We acquired the Chinese crusher manufacturer, Shanbao, which has also put us in a strong position in the Chinese construction market. Looking at our restructuring programs then, the first one was very much related to Sandvik Materials Technology. This savings program is a big part in achieving the better performance that we have seen in SMT. The second program had the largest focus on Sandvik Mining. The reason for that is, of course, the big shift that we've seen in the market here in the mining industry. I think we also can see that Sandvik Mining is dropping in terms of its EBIT margin much less during this downturn in the cycle than what we did in 2009. Gary Hughes will talk a bit more about that during his presentation.
But the mining market continues to be difficult for us, and due to that, we are today launching a further initiative to continue the cost restructuring of Sandvik Mining, with an ambition to reduce our costs of between SEK 500 million and SEK 700 million, and we will have one-off costs related to this program of SEK 300 million-SEK 400 million. So this was a few words about what we have done over the last couple of years. Now, if we focus on the future, how can we develop and grow this company going forward? And I think there are two areas which, for me, are absolutely key for us to focus on. One is operational excellence, how we operate this company, how we improve our processes, how we improve our innovation. And the second area is growth.
Sandvik is a growth company, and we need to continue to focus on, delivering strong growth as an organization. The areas within operational excellence relate to innovation, leading through our employees, leading a sustainable business, increasing our supply chain efficiency, and also improving our capital allocation throughout the group. And the growth relates to, of course, a lot organic growth. That is the most effective way for us to grow, and by having a leading innovation, delivering the products for the future, we can deliver a strong organic growth in the company, and that will be complemented by acquisitions. So by doing these things, we believe that we can deliver a leading financial performance, higher returns on capital, stronger growth in the Sandvik Group, and lower earnings volatility. I want to touch on these aspects, of our ambitions going forward now in the next couple of slides.
Now, first, I'd like to say a few words about innovation. Numerous steps are being taken within innovation in the Sandvik Group, right now. The most important is that we have a strong focus on the product portfolio of the future, what products we need to offer to our customers to maintain and develop our market positions. And that, that is ongoing. We are developing a better access to core competence around the company by developing centers of excellence within areas like modeling, materials characterization, and powder metallurgy. We are building our R&D presence in emerging markets. We have projects ongoing to significantly expand our R&D presence and organizations in both China and India as we speak. R&D is very much, of course, about people, and here we have, during the year, launched a new career path for experts within the R&D organization.
And this means that our R&D experts can do a career not only by having more people reporting to them, but also by their achievements within the R&D organization. And earlier this year, we appointed our first two group experts, and I think that's a strong symbol for everybody working within Sandvik's R&D, to see how you can do a career within Sandvik and how this will be a good choice for you in your life. We're also focusing on new technology areas. That's Sandvik's history, and that's how we're going to develop in the future. There are areas like 3D printing, which are very interesting for us. A lot is going on with the environmental area, where I think Sandvik has a lot to offer.
This focus will continue, and Sandvik needs to continuously look at how we can use our technology base to potentially move into areas and serve new customer groups. Just recently, we have made two, I think, very interesting product launches. This insert, we call it the P25, is a very important turning insert and the backbone, or one of the backbones, in the Sandvik Coromant portfolio. It's quite a long time, actually, since we launched an updated insert into this segment of the market, which is one of the largest within Machining Solutions from Coromant. But with this insert that was launched at the EMO Fair last week, this puts us back in a position where we actually have a product that clearly performs 20%-30% better than our competitors' products.
This drill rig is actually parked outside here. It is a modular design. We use the same modular platform for both the top hammer and the down-the-hole version of this, machine. That makes manufacturing more efficient, reduces the number of spare parts, but it's also a very high-performing drill rig compared to our competitors, and it takes us up into a wider dimension range in terms of surface drilling than what Sandvik has been in the past. So I think these are excellent examples of how we, through our research, through our innovation, are delivering an offering for the future that will help us grow, take market shares, and develop our markets going forward. And that is maybe the most important thing for Sandvik's future.
Our employees are, of course, the basis for everything we do within the Sandvik Group, and it's not that we have any special magic machines or so. It's the hard work and dedication of all our employees every day that actually makes and creates the value to all of you shareholders in the Sandvik Group. We've worked a lot within the HR area over the last couple of years, and I'd really like to point to especially the talent management and succession planning process that we have developed, and we're getting a much better grip of our global talent pool throughout the whole Sandvik Group.
So we know what talents we have, that we recognize those talents, that we train them, that we have clear succession plans, and that we also have plans to fill the gaps when we don't have internal people to succeed people who leave or retire from the Sandvik Group. So we do, when we look at our high potential population, have a very good global spread today, actually. We are building a strong competence base, not only in Sweden, but on a global basis throughout the Sandvik Group. Sustainability has to be a core part, as I see it, of the Sandvik Group. We need to lift our presence here, and we are putting a lot more energy into the CSR issues now than what we did a few years back.
For me, sustainability is about all aspects of how we run our business. It's part of our customer offering. It's an important driver when we look at how we develop tomorrow's products, and that we meet the right requirements from our customers, and from the environment, for example. And then it's also very important when it comes to being an attractive employer. People today want to work in a company that is respectable, and that's you can be proud of working for, and therefore, the CSR issues are extremely important in this area as well. Sandvik is a truly global company. We actually have around 150 manufacturing locations throughout the group.
Over the coming years, we've now set out a plan to decrease these 150 sites by 25 over the next three-four years. This will create a more efficient supply chain, help reducing net working capital, reduce our costs, and also help us reduce our earnings volatility. Our expectation currently is that there will be restructuring costs related to this in the range of SEK 3 billion- SEK 4 billion over this three-four -year period. But, this program will, of course, need to be detailed. It's subject to final decisions, union negotiations, and so on. So we can today not be more specific about exactly which sites will be affected and how by this program. But, of course, we see that there's a very good payback on taking these steps and making these investments in the one-off costs.
Capital allocation, and I talked earlier about that we have been ineffective in using our resources within the Sandvik Group. That came to R&D, but that also comes to capital. And we have been investing a lot, especially in Sandvik Materials Technology, quite little in Sandvik Mining over recent years. And when we look forward into the future, our plan is to change that investment to distribution, and especially the share of Sandvik Materials Technology will be lower over coming years, and there will be a stronger focus on developing our mining business and the mining's footprint here. We also have a focus on the geographical split of our investments. In recent years, about 70% of our CapEx has been going into Europe.
Of course, Europe is not the region where we see the exciting numbers when it comes to future GDP growth, where we see our customers really expanding. Over coming years, we expect our investment profile to look something more like this. Europe is still very big, and the reason for that is that we need to continue to reinvest, of course, in our existing manufacturing plants. But when it comes to expansion and development, especially the emerging markets will get a totally different focus in coming years than what we've seen in the past. A few words about growth. We have a target to grow, in the long run, 8% per year as a group. We have initiatives for all business areas, focused about, a lot about organic growth, but also in some areas about acquisition-based growth.
Mining, we've continued to focus on core applications and geographies. We need to invest in the future, our future offering in areas like automation and also continuous mining, which are technology areas that are developing quite rapidly right now. Machining Solutions really needs to step up innovation. The whole driver of that business model is that we continuously launch products like the P25, that I talked about earlier, and that we can on a, at a rapid pace, continuously get out the next generation of these products. That's what's gonna keep us ahead of the competition, help us take market shares, and of course, deliver along, a good profitability over time in that business. Materials technology has its biggest opportunities within tubes for the energy sector, and also within areas like, for example, chemicals and fertilizers.
Sandvik Construction, well, we're a small player in some very select niches within the construction, enormous construction industry. Here, it will be more looking... continue to look at these niches and how we potentially can grow and develop in these areas. And then Sandvik Venture, it's very difficult to generalize. It's quite a mixed bag of different business units, but we also see a number of good opportunities to continue to grow the venture portfolio and the venture business. On top of delivering organic growth, we also will continue to have acquisitions in Sandvik, and that is also our history. Sandvik has bought, over recent decades, quite a lot of companies. And I'm glad, actually, today, we could announce two acquisitions with the Sandvik Group, and maybe you've seen the press releases.
One relates to a company called Precorp within the Machining Solutions portfolio, which really enhances our position against the aerospace sector. The second relates to Process Systems, a business unit within the venture portfolio, and that is a very successful business within the Sandvik Group. Being able to do both on acquisitions there and grow that business is financially very attractive area for Sandvik to continue to grow and develop. These are examples of steps that we will continue to take to continue to grow, continue to expand the Sandvik Group.
So by focusing on our operational excellence, delivering the products range for the future, driving organic growth in our all five business areas, focusing on the high growth sectors where we can operate, and also the high growth geographies, and on top of that, looking at acquired growth, Sandvik will continue to expand, and we also, by doing this, will deliver on our 25% ROIC targets, which is our published financial target. So in summary, we are building an even better Sandvik. A lot has been accomplished over the last couple of years, and we've built, I think, a strong foundation to continue to develop into the future. We are developing the products, and we also have a lot of processes to develop the people we need to deliver on our targets for the future.
And by implementing these steps that I've been talking about, we will deliver on our growth, higher returns, and reduce our earnings volatility as a group. Now, finally, I'd just like to point to a couple of recognitions that the Sandvik Group has got over recent time. One was in The Economist, where they, and I quote from, from the magazine, said, "Sandvik is obsessed about productivity, both its own and its customers." And I think that very much describes the essence of Sandvik and how we are successful as a company. Another thing which I'm very proud of, and which I think was fantastic, is that Sandvik was earlier this year rated as a, had the highest rating of any Swedish company on the Forbes 100 list of the most innovative companies in the world.
That rate of innovation is what's gonna make Sandvik a good investment for you over the years to come. Thank you. Okay.
Thank you, Olof.
Thank you, Magnus.
Let's move over to the question and answer session. We've got some 10 minutes plus or something like that. We've got three microphones that we need to use, and we've got some questions over here. Jeff?
... I got it. Thank you very much. It's Colin Gibson from HSBC. SEK 500 million-SEK 700 million of savings in mining, that's against a run rate of savings you've had in the organization of about SEK 1 billion over the last couple of years. Does that mean you've picked the low-hanging fruit already? Or should we see that there are more savings elsewhere that you haven't specified today? And the second question was, just since we last met-
Can I answer the first one, though?
Yes.
Yeah. Well, I mean, this is a saving to adapt to changed market demand. I think what is gonna enhance longer-term margin development in our mining business is, of course, the supply chain program and the, the elements of it that affect the mining business.
Are there other savings that you're hoping to generate to keep that pace of cost savings at closer to SEK 1 billion, or should we look at it as SEK 500 million-SEK 700 million?
Well, we need to continuously adapt depending on the market situation and how it's developed for the mining business. So, if we continue to see a very weak market or any further deterioration, of course, we need to consider what measures we need to take to address that situation. But, at the same time, at some point, the mining market will, of course, come back. It's an extreme drop that we're seeing, and not very sustainable level either, this very low level that we're seeing in mining. So at some point, of course, the miners will need to continue to invest.
And then I had just one other question. The two questions I get from investors most about Sandvik, number one is 3D printing, which I don't want to ask you about now, because that's too-
I can answer that if you want to.
That's very, I think, that's too discursive for a quick Q&A.
Yeah.
The other question I get a lot is management turnover.
Yes.
And I know you haven't looked to... You haven't commented publicly on some of the management turnover we've seen, particularly in the last month, for example. But is there anything you can say about what has been, since we last met in Sandvik and a year ago, just down the road, quite a high level of turnover on the executive team? Thanks.
Mm-hmm. Well, to start with, I mean, the team I was given, we had a significant succession issue, and we had a very uniform age profile of that group of people. And, I mean, it was my. Well, I both wanted to and had to modernize the leadership of the Sandvik group. And we have done that. We do have a new leadership team, which I think is the right one to take Sandvik forward. Have we made one mistake or two along the road? Yes. But I think for me, from my perspective, I mean, the biggest mistake would be if we hadn't addressed this leadership challenge that we had in the way that we have.
Now we have a team that is a strong team, mainly recruited, actually, internally in the company, that can take and drive this company forward. Yeah. Okay.
Hi. A couple of questions. One, on the SEK 3 billion-SEK 4 billion restructuring that you talked about over time, just trying to get a feel for what you think the saving could be off the back of that. And could you say a little bit about, I know it's early, and you've got union issues to talk about, but the 25 plants, the balance across the divisions or across the geographies, is it particularly skewed to Europe or a particular division? Can you say a bit more about that?
Well, of course, we need to shift our footprint to really where we have the highest customer demand, so there will be an element of that. At this point in time, I don't have any more details to share with you regarding exactly how this is gonna pan out across the various divisions. We'll give some indications for Machining Solutions and mining, but the details, as you say, consultation with unions, final board decisions, et cetera, will come gradually over this period to come.
Changing topics. The tooling business, Machining Solutions-
Yeah
... has always historically been a very operationally geared business.
Mm-hmm.
We look like we're heading back into an environment of growth, looking like it might recover. If it does, and you've talked about trying to reduce the volatility of earnings in the group-
Mm
... over time, how much has the fixed variable cost structure of that business, say, change versus 2004,200 5, 2006, when we saw the gearing at that point and maybe in 2010 on the recovery? Are we gonna see the same sort of drop through if we see that demand, or has the cost structure changed a bit there?
Well, I mean, we'll improve our cost base by these steps, but, I mean, we, of course, should have a strong operating leverage when-
Yeah
... the volumes come back into the Machining Solutions business, so that, that has not changed.
You think the leverage is similar to the old leverage?
Yes. There shouldn't be any reason to assume a different leverage than what you've seen-
Yeah. Okay
- in the past. Mm. Yes.
Hi, good morning, it's Guillermo Peigneux Lojo from UBS. Two questions. Can you comment a little bit more on mining equipment or mining division, what you just saw leveling off? Are you referring to the rate of change, or are you referring to the absolute level of order intake? And also, could you differentiate in between aftermarket consumables and equipment?
Yeah, I mean, what I mean is that we saw a big drop in order intake, but that has leveled off on a sort of new platform here. So, that we see on a stable level right now. When it comes to the aftermarket and the tools, more or less a stable environment, which we should expect. But, I mean, we see mining companies maintaining production, and that means that the rates of consumables and so on should stay at the same level. The big drop is, of course, in our equipment business. I mean, they are not investing in new machines right now in the mining sector.
And then, regarding pricing,
Yes
For new equipment, some of your competitors have been sent letters by their customers, the mining companies, asking for price cuts or looking at the price tags of the items they're buying. I just wonder whether this is kind of their own specific problems, or is also actually something that you're going through?
Well, in the mining sector, there's a lot of pressure now to bring down costs. A lot of CapEx programs have overrun, and they're, of course, putting pressure on all the equipment suppliers. I mean, for us, the important thing is that we can show that we deliver value to our customers, and that I mean, our offering gives them better productivity and helps them lower their costs. And I think automation is a good example where these kind of investments can still be very attractive for our customers because they can have a fairly short payback. They help them reduce their operating costs. And so CapEx will be more skewed to these sort of cost reduction programs instead of the sheer expansion CapEx that we've been seeing in recent years.
Thank you.
Okay, hi. A question on the restructuring program, the upcoming.
Mm.
I guess this addresses everything from production capacity to working capital and purchasing savings all bunched together. Could you please help us out to understand what type of working capital sort of improvements you think is doable on a-
Well, we have, at this point in time, chosen not to quantify exactly what that means. So, of course, having fewer sites, we have fewer stocking points. We can also, when it comes to our volatility in sales, we can move people between different production lines and equipment production lines. So, there will be all of these kind of benefits by bringing down the site footprint in the group in the way that we're planning going forward.
So, would you prefer or prioritize working capital over sort of operating costs in this?
No, I think they go hand in hand. And, I mean, we will achieve improvements in both of these areas by doing these changes.
Thank you.
Mm.
More questions?
Thank you. Ben Maslen from Bank of America. I'll have two questions, please. Firstly, on mining, I think the mandate a couple of years ago was to close the margin gap on, on the peers. Does the new program that you've laid out today still aim to do that, or is it more of a kind of stopgap to deal with the volume drop that you expect to see in your revenues over the next six months?
The main, main purpose for the program is to address long-term cost efficiency. This program is not mainly aimed at sort of addressing the short-term market situation that we see right now.
So, the objective of closing the margin gap remains intact?
Yes.
Yeah. Okay, thank you. And then on the supply chain savings, obviously, you've given us the costs.
I'd like to comment-
Sorry
... just, also where the margin. I mean, I think one can see also, if you compare to how, for example, our mining margins have developed, with the sales drop we had in, between 2008 and 2009, and the EBIT margin impact that had, compared to what you've seen today, with also a very significant sales drop. We have already started to show that we deal with this volatility in sales, in a more efficient way within the Sandvik Group.
And then on the supply chain savings, you know, you've given us what it will cost, and, you know, you presumably will get savings from that. I mean, in your experience, do supply chain savings tend to get kept by the group, or do you think they get, you know, given away to customers or lost in natural inflation? And, you know,
No, I think we can land a lot of this in the group. I think this program complemented with what we're doing with our product range. We had a customer day in Tampere two weeks ago, and at that day, we actually launched more new products on that day than we've done in total over the last eight years. So the mining market has been in absolute growth mode. It's been very easy to grow and develop. But now, of course, competition is tougher, the market is tougher, and it's even more important now that we have the right products that we're ahead of our competition, and that we are setting the industry standard in the areas where we operate.
I think Gary and other people from mining, for example, can show you some very good examples of steps we have taken in that direction just over the recent one-two years.
Thank you.
Yeah.
Thank you very much. We need to conclude the Q&A session right now here. There will be an opportunity towards the end of the day, as you see in your schedule as well. But right now, now it's time for the group assembly. So I hope that you've found your group. And towards the back of that wall, you will see signs with groups one to five. I'm not saying pick your sign, but pick your right sign, and your guide will follow you to the correct stations. Now, in order for all of this to work, we, of course, need to be strict on time as well. So your guide is going to be a very pleasant person up until three minutes before the time is up. Then, the guide will turn into a time cop.
I think it's not good that we keep you waiting too long. Good morning. Welcome. Welcome to Capital Markets Day for Sandvik, and presentation for Sandvik Mining. Real pleasure to be here. It's some time since we last spoke, I think May 2012. And what I'd like to do today is really talk a little bit about what we've done since then, talk a little bit about the market, and present you the way forward and what our strategies tell- you know, this is kind of the second step in our strategy that we presented in 2011, takes us. Before I start, I'd like to introduce you, Andy. Andy, from the first of October, will be my new finance guy in mining. So Andy, please just introduce yourself.
Yeah, sure. I've, I've been with Sandvik for 19 years, and I've worked for SMT. I've worked for Coromant, Valenite Safety, Tooling Supply, Construction, and now Mining. So I've lived in the U.K., the U.S., Sandvik, and Stockholm, and now Amsterdam. And it's a real pleasure to join Jack-- Gary, on this, this journey now with the transformation program that we're going to be running the next three years or so.
Thank you. Okay, first thing first, safety. We work in an industry that's extremely focused and in some ways, obsessed with safety. It comes first to us because our customers require it, and I think that it's extremely important for me that safety is first on everything that we talk about. If you look at how we've delivered results now, we always measure Lost Time Injury Frequency Rate, that's the number of lost time injuries we have per million man-hours. If you look at where we were in 2008, at close to nine, where we are now in 2013, in fact, with the results from September, we should be below two. That's considerably better than many of our peers.
So I think the message why I want to show this is not only is safety really important, but it shows that Sandvik Mining can drive cultural change. And I think a lot of the things that we're going to talk about in the presentation is about how do we change a culture, and how do we change an organization, and how do we transform our business. So this is a really good... not only is it first, but it's a really good opportunity to talk a little bit about how we drive things in Sandvik Mining. Very strong leadership and safety, so safety first. If we look back at quarter two, it's obvious that demand in our industry has softened somewhat, and that, you know, the order intake is down considerably. I think that's quite clear in quarter two.
All I've said, that since then, demand has definitely flattened, and that's how we see the business developing. With that said, invoicing will continue down for a few more quarters. And even if margins do drop, I believe, and I'll show you later, that we will not see this kind of development in our margins that we did in the last downturn. That's the message I'd like to give you there. And I was just saying to Ben Maslen, you know, at the end of the day, never miss a good recession. So if things are slow and the things are flat, that's a great opportunity for us in Sandvik Mining to address some of the things that we've been talking about for a very long time. So let's talk a little bit about what we've done.
If we refer back to the two Capital Markets Days that I presented at before here, I spoke a lot about the need to drive clear targets and clear focus on sales and products, 'cause I believed in the old organization, that is very much where we'd lost focus. We needed to take complexity out of our organization. We needed to go from the very complex matrix organization we had in the old SMC, and put in place a much simpler organization to work with, which drove clear accountabilities. We said then that we were going to focus on core. We said then that we were going to be very clear on what our core was and to drive it very hard going forward.
That in order to become more competitive, one of the most important things for us was to drive and reduce time to market and to drive modularity. And probably most important of all, was to improve the way we manage in a downturn. Because I think in 2009, you know, the way we managed that downturn had a big impact on the credibility of this organization. So those are the things that I really set out to do. And being part of this, of Sandvik, I think this whole Sandvik strategy of being one Sandvik, to be number one, I think is really important. And what I'll talk about, a little bit about today is some of the ways that we're actually, we've developed things together in the new Sandvik, how the new Sandvik works in a much more seamless way. So what have we achieved?
You'll see that there have been some operational and financial improvements. A lot has been done, a lot of great achievements done, maybe that have been clouded by the way the market is developing. But I think if you take away the fact that our market has developed in a very negative way, there's been some very strong achievements. I showed you earlier on the Lost Time Injury Frequency Rate going down. We've driven sales efficiency. A tremendous impact in our time to market. Outside, you'll see two products, the Pantera that Olof Faxander spoke about. When we last spoke in May 2012, that product was not even designed. It was only approved in April 2012, and that product is already being shipped to customers. So we've almost halved our time to market.
And if we want to remain competitive, if we want to drive pricing in this tough market, it's extremely important that we drive new products out and we reduce time to market. So we've shown that we can, we can change paradigms in our company and work differently. And I had a very flat structure the last 18 months, and you'll see later that we're changing the organizational structure to a much more functional structure. The last 18 months gave me great insight and transparency into how the organization works. And as Olof said, more product launches in the last few weeks than we've seen in a number of years. So those are achievements that we're very, very proud of. I assume a lot of you would like to understand how we see the market.
I think if you look at our mining market, there's been two distinct periods, the way we see it. 1990s, slow growth, and this is the equipment market, not total mining CapEx. In the first 10-year period, between 1990 and 2000, a pretty slow development. This is the time when Tamrock was making lots of acquisitions. This is the time when Sandvik bought Tamrock. It then got followed by what many people call the super cycle. In other words, a time of high growth, time of high capital expenditure on the mines. You can see that the lower bar here, being the operating expense, didn't develop as rapidly as the capital expenditure on mining equipment. Quite an interesting period, a period we've never seen before. If you look at this, after every super cycle comes a correction.
It had to come at some stage, and it's very clear now that we're in a period of much lower levels than we were up to 2012. And if we talk about predictions, we believe, based on a number of predictions, a number of analysts and consensus, our consensus says that we will see a softening in the market going forward. We will see, as I said earlier on, invoicing developing negatively in the quarters to come. But the fundamentals in our industry haven't changed. Mining will come back. Mining will recover. We have no doubt. And I mean, that kind of sets the scenario and the basis for the strategy we've been developing since March going forward. So how we manage this downturn?
If we look at the period between 2008 and 2009, the peak to trough, our margin dropped 14 points, where the best-in-class dropped 4 points and the peer average was 4 points. If we measure ourselves quarter to quarter, two to quarter two, our margin dropped 4 points, where the best in class dropped 3 points, and the peer average between 6 points and 7 points. So I think this is clear evidence that we've been able, this time, to improve the way we've managed the drop in sales. And these are our numbers as we've delivered in our Quarter two report. So even if we expect more decline, it will not come anywhere near close to where it was in 2008, 2009. So how are we addressing this?
Well, in November 2002, we announced SEK 650 million cost savings, and Olof today announced between SEK 500 million and SEK 700 million. That brings us to about SEK 1.4 billion. We have been moving down with the market. We haven't been announcing everything that we're doing. Our intention is that by the end of quarter one, quarter two next year, we've taken SEK 2 billion out of our cost base. Not all of this has been announced to the capital markets. We've been addressing it as the market is going down in a very responsible way. Our headcount reduced by 1,000. Already 500 employees taken out of the organization, and a one-off SEK 700 million, including the 350 we announced today. We're already halfway through. So we're extremely confident that by the middle of next year, we've reduced SEK 2 billion from our costs.
Okay, so what's happening in the market? How is the market behaving? And I think, I don't want to focus too much on demand. I don't want to focus on intensified competition. We've always had strong competition. It's not something we're not used to. I'd rather talk a little bit more on the preferences and the technological evolution. And it's very clear that customers are focusing much more on total cost of ownership. Customers are focusing much more on volume. Sorry, on cost, not volume. Somebody asked a question about pricing. We always see pricing pressures in this time of the market. Our response to that is to take the discussion to value. Our response to that is to bring new products to market. That's how we remain more competitive.
For the last two years, we've driven extremely hard to get the time to market down in mining. We have an extremely strong position in automation in underground mines. That's something we need to build around. That's something we need to capitalize on. That's something that we need to really focus on much harder and put more R&D money into going forward. And hard rock continuous mining is something Olof spoke about. We have to make mining safer. We have to make mining much more efficient. And that has to be done by us with the help of our customers working together.
If we look at our market position, and this is quite a busy slide, but the reason why I wanted to show this slide is to show that we have some extremely strong positions, and that the mining market, we estimate, is about SEK 800 billion, with a profit pool of some SEK 90 billion. We're very strong and present in parts of the mining chain, which are extremely difficult. Underground hard rock mining, underground soft rock mining. These are the core applications to us, and this is where we need to be much stronger in the future. I also show this diagram because it shows that we're not present in a large part of the mining value chain today. I think that strategy going forward needs to be, we need to focus on our core applications.
We need to focus where, you know, the segments and the applications are more interesting and much more closer to our core competencies. Because it's obvious that we are closer to some applications than others. So that's really what our strategy is going to be, focus on core. If we talk about the strategic direction now for mining, if we talk about where would we like to see this company in 2020? I think we've shown that we can address flexibility quite clearly, shown that we can change a culture. This whole journey around safety has been a very good example of leadership-based culture change. We've shown that we can manage the downturn better than we did the last time, at least so far. It's now time to take the next step in our strategy. This is not a different strategy.
Now, Ben Maslen asked the question, "Are we not going to work and address our gap between our major peer? Are we not going to address this requirement to improve our profitability?" The answer to that is no. Of course, that's important to us. Now, we want to be the future industry leader. That means we need to lead in value creation, not just for our customers, but for our shareholders. So what does it mean? And I think... I'd like to explain a little bit how I see the mine of the future. Now, this is a model which shows different facets of mining, where we are present today. So drilling, exploration, underground, coal, these are the parts of the mining chain where we are present today. And we have an extremely strong position in underground automation that we need to develop on.
What you see outside the Pantera is probably the first example of what we call really, truly smart equipment. Self-diagnostic, automated, self-drilling, self-correcting, truly smart. And I hope you have time at lunchtime to go out and talk to Marcus, the R&D guy, a little bit about this. And we will now put that together, link it with our smart services. In other words, how do we make the mining operation easier, safer, more productive? And how does Sandvik get paid for doing that? That's extremely important for us. And the vision must be that we take our strength in AutoMine, our strength in underground automation, link it with communication, link it with software and control systems, so that we can start to manage not just how our equipment works, but how the mining process generates value and lowers cost and drives productivity.
If we as Sandvik don't do this, someone else is going to do it for the mining company. We have an extremely strong position. We have an installed base of some 14,000 equipment. We want to get out there and make sure that we can drive the mine of the future. We see that as our responsibility. It flows from our core values, and we believe there's a money-making opportunity here. So we're going to become the leader in automation and smart service. I spoke about focusing on core. I'd like to talk a little bit about where we will be leading. If you remember that diagram I showed you earlier about the position, we're not strong in every part of the mining value chain, and we don't intend to be. So focus on core is quite clearly underground hard rock mining.
That's going to become more important for us as we go forward. A lot of discussion about coal. We have a strong niche position in coal mining, which is roadway development and room and pillar mining. We will continue to develop in that space. It's a profitable segment for us, and it's one where we have a very good competence, and it's one where we can leverage the capabilities, not just of Sandvik Mining, but with other parts of the group. If there's one organization in the world that can drive continuous mining, hard rock cutting, it's a materials company like Sandvik. With our skills in Sandvik Materials Handling, Venture, and ourselves, there's a lot we can do to change the way of cutting rock.
If you have time at lunchtime, whenever, please have a look at some of the new drilling tools that are out here. That's a good example about how Sandvik has started to work together. So continuous mining is going to become really important for us. Faster development in our rock tools. This is the fundamental cradle of Sandvik Mining and Construction in our Sandvik Mining. We haven't done enough here. We'll do much more. Smart service, being smart about how we manage mines, operations, and processes, and productivity is going to be really important for us, and this is stuff we're doing right now with this new machine you see outside.
This is the first time a machine's been developed in 18 months, the first time it's come out with a full automated package, the first time it's come out with a full drill string package, the first time we've done everything as a package. We will continue to do this. New products to make our products more competitive. Because, yes, the market might not be growing, but there's still a strong market out there, and by bringing new products with a better value proposition, we believe we can drive growth and profitability for Sandvik. Alternate energies, electrification, those kind of things, those are going to be very much a part of our future going forward. And we need to focus much more in our core geographies. We need to focus on driving strong relationships with our customers in our core geographies.
The emerging markets become increasingly more important for us, and you'll see in the organization structure, we've now set up an emerging markets organization. Sandvik Mining is getting into the mid-market. That's very clear. It's going to be important for us. I believe that we need to set new industry standards. We need to be setting the industry standard in our, in our offering. Our supply chain, we must have the most competitive supply chain. A lot of discussion around time to market. I'm saying to my guys now, time to market is not important anymore, and I want speed to market. I now want more products, I want them out quicker, and I want them to fill gaps that we believe and we've known for some time we have. You know, please, let's stop talking about time to market now.
Let's talk about velocity and speed to market. Let's talk about getting new things to the market, because that's how in a downturn, in the period of flat that we're in now, that's how we drive value for, for our company. The more products we bring out, the quicker we bring them out, the better it is for us. And as I said earlier on, leader in automation and smart services, that's going to become increasingly more important for us. One of the things we are driving very hard now is that after a period of ten years of super cycle, we have to get our organization out there with a strong winning culture, with a strong will to win. So not... It's not just about the products, it's about the mindset and the attitude of the people. It's about how we incentivize.
It's about how we drive our organization to get out there and spend time with the most important part of our business, which is our customer. So we're spending a lot of time focusing our people on value selling and getting out there and actually trying to turn the constant discussion about cost reduction to value creation. Because I think that's where us, as the supplier, we've always been really successful in these periods of downturn. It's when our application engineers and our mining engineers really start to add value, is when things get tough. So we're driving that extremely hard now, this true winning culture. And since March, we've been working on a review of the strategy we were set in 2011. A solid benchmark and a solid analysis of our supply chain, every site around the world.
So we've been working extremely hard since March to deliver the second step of our strategy. And what I'd like to show you now is quite a busy slide, but it's really the second step of our strategy, and I want to focus on five things at the bottom here. So it's a pretty busy slide, but I'd like to introduce the Accelerate logo. And what Accelerate means to us is that, you know, we need to excel in what we do, and we need to do it much quicker than we have done in the past. One of the things I've learned about the organization I have the pleasure of leading is that when you start to talk about some of the issues we have, many people know what they are, and there's a lot of will to get it done.
So Accelerate is our step change, if you want to call it something that you're probably pretty aware of. So Accelerate to us is something which is a metaphor to us of how we drive things faster and how we actually excel in what we do. And in this process, since March, we've been very clear to define our vision, our targets, our strategic focus, and how we win. I think there's no doubt we're set up for faster innovation. Please talk to Marcus, he'll tell you how we've done it. I don't need to go into details there, but the important thing from a value creation perspective are the five, what we call pillars. And those of you who know a little bit about mining, I mean, what pillars do? They actually support things from collapsing.
These five pillars are really important to us. It's a very strong metaphor for us in mining, the five pillars. The Accelerate program is built up of five pillars, a world-class supply chain. It's really important for us, how we transform the aftermarket business. It's very clear from our benchmarking, that from a profitability and penetration point of view, we're hardly world-leading. There's stuff we have to do there. Drive cost efficiency. What have we done, and what will we do to drive cost efficiency? To develop the offering of the future. I spoke about this mine of the future, automation, smart service, more productive equipment, leapfrogging competition. That's where we're going to focus. Excelling in sales. Getting out there, driving that really strong relationship with our customers through account management, mining, application, knowledge, and experience, and... That's what's going to be important for us.
Each of these pillars have a total of 16 work streams. I wanted to show you this. I didn't want to go into details. I mean, you have it in your presentation, but things like sales and operational planning, we started that two years ago. If we hadn't started that two years ago, we would be in a much different position today with our net working capital than we, than we were in 2008. By focusing on forecast, order, and delivery, we've been able to manage our net working capital much better this time than we did the last time. Right sizing or cost efficiency, these are things that you can look back, that by middle of next year, we would have removed SEK 2 billion of cost.
So we're continually analyzing and following the market down, and making sure in doing so, we are not damaging our ability to grow when the market comes back again, 'cause it will come back. I spoke about develop offering of the future. I mean, there are a few things here which are a little bit longer term, which I'm not prepared to discuss right now, but the point here is that these five pillars are owned in the line. They're owned in the organization, and from the 1st of October, we have a new organization. What we've done here is, we've put the organization into a much clearer functional structure now, 'cause I believe that's the only way we can drive the kind of transformation that we need. 2011, very complex structure.
The strategy then was over time to put it into a much more functional approach. I think this downturn or softening of the market is a great opportunity for us to address many of the things that we've been talking about for some time. We'll put the whole aftermarket here, global equipment. The supply chain transformation will happen in here. While our sourcing guys focus on their sourcing, these guys will be driving the P&L improvements through the structural transformation that needs to happen. So that these people can remain focused on the business, we've also formed two new product areas, emerging markets and mining automation. That's how serious we take these things. We've tried for many years to develop our mid-market and local premium products in our, let's call it, in our premium product areas. It just doesn't work. We want to have focus.
It's that important from a, from a strategic and a competitive point of view going forward. So that's the new structure that's in place, and, I think it brings clarity, accountability, control, and it's really the next step in the evolution. Okay, a new way of working. Olof spoke about being in Tampere last week. It was fantastic to feel the spirit there. Fantastic to see, you know, 160 customers. When the market is soft, to see that we continue driving and getting our customers, the opportunity to see new products. Go in a little bit more detail about the, the two transformations that we need to do, and it's clear, as I said, that the aftermarket is something that, from benchmarking, we're definitely behind from a profitability and a penetration point of view. So what are we doing to drive that?
Quite clear. Sort out our supply chain. That has an impact on net working capital and customer satisfaction. Work around our offering and our execution. We know from the benchmark, we have a gap there. Focus much more on our installed base, and a little bit more, focus on bundling with equipment. Because there's significant upside here. If you think about this pillar, significant upside in volume, profitability, and capital efficiency by, by addressing this. The next is our supply chain. We have a legacy of complexity. If you remember back to 1998, all these acquisitions, so we have this, this complex... This legacy of complexity, and we have a very fragmented and sub-optimized supply chain, which we now are going to fix. And the improvement focus here is delivery, speed, cost. That's what's going to be important to us.
We believe that if we can shave lead times off our equipment, that's a big impact on our market share. So this is also—it's not just to address the cost, it's also to become more competitive. And transformation. You know, Olof talked about reducing sites. Our estimation, and we can't go into too much detail now, is that we reduce sites between eight and 12 in mining. That's the kind of delta we're looking at. I'd like to give you some indication of the value creation pillar and the steps of, and relative importance. And what we're showing here is the delta by addressing the five pillars that we spoke about.
I think to put things into context, we believe that the value creation, if we take the focus on internal efficiencies, is bigger than what we forecast the market growth value creation would be. So it's an extremely important thing for us. Extremely important. So this is why this Accelerate program is something that we're going to drive extremely hard. And like any extensive change program, there are risks. I just wanted to show you that we've identified the risks, we understand what they are, and we're focusing very hard on making sure that we have a very good execution. It's a big step we're taking, but we have clear plans, thousands of hours of analysis we've done, and we feel extremely confident that we presented this to our board the other day, and we're now busy driving this hard, going forward.
So just to summarize, you know, even if the strategy we started in 2011 has generated some improvements, it's obvious we have a lot more to do. It's obvious through the process of benchmarking that there are opportunities for us, and to be leading, we need to be also leading in value creation. So we continue, and we will increase organization efficiency. We will continue to drive the internal efficiencies in the organization. As I said, we will shift the strategic focus, focusing much more on our core, focusing much more on the profitable segments in the mining industry, where we're strong today. We need to build stronger barriers to entry around our installed base. We need to consolidate our supply chain.
These two pillars are probably the most important from a value creation point of view, strengthening our aftermarket and consolidating our supply chain. Then as, as I said, developing the offering of the future, bringing equipment to the market in rapid time that gives the customers considerable improvement in productivity and, and total cost of ownership. That, you know, in 30 minutes, is what Accelerate's all about. So, time for Q&A, I suppose. I can see everybody's keen.... Good. Thank you for listening.
Do you need microphone or?
Just a mic, please.
Thank you. It's Andre from Credit Suisse. I actually have three questions, please. Firstly, on your CapEx expectations and the recovery in 2015, is there a kind of a commodity price recovery baked into that? And is there maybe an expectation of some pent-up replacement demand feeding into that? Because it's quite different to what the miners are telling us about their CapEx expectations for 2015.
That's the best consensus, you know, the best estimation we have, is that we will see this pick-up. But I, as you know, this is quite a volatile industry. It's changing every month. So I suppose your guess is as good as mine. I think at the end of the day, this is what we see. Whether it's 2014 or 2015, your guess is probably as good as mine. I think, you know, what I've tried to show you is the scenario in which we based our strategy on. If it comes a year later, quite frankly, that gives us more time to deal with some of the internal things that we need to deal with.
Interesting.
But what I think, what is important there, what we see is that OpEx will start to actually grow much quicker now, because it's obvious that on the equipment side, the last five-10 years, we haven't seen the growth in operating expenditure. It's been a lot of kind of CapEx on equipment so.
Got it. On the new products, are you expecting to spend more on R&D? Has this been sort of happening already, and can you give any numbers on, you know, new product launches this year versus last year, versus the year before, or vitality ratio or something to help us to put numbers around it?
What I can tell you is that, between 2008 and 2009, we probably lost velocity in product development because we kind of cut costs in many parts of our organization. This time, we've added R&D resources. So when you see the headcount reduction there, that's actually net, because we've actually added R&D resources, 'cause I think this is an extremely important thing. When the market gets like this, the worst thing we can do is cut R&D.
Yeah.
You heard what Olof said, we need to drive R&D, we need to drive... So we've actually seen a net increase in our R&D resources.
Great. And just finally, on aftermarket, which is, looks like the biggest opportunity out of the five pillars, I think you gave the installed base number. Could you just repeat that? And is that the base that you maintain or sort of how much-
It's around 14,000. That's not all that we maintain, no.
What's the ratio of what you maintain versus others?
I don't know offhand, to be honest.
But is that where it's coming from, that big opportunity-
No, I think-
Of capturing install base?
I think our biggest opportunity is driving the profitability up, and by making sure that we have a better penetration, and that's by addressing, as I call it, fleet management. In other words, understanding where the equipment is, what it's doing, and making sure that when we introduce new products, we introduce it with the aftermarket in mind. I mean, you'll see the new product, the Pantera. I mean, it's not just the rig, it's all that goes with the rig, the bits, the drill steel, the shanks. I mean, have a good look at it. I mean, that's the kind of new way of thinking here.
Thank you very much.
You're welcome. Yes. Hi, how are you doing?
...
Can you hear? Yeah.
I can hear you.
Thanks. Lars Brorson from DNB. Just a couple of factual questions, if I could, on your restructuring program, the SEK 500 million-SEK 700 million. Is there any site closures within that? Or is that purely based on headcount reduction? Can you give us a sense of what that headcount reduction looks like, and whether also there's any temps going? And perhaps just to that, whether that changes the element of flexibility in your cost structure going forward from what we have seen.
Yeah, we spoke about a number of restructuring costs a lot since November and today. And I think the first answer is that not all of this will be permanent. I'm sure when the market picks up, some of this will come back in the costs. The intention is, like I said, we're, you know, we're following the market down. As to site closures, in this, in what was mentioned today, that is not included in the longer term plans of moving our footprint. This is really just about getting the operational efficiency and the cost down, not in addressing... That will be a separate thing, which will be presented when we have more details.
How easy is, or what's the timing of, of those cost savings, the SEK 500 million-SEK 700 million? Is that on par, would you say, timing-wise, with what you saw in the 2012 program?
Sorry, the last question.
The timing of the cost savings, how quickly should we
The 500-700?
The 500-700, what should we expect that to come through?
We need to start getting it through for quarter two next year. I mean, there's-
Yeah
... there's notice periods and everything before you, before you get the full effect coming through on these. But I mean, it is to try and address the order backlog still coming down for the next few quarters, to be able to maintain that managing the downturn slide that you showed, Gary, where you were close to the best in competition. And then really, the transformation program is to close the gap. I would say that's more longer-term actions there to try and-
Just to be clear, the SEK 500 million-SEK 700 million on a run rate basis in the numbers by Q2, in the Q2 next year?
Well, we probably won't get the full run rate through by Q2 next year, but we're hoping to still start to see some material effect from that in the quarter two result.
If, one final one, if I could. The eight-12 sites, is that pending on the development in your end markets from now until the decisions have been taken, in sort of an upside or downside case, or is that-
No, that's not the site closures for the footprint is not really as a result of the downturn. That's to close the gap.
... Yeah, it's, they're two separate things here. I mean, this whole transformation supply chain is something we need to do, frankly, regardless of what happens in the market. It's something that we've addressed as extremely important for our profitability point of view, to close the gap and, you know, the volatility. Because we're in a cyclical industry. I mean, we have to, we have to be able to manage these downturns much better. And I think I was saying to someone earlier on, my reflection is that we've done a lot in the last two years to address the process issues we've had. Forecast, order, delivery, you know, those kind of things. Ordering, planning, and those kind of things. It's now obvious that the next step is to address the operational footprint, because that's where the big savings will come.
And, and-
I don't think there's really much more we can do, frankly, on the process side.
Now is the time to do it.
Yeah.
I mean, we don't see the volumes picking up in the next two years, so now is the ideal opportunity to be able to manage-
Yeah, you know,
production transfers.
I believe a lot in this, never miss a good recession, and this is a good time to get some of these things done.
Mm.
When the market's booming, it's tough to kind of focus on some of these things. Now is a great opportunity for us.
Mm.
We're going to address this very strongly the next three-four years. Yes?
Hi, it's Jon Mounsey from Exane BNP Paribas. A couple of questions, strategy related. First of all, interesting slide showing where you are versus your peers in the various segments. I think later, you talked about the strategy going forward as being to be number one or number two in the niches.
Mm-hmm.
Obviously, on that first slide, there's a few areas there where you're not.
We're not number one or number two.
I think in particularly downstream-
Yes
... Is this something then that is potentially less interesting going forward, or you'd have to bulk up, or what's the strategy to deal with that?
You know, I don't want to talk about the strategy, but I think obvious, to be number one and number two means we need to continue to address our, our kind of competitive position in some of these markets. Some of them we're not. And, I don't-
Some of them you are quite far away from being number one.
Yes, I know.
I mean-
Yeah. I know we've had this discussion about mining systems and exploration and all these kind of things over the years. I think from strategy comes consequence. So...
It's an interesting comment there. Also, just on the other part of the strategy, focusing in on automation. It feels like, you know, what's the key competence at Sandvik? Materials technology. But automation is maybe... Is it within your area of key competence? If I think, you know, there's more software, will you need to acquire some of that knowledge? There's more, just the automation in general is maybe slightly outside your comfort zone, potentially.
I think we have a strong position in automation. Rio Tinto, you know, Newcrest. I mean, that's our core, our core competence, and I think that's been driven by mining knowledge, understanding application. So I think we have that. I think where we will develop going forward is very much into finding the competencies we need to link our assets with resource. In other words, how can we help the mining companies maximize productivity? Now, if that means we have to acquire or do it organically, you know, I think Sandvik's always been a company that's looked at growing both ways. So I'm not willing to say, you know, what's in our strategy, but just to say that that's the direction we want to go in.
Just-
Very... Sorry.
Sorry. Just finally on R&D, you mentioned it's been rising. Will it continue to have to rise, and is there kind of a target you have for that in terms of, say, percentage of sales that you'd like to get to?
I'd like to have a larger percentage of our annual sales from products we've developed in the last five years, in three years than we do today. And I think that means we have to drive much harder in the R&D space. And that's why we've kind of ring-fenced it this time. And we've had a net addition in R&D, despite the fact that we've seen this decline in the order intake. Because we want to be in a much stronger position when the industry comes back, because it will recover, and there's no doubt about that. So, you know, I don't think you must... We must address the kind of business, the competitiveness, as well as dealing with our supply chain. So, yeah.
Thanks.
Yes?
I'm trying to nail down all the moving parts, you know, within your division. So revenues are SEK 38 billion last year. I believe aftermarket was roughly 20, equipment 10, services or project sales eight, more or less. If I look at the revenue decline in the first six months of this year, you know, revenue is down by SEK 2 billion, profit is down by almost SEK 1 billion. So operational leverage has been very high on the way down. Obviously, you know, it's really now where we'll get to the pinch point in equipment production, I suppose. But then again, you know, sorry for making this very complex.
Mm.
A year ago, your margins were 18%, so you had seen a lot of the benefits that you're talking about. So I'm just wondering, you know, should we look for this kind of leverage also going forward, but then with mitigating factors, as you presented today, you know, the outcome will be better than that? So, you know, would it be possible to add a little bit of color what's happening in each segment, so to speak, and whether the operational leverage we're seeing so far is representative-
I think that-
or we should expect?
That leverage is a bit high, I think, and some of that is down to the mix with the project business. I mean, if you, if you look at us, probably 80% of the business is projects or assembly. So, I mean, there's no way the leverage should be close to 50%. But so I think there's been some negative mix effects in there with more volume through the project business.
That's fair. And I guess, you know, that SEK 10 billion, and order intake is run rate at, say, 28, and your revenues are 38 last year. I suppose that equipment is down, or will be down by much more than 50% in order to kind of bridge that gap?
You seem to have some pretty good analysis there, but I don't think we've communicated, you know, where our business is going, other than—I mean, I don't think so, sir.
Okay, I'm just-
I mean, I can't comment, frankly. I think we need to wait for the quarter three report to see how-
Finally, just a clarification then. You said that you had 25% improvement in sales efficiency?
Yes.
What do you mean by that? You know, do you get 25% more revenues out of the same sales force? Or how do you-
Yeah, it's very simple. I just take total employees and divide by the sales.
Okay.
That's the way I look at it. Very simple measure.
That was up to 2012, full year 2012?
Yeah.
Thank you.
Okay, thank you. That's the end, so we have to leave, unfortunately. Sorry.
Okay.
I'll catch you later. Okay? If you, if you find me, we'll, we'll have a chat later, okay? Thank you very much.
Okay.
Take care.
Welcome to Machining Solutions. My name is Jonas Gustavsson, and I'm the president of the business here at Machining Solutions. I also have Mats Backman here, and he will do his last... Enjoy the last, you know, presenting the number for Machining Solutions before he moves up to the group, and then he will review the numbers.
I will chase you.
I know that, so that will be interesting. Anyway, welcome here, and before we go into the presentation, a few words about safety, since that is also the key priority in Machining Solutions. If anything happens, there's two ways of getting out of here. You can run in that direction, follow the signs, or in that direction, following the signs. And the assembly points, as Magnus mentioned earlier, is the roundabout outside the building. All right? This is the way we plan to have the presentation. Now, today, a short introduction, and Mats will do a short business update also, all figures quarter two, but still a few words about the figures and also on the market as we see it right now.
Then I will cover a bit context and starting point for Machining Solutions, and then go into the strategic direction that we have worked on during the last six months. Four key building blocks that I will talk a bit more about, and that's, you know, offer and technology, making sure that we have the best offering in the business. Second one, cost and productivity, the mid-market as such, and then, you know, the portfolio and mergers and acquisitions. And finally, then a bit execution and summary. So that is the plan for this session. Maybe a few words about myself now. I'm, as you might know, then, new in this position, Machining Solutions, since first of February this year, so it's around seven, eight months.
Before that, I was heading up Materials Technology for a couple of years, starting up the step change journey at Materials Technology. But then I had the opportunity then to change and take on the Machining Solutions. Which is also, for me, very interesting, because I've been five years at Sandvik, but before that, I started at ABB with turbine blade manufacturing, actually, in Switzerland. Moved to Bombardier, which was an easy thing, because of course, Sandvik sold off the train business, so I ended up in Bombardier. And then spent six years in Austria at a part of Bombardier, producing snowmobiles and Ski-Doos and Sea-Doos. Very, very funny product, I have to say. And at that place, I was leading, I believe, a big operation, producing and developing engines. So I produced a lot of engine parts.
So what I want to say is that many of the years before I joined Sandvik have been as users of metal cutting tools, producing crankshaft, producing turbine blade. So I've been a, you know, big customer to Seco, to Coromant, to Walter over the years. So I have easy to identify myself with a customer, which is kind of interesting when you move into this position as being heading up the whole Machining Solutions division. So that's my background then. But it's fantastic to step in and, you know, take on the crown jewel of the Sandvik then. Yeah, Machining Solutions, you know, I mean, the size we are, this is 2012 figures, around SEK 30 billion in revenue.
2012 ended up on the EBITDA, SEK 6.64 billion, rose to 31%, and we're just below 20,000 employees around the world. For us, it's fantastic because we are clearly the market leader. From size and scale, we are number one in the metal cutting business. I will come back to that, because it's a very important part of the journey ahead of us, that we are the market leader in our business now. All right, Mats.
Thank you.
A few words about-
The second quarter is already history, but just a short summary about the development. What you can see here on this chart is the development starting first quarter 2007 until the second quarter 2013. Columns represent invoicing in absolute numbers. Red line is the development of the EBIT margin, and the blue one is the development of return on capital employed. Looking on the second quarter invoicing of approx SEK 7.3 billion, and that's approximately -1% price volume, comparable units, comparing with last year, though. So it is an improvement comparing with the first quarter, where we were on the level of -7% price volume. So an improvement in terms of order intake invoicing in second quarter.
And what we saw in the second quarter was improvements in, mainly in Europe and Asia, China, I would say. In emerging market, we saw slight improvements in those markets now. EBIT margin or EBIT in absolute numbers, SEK 1.5 billion , close to 21% in EBIT margin, and that's a quite significant improvement comparing with the first quarter. But it's not as dramatic as it looks, 'cause what we... We had one loss in the first quarter affecting the margin with approximately 2%.... But still, the gap is pretty much due to productivity, improved productivity in the second quarter, where we have been able to adjust the cost base to the lower volumes coming through in the first and second quarter. So a lot of productivity.
What I also want to highlight in the second quarter is that we managed to keep the inventories relatively flat in the second quarter. From a seasonal point of view, we normally have a stock buildup in the second quarter, but we managed to keep inventories and to keep very good management of the net working capital as well in the second quarter. Return on capital employed, 26% reported, but if we annualize the second quarter, it's on the level of 31%, so positive trend looking on the second quarter, driven by the profitability, but also, as I said, with the improved net working capital. I think I'll leave it with that, you.
All right. Thank you, Mats. Now starting up, looking a bit on the context and the starting point for Machining Solutions then, and we're choosing to define both our starting point, but actually the journey ahead as leading, leading, but also leading to the next level, because clearly, we are the market leader. If you take our brands together, Walter, Seco, Coromant, and also the Dormer brands, we are the, I would say, undisputed market leader in the metal cutting business. But we are also aware of that it, it doesn't, you know, the history will not, per definition, bring us up. So we need to be taking most of our processes to the next level, and that's actually how we are rolling out this strategy now internally in our company then.
So leading to the next level, but also to focus on the core business. For a period, we went also a bit on the adjacent areas, but I will show you a few numbers, how we have defined the metal cutting business, and it's a very attractive business to be. So leading to the next level and focus on core. Looking on the market, the market size as such, we estimate to be some SEK 145 billion , and that's the total metal cutting market, from high- speed steel drills, taps, inserts, tool holders. The total market, SEK 145 billion. And that is actually a big niche, you could say. And we, as the leader, operates in all of that market.
Obviously, we are more active in the more advanced tool, in the more, in advanced insert, but the total market for us, it's the core market. If you map ourselves, compare, also some of our key competitor, you can see that average profitability in this segment is around 15%, which is not bad. I mean, myself, I have a history of materials technology, as you are also watching. It's a different game, stainless steel. This 15% says, you know, why would you look outside that interesting niche when that's the profitable level you can have over a long business cycle, actually? And finally, in that SEK 145 billion, which you you can slice it in different kind of application products, the most advanced products, the most interesting product from us, it's quite high entry barriers to go into that.
Olof presented the 4325 that was launched last week from Coromant, and that little insert contains a lot of innovation and deep technology know-how. So okay, a high-speed steel tap, you might be able to bring out in the market quickly, but to bring out that insert, that little insert that brings 30% productivity gain compared to competitors, that's not easy. So that's why we estimate it's a very interesting segment to be in, the metal cutting segment. So that's also a reason for us to even increase the focus on the core business and not look adjacent for everything else. If you look on market trends that we are following, we can see. We can still see that the premium segment is still a majority of the total business then.
So, we estimate the premium to be some 2/3 of the total market, and maybe 1/3, you could classify, I have a picture of that later, as a mid-market or a non-premium. We see also that competitors continuously copying our way of selling. We still have a gap to our favor, and our way of selling our premium product is work very deep into our customers, supporting and driving the productivity at our customers. Low-cost players entering the market, that is also something we see. And finally, then, we see, of course, we see technology entering. 3D printing was mentioned this morning, but we don't see a revolution at all. We are observing, monitoring, following that trend with 3D printing, and actually, we see it's more used into prototype, prototyping, and so on.
We think it can be in our favor, so we don't see a revolution that will completely change the metal cutting business over the next coming period. Developing markets, we see a strong market growth. We see also trend, Japanese, Korean, players follow the domestic customers. So when they set up new plants in China or in Indonesia, they prefer to choose the tools they bought in Japan. That's why Japan, for example, is an important market for us, as Korea is. Local players moving up in price position, and there are very market-unique sales channels in China, and we have learned a lot over the last years how the mid-market segment is running and how it's working. If you look on customer behaviors, we know also that the majority of the customers use multi-brands.
So we know that some 80% of our customer uses more than five brands into their operation, and that talks in favor of our multi-brand strategy now. Second, buying on productivity and total cost. So that means that we have a long tradition of supporting our customer in driving productivity. So when the machine is running to have, you know, 30% or whatever advantage compared to other competitors, but also when the machine is not running. And right now, we are spending more and more time supporting our customers in optimizing the total cost in their operations. And I was recently in U.S., visiting some of our key customers, and we have full-time employees at customer sites year after year after year, supporting them in optimizing their crankshaft line, for example.
You know, when you have a bottleneck in one operation, you need to debottleneck that, so we bring out some new product, optimizing that, and that's the way we sell our products, and that's still ahead of our competition. Shorter product life cycle. Customers also bring out quicker and quicker newer products. That means that we also need to meet that with bringing out new products more frequently, good products, and also in our favor, decreasing machine investment, as I said, relying more and more on us, more or less optimizing and running a big part of their operations. Again, I recognize that from being a customer to, for example, Coromant, when we had a lot of support in Coromant people supporting and driving operation.
It's a fantastic sales model, because after a while, you get extremely dependent on this expertise, and that's what we want to penetrate and increase them. I've been a customer where actually, like, machine builders is important to get into machine builders. So when they expose a customer, they want to have our people with, but they more or less act as under the customer flag, which is a fantastic sales model. If you look on the competitive landscape, I mean, we can divide it as we have done in the premium, non-premium, mid-market, then we have a niche area. We are clear, as I said, with the three brands, Coromant, Seco, and Walter, the leader in the premium, and we are choosing here two other competitors, the ISCAR brand from the IMC Group and the Kennametal.
There are not so many in this size and scale in premium. Maybe we are around eight, nine, depend how you classify them. So that's premium, and that's clearly the biggest segment also. Then there's a niche area, maybe there are 50, 60 competitors, and then you have the mid-market, and mid-market is a battlefield. It's more than 100, very fragmented, as we see it. And again, around one third is the mid-market, as we have estimated it. Now, moving into the strategy. We have defined seve objectives that together will lead us towards gearing up harder on growth and also, of course, in increase our profitability. First one, which is, I think, uniform for all the business areas in Sandvik, that's to reduce the number of accidents in operations.
We have a, you know, stable manufacturing operation, but there is still room for improvement also at Machining Solutions to make our environment more safe. So that's number one. Second one, that's volume growth in addition to value growth, and that's an important statement that we are doing now. We are gearing up a bit harder for growth, go for market share, so volume growth in addition to value growth. Thirdly, prioritize growth in attractive segments and regions. Of course, that is a part of that one, that we have defined now with our brands, which segment, which region do we believe we will have a more interesting growth, and that we're attacking a bit harder.
Strength in R&D portfolio, as I said, that's the base of everything, that we have the best products in the world, that we can bring out the best products in the world to our customers. And optimizing manufacturing footprint, I will talk about that. Olof mentioned the 25 production units. I will talk about our view on that, but also to drive operational excellence into our manufacturing chain, footprint. Portfolio and M&A-based growth, to always review the portfolio, but also look and hunt for interesting acquisitions. This morning, we talked about Precorp, I will say a few words about that, which is an excellent fit into an interesting growing segment, aerospace. And then seven, broad entrance in mid-market with a multi-brand strategy.
A bit more than one year ago, we informed you about the Carboloy launch, which was one brand, but we will go harder into the mid-market. So we will cover the premium with our brands, but we will also have a broader coverage of the mid-market segment with a multi-brand strategy also there. So seven important objectives for us to support and drive our strategy going forward. Now, we have decided to kind of build up the strategy on building blocks. In the base, you have execution, and I know that, from experience also before, but for example, the journey we did with SMT, that you can have the most fantastic strategy, but if you are not strong in execution, you might have a problem. So we will drive the execution very hard going forward in Machining Solutions. And then four building blocks.
Make sure that we have the leading offer and the best technology. That's number one. Then the second one, cost and productivity. Scale-wise, we are the biggest, so using the scale, we've-- we should be able to bring down the cost per produced unit, and that is an absolute ambition to also be leading in cost and productivity. And then the third, as I said, enter the mid-market, and the fourth, then, to have a ongoing review of the portfolio and also look for interesting, acquisitions done. And that together now will be the base for growing our company and make sure that we are, that we are not only staying and become the leading, that we become the undisputed leader in the metal cutting business. And we have the fantastic, again, starting position as being number one. It's just that we need to make sure that we...
You know, when you are number one, you have to still be hungry to increase the position to the others, and that's important for us. So up on the leading growth, I think, as I said, volume growth in addition to value growth. Another important part of that is to make sure that we have a clear, a distinct differentiation strategy between our premium brands.... All Walter, Seco, and Coromant operate in the same segment. And of course, our ambition is to make sure that we cover as big part of that premium segment as possible, starting with what kind of offer do we have? What's the sales channel? What customers do we go for, and so on. So that is what we are also working very hard on, to make sure that we have a good differentiation strategy between the premium brands.
Talking about the position then, a year ago, or a bit more than a year ago, we, we, informed about how we position our brands, and we had a nine-fielder like this, where we have our premium brands up in the global premium, and we defined Pramet, Safety, and Impero as being something we call local premium, and we even said that we might launch a niche brand under the Sandvik brand. And then we have, Carboloy and Dormer down in the mid. This is a generic structure that after a year now on heavily investigating, trying to understand and learn, for example, the mid-market, it's very different. It's very different how, the market is in China, India, compared to Germany, compared to U.S.
So what we have decided to do now is, based on a lot of facts, and this is one example where you have premium. So basically, this is a price band down to the lower part, and you can see the volume distribution in this particular region then. That we will, of course, play our premium brands up in the top, and I mean, even in China, there is a big premium. So that's where we will leverage and use Coromant, Walter, and Seco. And then we will take, so what we call the local premium, and try to cover as big part as possible of mid-market. So we have the Pramet, Safety, and Impero, in this case, here up on the high mid, Carboloy, in this case, are covering the lower mid, Dormer, that's our round tool offering into the mid-market.
So that's what we mean with having a multi-brand strategy also in the mid-market. So right now, we are setting up and actually repositioning our brands to cover also as big part as possible of the mid-market, going forward. So if you look on the building blocks, then offer and technology, and Olof mentioned that we have a tradition, and it, it's actually from where we are coming to have the best products in the market. And what we will make sure, and that we will work even harder with, is to work with these three boxes. You know, make sure that we have the product leadership. Secondly, advancing customer interface, exactly what I, what I said, the way we interact and work with the customer, helping them to drive productivity. And thirdly, make sure that we bring out new innovative products on the market.
Olof showed the 4325, which is a new insert that we launched last week at the EMO exhibition, and that gives actually a 30% advantage compared to our competitors. That is a fantastic thing. So if you have a big operation where your turning operation might be the bottleneck, so with this one, you can both drive productivity and cost, but you can also de-bottleneck and avoid investment. So there is a big pull for that product on the market. But we have also launched other interesting product recently in Walter, the Tiger-tec, and also in Seco, and there are also other applications. This is just to state that in the business of Machining Solutions, we have to have frequent launch on new products.
If you miss, you open up the window to competitors, and our intention is to be very clear on always launch good products, to not invite competitors to eat from our table. Developing customer interface, and this is also something that we have a good tradition in, how we sell our products. But one thing that we now spend more time is to develop into, which is also a big part of the mid-market, you know, how can we sell our... Say, how can we increase efficiency in our channels? There's a different way of selling to mid-market, also more based on web solutions and other distribution solutions then. And we need to make it easy to buy products from Sandvik, from Machining Solutions.
But of course, still, drive the application expertise, and also to make it easy to get access to our product data. More and more of deciding a product is done from the computer when you make your CAD, CAM simulation, and then you have to make it easy to download all our products with all the features, so you easily can use our tools when you decide of your milling strategies. And that is also a way of selling our products, where we also now plan to bring out new software solutions to our customers that is also quite innovative in how you work with the customers. So this is very important then. And finally, then, make sure that we have this frequent innovation brought out on the market, from product, but also from the way we sell our product.
And actually, this is highlighting that we are working also a lot with software solution that should make it easier for customers to get product from us compared to competitors. So three very important: product leadership, customer interface, and bring out innovation on the market. Now, cost and productivity, and as I said, and you know, I'm brought up, and I'm coming from the manufacturing. I had production leading position for many years. Scale is a great thing to have in manufacturing, and with the scale we have, we can clearly be number one in that, and having the lowest cost per produced unit. So what we are doing now, besides driving performance in R&D and sales, is that we have set a clear, ambitious target for us to reduce the cost per produced unit. And we will do that by three things.
First of all, we are optimizing our footprint, and of the 25 units or production units that Olof highlighted, I would say 10-12 is within the area of Machining Solutions over the next coming years. Second one is to drive performance per each unit, drive efficient lean program at each production unit, and there are more opportunities to be done at our place. And thirdly, to drive material cost reductions. These three areas are important building block to make sure that we will have the most efficient supply chain for metal cutting tools in the business then. And that's we, we should, and we cannot have any other ambitions based on the size we have. And that's the way we see it, setting the foundation, scaling up, and having the full savings.
We have a lot of sites to cover then, but we have a clear roadmap on how to roll this out now. Mid-market, I mentioned that we are going into the mid-market, and again, we started with Carboloy some year ago, and we are adding now other brands, and then we have a round tool offering with Dormer, and we are leveraging from our position right now. But we are also setting up new sales channels, new distributors, and we're actually taking up the fight now with many of the, I would say, mid-market actors out there. Because it's not only, because first of all, we will make money out of this, which is, I think, one good reason for going in there.
Second, it will not jeopardize the premium, so it's not either/or, and that's, I think, it's important part. We will keep this as isolated as possible, because premium is still, of course, size-wise, number one. And then there's a conversion, as I said. Many of these customer will bring in new machines, and being active at these customers now will make it easier for us to take part of the conversion when they need Coromant tools or Walter tools, or Seco tools instead of the mid-market products. So there are several reasons for us to go in broadly into the mid-market, and we will do that. Finally, portfolio and M&A, then.
We highlighted this morning that we are bringing in the remaining parts of the Precorp Corporation, which is a company in the U.S., some 200 employees, SEK 230 million of revenue. Main focus is aerospace industry, which is one of the segments that we are attacking quite hard now with new products. And as you know, there is a big demand for new aircraft, and actually, the order books for many of are full the next six-seven years now, so aerospace is important, and this is one acquisition that perfectly fits into the portfolio of Machining Solutions. And then, if you look on the whole value chain, there are opportunities when it comes to the workshop, and as I said, tool design, machine operation, even down to logistics.
I think what we are doing is that we are bringing out new innovative solutions here on the total value chain, but also when it comes to inventory, how to bring out the products. But we are seeing them as tools for generate sales of our products. So we do not expect a new leg in Machining Solutions that creates a lot of revenue into service or whatever. In fact, we are developing these interfaces to boost and support sales of our tools.
I've seen it being at the big customers in the U.S., where, as I said, when we have two, three, four employees, extremely skilled production engineer people being at that site for three, four years, where the customer is extremely depending on our expertise, and that is one example which we will continue to develop then. Finally, I think execution, and if you look on the organizational setup at Machining Solutions, we have decided then to create a new product area that will host the brands that we are going into the mid-market, and that is an important product area that we will keep them as separate as possible from the others. We have our three then, with Seco, Walter, and Coromant, that operates in the premium.
We also then are using supply chain and production, so we are actually driving the lever across that, including the Seco footprint then, to get scale and get out cost and drive up productivity, but also to share production technology. And then we have a staff with one example is that we are just now bringing in a head of R&D, that we have not been lacking, to make sure that we still, with a multi-brand approach, leverage from technology also in the R&D side. Because for me, also, it's clear, and it's a fantastic position to be size-wise, as we are now, we can do more. We should be able to do more than competition, and in fact, then closing the gap, also when it come to growth, going forward.
So we have spent a lot of time setting up the strategy, but I can assure you, we are now spending a lot of time in setting up execution model for making it happen. So I would say in summary, again, starting out, I started up with a core. We will leverage the attractive core business. So again, no real need for looking outside the metal cutting business. It's a very, very, very interesting segment to be, and there are still much more to do for us in that SEK 145 billion market. Second, we have ambitious growth plans now, and we expect strong EBIT and cash flow development based on that, of course, and the building blocks into our strategy is clear.
We will make sure and focus a lot on bringing out the best products, the best technology, the best way of selling. We will be ambitious in taking out cost and drive productivity in our supply chain. We are going into the mid-market more broadly, not jeopardizing the premium areas. We will finally have a frequent, you know, review our portfolio and look for interesting M&As, but base this on a strong execution. And I think by that, I feel confident, thrilled, energized with the fact that we want to stay as the leader, but we want to become even the undisputed market leader. And it's core that we are focusing on, not looking for adjacent area, because there are so much more to do within this interesting business. So I think with that, I would open up for questions. Yes?
Just an M&A.
Oh, we need to have a, yes, go on, Nick.
Just an M&A. I think last year, not you, but, the previous head of the division said that was huge opportunities in buying mid-market players. We haven't seen that much yet. Is that because of, you know, high multiples or taking a long time to identify targets, or?
No, I think we are still seeing opportunities in mid-market as well as in the niche areas, as well as, you know, potential premium, like I would say, Precorp, I would say, is a niche, premium. But I think it's more the fact that we have not yet found the best acquisition in mid-market. But I think we are open to that still, that there are opportunities in mid.
I can just kind of confirm that, but what we need to remember that we are looking on the different brands that Jonas are showing now. We are a key player in terms of mid-market, adding Dormer, Pramet, Carboloy, Safety and Impero together. So it's difficult to find a target in mid-market that is kind of bigger than we already have as a portfolio.
And then just a question on current trading. I think, you know, we just came from construction, and he was hinting on sort of near-term weakness coming out from Asia, and what are you seeing here? Obviously, a completely different portfolio of products, but if you could comment a little bit on, yeah, what you see in current.
Yeah. I think it will be a more or less, we will say that what we communicated in during the second quarter is more less what we see going forward right now. No major, major changes. So, so I would say, I would say stable, but no real... I think what Mats said in the beginning is, is valid, and so there's basically what we said in the second quarter.
No change from the communication.
The impact.
In Q2, was that we see the same pattern.
I guess, yeah.
Yes. Yes.
Yes.
Yeah. Yeah, yeah, yeah. I mean, comparing with previous years-
Absolutely
... that's another thing.
Yeah, that's another thing.
'Cause, I mean, by just keeping a kind of stable run rate, we would get into growth.
Yeah.
Yeah.
Just finally on automotive, I think it sort of felt like that was a little bit more positive or, you know, is that the same thing?
Yeah, I think if you look on the macro, we feel that maybe automotive will start to increase, but we have, as I said, still numbers says that we are still on the same, you know, more or less as we saw in the second quarter. But automotive is, in our business, there is a geographical shift in automotive, and I think western part of Europe will might suffer more, but I think automotive in our business is a key segment. We have and we are a key player in automotive, but we will... That's one important segment for us. Yes. So yes, we will try to use the microphone sometimes.
Could you just say anything on, on, you said that you were actually not sort of taking up inventories in Q2? Could you say anything about production plans going forward? And then secondly, on the mid-market, you've been sort of saying over the past couple of years that this is a very low base, and it's gonna take a lot of time to sort of build the revenues in the mid-market, and now you're getting more aggressive, launching more brands into the mid-market. How big is it now, and sort of what should we expect going forward in terms of growth?
Let's start with inventory now.
Yeah, start with inventory.
I mean, for obvious reasons, we have a destocking in third quarter due to the holiday period. But as I said, we managed to keep the inventories on a lower level in second quarter than we normally do. So that is kind of somewhat positive for the productivity. But going forward after holiday period, I would say that, I mean, we're planning to produce according to demand, basically. Nothing else.
When it comes to the mid-market, I think it will take time. It's not like it's an easy thing to go in there, and what we are doing is that we are very clear how to do it and to what we think is the right thing to do. So now, we started with the Carboloy as a clear mid-market initiative, which was really starting from scratch, developing a basically or taking an old brand and bring it out in that. And now we are positioning, I would say, repositioning Pramet, Safety and Impero more in the mid-market, as well as Dormer. But so, so it will take time, going forward. But of course, we expect with that broader approach, you know, a faster growth compared to what we have had in the past, at least.
Because what Mats said, with that fragmented landscape, we are already a player in the mid-market since it's so fragmented.
But you gave us a picture of the market in general, sort of 2/3 premium market-
Yeah.
1/3 the mid-market. If you want to achieve that split on your own, I don't know—I don't really know the starting points, as you haven't given us the full starting point yet-
Yeah.
But can you sort of box it in a little bit?
Yeah, but I'm not sure that. We didn't say that we want to achieve that split, because clearly, if you look on now and say 2020, the premium segment will continue to grow. Because as we said, there is also a transition, transformation from products where they source from mid-market products up to premium products. So for us, still, the premium will be the most important one. But then we want to go in and become a player, a key player in the mid-market also, because we also believe it's important for us to play a role in leading that transformation up to premium.
But, you know, in premium, as I said, we are—if you say that we have around a bit, maybe eight key players, and we have three of the strongest brands in the premium, so it's a fantastic, unique situation we have in the premium. And I think, coming back from the U.S. a couple of weeks ago, that the rebound in U.S. industry, where they, we really have a lot more self-confidence in setting up manufacturing plants in the U.S. right now, it's interesting to see, and they are all looking for top-notch tools, because for us to stay competitive here, we need to have the best of the best of the best.
So I think that's also a trend you will see going forward, where western part of Europe, North America, and step by step, also, the key players in China, they will ask for the best of the best. Because here you have machines worth hundreds of millions in investments, and you have these huge components, like a turbine axle. And the only thing that sets the performance between these two is the small little insert, which is basically a non-investment product. So to take a chance on that little insert, having a breakdown or whatever, when you're a bit advanced, it's not worth it. So that's why there's still room for us to optimize the whole premium segment.
So that even though we go out and say, we will attack and go hard on the mid-market, still the premium is still much more to do for us then. Yes?
A couple of questions on the mid-market, and one on competition. On the mid-market, can you give us a feel for how big it is for you guys now? Are we talking 5% or 20% of your revenue, when you throw all the brands in that you've talked about?
Yeah.
Do you think that that's going to grow faster or slower than the premium business? The margin of the industry, when you look at that 100 list, I know it's probably a lot of it's private.
Yeah.
Do you have a feeling against the 15, what the margin is across the mid-market?
Okay. Margin-wise, I mean, I think we intend to make money in the mid-market, but then I think there's a huge variety of margins. You have, as you said, private companies happy with lower margin. You have companies who might attack that segment due to taking market shares, and you have a big variety of reasons for going in and attack them. So I think also the margin development is very different. We will go in there to make money. We're not going in there just to play. We will also make money out of it. When it comes to the share-
Combining the brands that we talked about here, we are close to 10%, I would say, between five and 10.
Very faster or the same?
I think, depend on what you mean, because, in absolute value-
Sales rate.
In absolute value, I think the mid-market segment will grow slightly faster, we believe, going forward. But I would say with the ambitions we have right now, we also will grow in the premium, but maybe slightly faster, but based on also us coming in with a smaller market share as well.
What I'm trying to get to is any risk of margin dilution, because is this group of your sales, forget the market, is the profitability of that, meaningfully-
No
... lower than the premium side at the moment?
I-
I mean, I imagine it is, but-
Yeah, but what I, what I would say, I mean, you know Dormer in the, in the past as well, and the profitability for Dormer. So it's a clear difference in profitability if you're looking on the round tool side and the in-insert side, depending on the assortment. So that is number one. Number two is that, I mean, the, the offer going to mid-market in terms of assortment is much, much more narrow, so to speak. Meaning that we can gain a lot in terms of scale and productivity with a smaller assortment, higher batch sizes, and so forth.
Yeah.
It doesn't necessarily mean to assume that it is a much less in margin looking on the mid-market products, depending on what kind of products you're talking about.
It's difficult, because I agree with Mats. I mean, when we go into the mid-market, we need to make sure that we get the cost base down on those products due to different reasons. And of course, if you look on the premium, there's even a span, of course, on margins on the premium products. Maybe you would say that our mid-market will be closer to the lower part of the premium then, maybe, but I don't... So that's the thing. But of course, we have a different way of thinking, the business model going into the mid-market.
Just one other question. Iscar-
Yeah.
I know we don't know much about it, 'cause Mr. Buffett doesn't like to tell us, but it looks like their, their revenue, if we can imply something from the employees, has grown quite a bit faster than, than Sandvik, whereas Sandvik's grown quite a bit faster than Kennametal. And I get the impression from the, the Israeli tax that that their margins are maybe a bit higher. So do you think that their, their premium growth is a function of higher R&D, or is it just their tax break? What, what is it that Iscar are doing?
I mean, obviously, we also analyze and follow, since we think it's a very good competitor, ISCAR, an interesting competitor. So it's not so easy to get access, since they are not a public company. But, I mean, we know that they launch frequently new products. We know that they are, we said, copying our business model, so for sure, we see a development of ISCAR. So they are good competitors, as Kennametal is then, so, and... What I believe strongly is, with our position, Machining Solutions, gathering the brands together, drawing all synergies we can without jeopardizing multi-brand, we have all the means to increase the gap again. That's our ambition, and that's-- we should and cannot have any other ambitions. If we play this smart, which we will, our clear intention is to increase the gap to our competition.... close it to ISCAR.
That implies that there is a volume gap, of course. But, as we said, we don't know about much, much about ISCAR, but, we have a clear plan now, which is also gearing up for volume growth, and I think that's an important component for us then, implying that we will also take market shares. So for sure, with our strength in R&D and the way we will bring out new products, we want to make the life for our competitors tougher now than it has been. And we want there are clear directions which segment we will. We have a clear idea which regions we will go harder on. We will allocate more resources, we will allocate more resources in R&D, and we will drive the whole Machining Solutions engine a bit tougher, also taking out cost and driving productivity back-end.
That will also give us opportunity to be a bit more aggressive front-end. Right. Any more question? Yeah.
Could you add some more flavor on the progress of Coromant in terms of investments made and production and so on?
I mean, we start with CoroLo basic from scratch. It was organically driven, taking an old Seco brand, and reposition that into China. So I think the growth have been not. I mean, what you say, Matt, it has not been a great growth from that. What we have done over the last year, we have learned a lot about the mid-market. So I think now we are using CoroLo in combination with the other brands, and we expect a faster growth going forward.
Could you also say something about commoditization? What's premium product today, and how fast they slide into more mid-market?
How fast it slides down to?
To more mid-market offering. I mean, that dynamics.
I think it's important to see the offering, and that's why what we try to highlight. For sure, you have the product offering. Basically, what can the product do? But in premium, it becomes more and more even important that you are not only selling the product, we are selling the product with our way of servicing and installing the product, optimizing it. And here I'm actually on my home field, because, again, I was buying these products. And it's all about what kind of stability do you have in the machine? Do you get the smallest vibrations, you might need something else. How do you apply the cooling liquid? What kind of cooling liquid? Is it a oil fog or is it a direct cool? There are so many features that you can play with to get the last performance into it.
And that's where our expertise is. I wouldn't say unique, but we are way ahead of our competition. And that, I would say, expertise is becoming more and more important for our customers. All our customers hold on to cash as long as possible. And that's, I would say, you—I guess, you see that also. You wait with your investment until you have to do them, then you need to get it up and ramp it up as quick as possible. So in fact, the whole time in optimizing your manufacturing, get cost out, talks in our advantage. And I think that is also a reason why we will still see the premium growing. Maybe the mid-market will grow a bit fast, but the size of the premium, which includes all these features, will still be a huge size also when you look on 2020.
That's my firm belief then. And again, look on the big machines, look on the big components, and realizing this little insert in between is setting a lot of the performance, setting a lot of the cost base. And it's a-- That's why this is a very interesting business to operate in, and we can take out more of that. Yes?
You mentioned in the beginning.
Yeah, maybe.
Could you elaborate what that would mean in terms of productivity and capacity in general, and?
I mean, obviously, we are doing it to gain productivity. But I think at this point, we are in the beginning of that. There is a lot of things still to be done. Olof mentioned during the negotiation and finalizing the business case. So at this point, we are not prepared to share anything of that.
I mean, aiming for productivity, I mean, that's the most important thing.
Of course, as we mentioned, also, it will, optimizing the footprint will also, in a way, support our volatility, handling the up and down turns a bit more. So-
But you have too much technical capacity than today, or could you-
I think it implies-
What is your-
I think it implies that we have, if anything, we have more capacity, but it's also we, we want to do this because set up a structure for the future now, so it will gear up the structure a bit more towards the growth areas, maybe. And then, we are looking on different models. I mean, we have, you know, there's different things. We have the insert as one, and the insert, we have a very, integrated model, and we will keep that because we think there's a lot of, intellectual property and, and know-how in the whole, you know, this 4325 that we talked about. But then we have the tool holders. That's another story.
And here we are looking on different models, maybe to see if we need to do everything ourselves and how we can make that footprint a bit, even a bit more optimized. So if you look on the manufacturing footprint, there are also different kind of products, technology that we are working on, and we will set the footprint as optimal as possible, then to meet productivity, cost, lower the volatility, but also gear up for the future growth regions then. It's a good answer, huh? All right, last question.
Thanks. The price development in general, how are they developing? And maybe more specifically, the new product you showed, the P4325, how much more expensive it is compared to the previous version?
... Mats, would you like to take the price development?
I will get in for the-
No, I also would not like to do that, but, and I think when it comes to I mean, we will be happy to give you an offer when you leave, if you want to buy one, and then you can compare one. But obviously, we are bringing out the products then, with a lot of advantage for our customers. I mean, the customers, as we said, 30% gain in productivity, that implies that the customer is most probably willing to pay more for that insert. But then, of course, there's a part of that, that we also, drive, bring out to drive growth and, and take market share. So that's a balance act to make sure that we always have a good price development, but still also, go for a bit more aggressive on the growth.
Yeah, I mean, we have a positive price component.
Yeah.
And we'll continue to have it.
But, most important right now, and that is really to make sure that we bring out these products that makes a difference for our customers in reducing cost and drive productivity. All right, so I thank you a lot for listening, and I wish you a continued nice day. Thank you.
Thank you.
Hello.
Okay. So very welcome to Materials Technology. My name is Petra Einarsson, and I joined Sandvik already in 1990. And for the first 15 years at Sandvik, I held all kinds of financial positions that you can ever imagine in accounting and business control. Adam, you and I worked together back then. And always within Materials Technology. And I ended that phase by being the CFO of Materials Technology in the management team, together with Peter Gossas, 2003 to 2006. In 2006, Peter actually gave me the challenge to set up a turnaround program for the strip business within Materials Technology. And 2011, Jonas Gustavsson appointed me as head of Tube.
And now, since February 1st, I am proud to say that I am the President of Materials Technology, and this is the best job you can have, I believe. And, I have here with me, Andreas Burman, who is, my CFO in the management team, and we will together take you through this, presentation. But, I'm sure that they are also curious of who you are, so maybe you can say a few things about yourself to start with.
Absolutely, Petra. And my name is Andreas Burman, and I'm the head of finance, business development, and IT at Materials Technology. And I've held this position since September 2011, basically from the start of our step change program. All in all, I've been within the group for 30 years, in different positions, both on the business area level and also on group level. And Petra, this is actually the second time also that you and I-
Yes.
-work together.
You're right.
So we also had a bit of history in the late 90s, just before I moved away from the Sandvik Group for a couple of years, working as a consultant, and then came back here in 2004. So that's a brief-
Thank you.
Recap of my background.
Thank you, Andreas. Safety first. If something happens in this room, we have two emergency exits. One is here, just behind you, Andreas.
Mm-hmm.
The other emergency exit is in the end, back of the room, so you go out the same way as you came in. The emergency number here in Sweden is 112, in case anything happens. But of course, we will take care of you if something happens. And if you get lost and don't know where to go, if something happens, the assembly point is by the roundabout, just opposite the exit where you came in this morning. I'm also glad to announce that we have a defibrillator in this building in case you have an emergency and feel pain to your chest. I can actually also personally assist you in that case, because we have been trained, me and my management team at Tube, to use these heart starters that we have.
So with that said, I hope that you can relax for an hour and rest assured that we will take care of you, so you can focus on this presentation. Safety is the most important and absolutely my top priority, and so it is also for all employees at Sandvik. I truly hope that that will be one of your main takeaways from this day, from all presentations, that we really take safety first, and that is our top priority at Sandvik. This is what we have planned to go through today. I will start by giving a short update where we are in our safety program, and then financial development and step change is a special passion of yours, Andreas, so you will take us through that.
Yes.
...And then we will move into talking a little bit our, about the core capabilities of SMT, and then to look into more, more in details what our strategic direction and, strategy looks like. We call our strategy for long-term value creating SMT. Then a quick summary, and after that, the Q&A session. We have far too many accidents at SMT. If you look at 2012, we had 125 lost time injuries, meaning that you hurt yourself so bad that you can't work, that you have to stay at home. And if you, if you look at those 125 and make that comparable to, to other units, you measure accidents per 1 million working hours. And 125 accidents within SMT actually corresponds to lost time injury frequency rate of 9.3.
If we compare that with our customers in the oil and gas business, more or less, each and every one of them are below one when it comes to Lost Time Injury Frequency Rate. So this is a true challenge that we really need to deal with, and we have put in place an action plan based on looking into scrutinizing what actually happened in 2012, but also to put out the survey that we have had on the internet for all our employees to answer and give their view on what we need to do. Based on that, I would like to share with you these three conclusions. Firstly, 50% of our LTIs occurred in two units in 2012. Surprisingly enough, those two units are Swedish, and they are actually operating here in Sandviken.
So this is very much concentrated to Sandviken, and that is also what we need to put in all the efforts. Hand injuries are the most frequent injury type. 40% of LT, of the LTIs last year were hand injuries. And we can also see that 80% of all the LTIs are related to behaviors. And we have our mindset to make sure that we really make a true step change also within safety. But we believe that this is very much a cultural and a mindset challenge. And to give you one example from the survey, we have one question in the survey that says, addressing then all 7,000 employees that we have: Do you have a colleague that believe that it's okay to hurt yourself at work?
And the answer that we have received in the survey is that 41% of our colleagues believe that it is okay, it's part of the job to hurt yourself once in a while. And I think that that is the mentality, and that is the culture that we have in Materials Technology. And of course, it's not okay to hurt yourself working for Materials Technology. But I believe that this mentality is created from where productivity first is king, not safety first. And this takes time to change, but we are determined to change that. But we believe that it will take some time to reach the target. So we are looking into halve the LTIs year on year, and that is the journey that we are on now.
The target that we have for 2013 is to reach below five. Right now, in August, we are somewhere around seven-eight. With that update then on safety, I hand over to you, Andreas, to give us an update on the financial development and step change.
Thank you, Petra. I will start with making a recap where we are after the second quarter, and also comparing that with the historical performance of Materials Technology. We can look at this chart here to the right, where you can see the bars, that's the invoicing, and you see the red, orange line here. That's the EBIT margin, excluding metal prices and one-off effects. And also here, at the end of 2011, we introduced our step change program, which I will tell you more about later on, and this is our turnaround program. And it's quite interesting to see that from the start of the step change, we have gradually improved our performance and also our EBIT. In Q2 2013, we reported an EBIT margin of 12.5%.
This is probably our best EBIT margin that we in Materials Technology have ever reported. We are also looking at more effects to come, which I will talk to you more about. But here, when we look at this picture, it's also important to see that we have in the year, for example, a strong second quarter. The third quarter, which we will come right now, is the seasonal weakest quarter during the year. We have lower activity in the European market, and also where we have maintenance stops, especially in the Swedish units, around four-six weeks. So that will also affect the profitability, but we see that also in the quarters to come, that more effects will come from the step change program.
Coming back to the second quarter, 2013, we can also look at the return on capital employed, and if we exclude the metal prices and look at the annualized quarterly value, we reach a 50% of ROCE. It is quite interesting here to compare that value to the target that is set up in our step change program. From a base of 2011 of around 6% and 7%, we said that we should increase our ROCE by more than 10 percentage points during a two-three-year period. So, given the fact that we are on a rolling quarterly basis, around 50%, it also shows that we are on the right track here.
If we then go into the step change, and to start with, a brief recap, what the step change is and what we have done so far. So in 2011, when Sandvik introduced, when we introduced our new strategic direction also for the group, it was clearly said for SMT, that we should focus on our core business, we should increase our profit before growth, and we should also increase our return on capital employed, as I said, with more than 10 percentage points during a two-three-year period, and then we also said, given normal market conditions. In order really to tackle that challenge, in order to stand up to this challenge, we introduced what we called, and what we call, our step change program.
And it is these six areas that you can see here to the left. And the first priority in the step change program is to create a safe working environment for all our employees. And that goes without saying, that is our top priority, and also, as you talked about, Petra, this is what we really need to focus upon, and really, it should be in everybody's minds. And also, I believe that there is a financial implication, especially when we talk about the growth, for example, for important customers in the oil and gas sectors. They are really good at safety, and many of these our customers are below one. And in order to grow the business, and in order to be credible suppliers to these customers, you also need to be really credible in the safety area.
So it's a really clear connection also to the business. Then if you go into the more financial areas, there are five areas, where in each of these areas, we need to make a step, really make a step change, not these incremental changes. And that is also why we call it a step change. So, so far then, as you also saw on the previous slide, the step change has delivered, and we have come quite far on the journey. More, there are more to come. Also, what's important is that we have implemented the way of working to ensure that the effects that we are planning for, that we also execute this, and that we also see the effects.
And this will, we will continue with, and it will be a very, very important strategy enabler for us going forward. So when we talk about how we will be evaluating business area, step change will be our key performance management engine and the key execution engine. So what have we done then up until the second quarter? We have improved our EBIT with SEK 1.3 billion , all in all, in these five areas. And the biggest part here is related to the cost savings, so that is around SEK 700 million , or more than SEK 700 million . And the primarily explanation here is that we have reduced our personnel by more than 1,000 persons, and these are sustainable reductions.
And of course, when we have done this, we have also reviewed the organization, trying to connect, and try to make a much more lean organizational setup, a more efficient setup. On top of the savings, we have also worked with the price and mix, and also to the growth initiatives. And these two initiatives have contributed by around SEK 300 million , which adds up to the SEK 1.3 billion . On top of the profit and loss effects, we have also worked a lot with the net working capital side, and capital efficiency, and we have reduced our net working capital compared to the peak levels in 2011 by more than SEK 1 billion . So all in all, when we summarize, we have seen that the step change program has delivered.
We are looking at effects to come, and especially within the consolidation and the area. And a good example here is the wider footprint, where we're going to see effects during the end of this year and also into next year. Another area where I would like to bring up is the operational excellence, and here we have productivity, we have the yield, and we have delivery performance. And these areas will be critical also when we talk about growth. So all in all, right now, we are really fit for growing SMT from a much leaner cost base. And right now, it's really to show that we also should capitalize on our position and a strong position within especially the oil and gas, and energy segment. So with those words, Petra-
Mm.
I will leave this.
Thank you, Andreas.
Presentation back to you.
Thank you. So let's jump into the strategic direction and what it looks like in the future for SMT. And, with the risk that I might disappoint you, I would like to start with that revealing the fact that we will not change very much. We will leverage on what we have reached in the step change and make sure that we stick to that way of working and focus on growth in our core areas. And, this is a slide that is very important to us, and I think this is also a lesson learned in the step change program during the last two years. And, we talk a lot about core capabilities and that we are leading in the materials technology. So what do we really mean by leading?
We believe that we have unique expertise in advanced stainless steel and special alloys. We also have a world-leading R&D, combined with metallurgical know-how. The fact that we have the whole primary setup with the melt shop here in Sandviken is a very good competitive advantage for us. And we also have an integrated production that ensures consistency and superior quality in our products. And this make it possible for us to drive the materials evolution, and this is also what we have been doing since the start of Sandvik. And this, so, this is very much... Well, this is the core for materials technology, and this is what we will stick to. How we make a difference within materials technology, that is also something that we have, that we have taken some time to discuss in the management team.
I believe that it's important both for materials technology to think through this, and also to be able to tell that story, to attract employees to work within materials technology. This is what we have stated as our mission, that we apply our unique expertise in materials technology to make industrial processes safer and more efficient, yielding greater output while consuming less resources. I think that truly we are a good supplier for our customers, both when it comes to making their processes safer, but also to make their production and their processes more efficient. Based on that mission, and looking into the future, this is the three most important things that I would like to highlight as our direction going forward.
Firstly, to make a true step change within safety, both for our employees' sake, of course, for them to not hurt themselves working for SMT, but also as a business competitive advantage in oil and gas. We cannot be on the 9-level LTI frequency rate in the future. Continue the journey in materials evolution, and also to capitalize on that unique expertise to grow the energy segment. And here we are targeting to have more than 50% of our turnover in energy. Today, we are around about 40%. So moving into what the strategy look like, and we call it long-term value creating SMT, and we also have the target to have a balanced profitability over the business cycle, or a stable profitability.
We have looked into also quite a lot of market analysis and trends to see what lies in front of us the coming years, and our conclusion is that we are well positioned to grow. Looking into the pie chart, the turnover of SMT, you can see here that we have a market exposure of 44% of sales in segments that clearly grow more than GDP: energy, medical, aerospace, and chemical. And I think all these segments have needs for our capabilities in product development of material. Looking at the energy trends, here we can take oil and gas, nuclear, coal, and renewables as one example.
If we stick to oil and gas, with which is the largest part of the energy segment, we see that it will be a substantial growth in oil and gas for the next coming years. The business opportunities for us is that the increased safety and lifetime focus in oil and gas, where the industry turn from 20%, 20 years in safety to 40 years, really speak for our kind of product. Combined with the tougher extraction conditions, where the extraction of oil go to deeper depths, more sour wells, and all that is also a good opportunity for us. So both that this segment will grow, but also that the need increases for our products, it's a good opportunity for us.
If you divide oil and gas, you can see here that the main part of the growth ahead is in offshore. But you also in all different parts of oil and gas, we have substantial growth. And to give you one example of our product offering in offshore, you can also see some of the products in the back of the room later when we have gone through the presentation. But I will not bore you to, with all the details on this slide. But you can see here that we have a quite large product assortment for offshore oil and gas, both for the top side, for subsea. Here we have manifolds, injection lines, control tubing. Umbilical tubing is a very important product for us. Also, control lines. We have downhole.
OCTG tubing is the production tubing where you actually produce the oil, and also well intervention is a very interesting area, where we also put a lot of effort into making the oil wells more productive in the future. And here you can see that the material trend is also moving from the properties where you don't have so tough environments, maybe you can utilize carbon steel. But then as the environment get tougher and tougher, you move in this direction, and then you need duplex tubes, which is invented by Sandvik, and nickel alloys. There is also a trend now in moving more and more towards powder and near net shape products, which is also one of our product offerings. So this is an area where we will put a lot of efforts and resources in the future.
You can look at SMT from different angles, and of course, you could look at SMT from a product area, look at the wire strip tube. But we have decided to divide the strategy in four categories. We talk about the strategic growth products, other core and standard products, low integrated products, and scale in primary. And the reason why we have done that is because we believe that there are different challenges in all these different categories. If you take strategic growth products as one example, it's the challenge is to capitalize on a strong position and to stay in the front of in the R&D development all the time.
While in this other core standard products, it's more to, the battle to compete with, cost, sort of price-cost squeeze every day, to be efficient, to really have a lean business model. And, low integrated products is a product that is not correlated so much to, to primary, and also the scale in primary is, has challenges on their own. So if I quickly go through each category and start with strategic growth products, then you can see that the, the challenge here is to accelerate growth through a strong position, and to make sure that we stay in very close contact with our customers, and even strengthen the key account management setup that we have. And the trick here is to, to reallocate the resources that we have.
As Andreas showed you, we have reduced manning quite substantially within SMT, and we have no intention to increase manning again. We will increase to some parts when we go out in shift forms and so, but we will not increase when it comes to the radical change, the structural change that we did in the step change program. So here we will reallocate the resources, but we will put more resources in the strategic growth products. Core and standard products, as I said, it's a very important part of the product portfolio for us, and it will be also so in the future. But here, it's to safeguard the position and to fight the price-cost squeeze battle every day. One example here is the wire footprint program that we have, and we actually inaugurated the pickling line yesterday.
This is quite a large footprint project that we have been working on during the full year at wire, and that we hope that this will be all sort of finalized by the year-end. When it comes to low integrated products, it's products that it's not strongly connected with Primary, but it's very important for SMT in the total product offering. You have examples here like zirconium tube for nuclear, powder products for oil and gas. Here we divide these products in three different areas: invest for growth, manage for cash, or exit. And you see that we will keep the share of the turnover on roughly the same level in the future. Last but not least, then, scale in Primary System. Here, it's very much about securing utilization in the Primary System.
This is of vital interest for SMT to make sure that this is done in a very good way. And I think that is, it's on its way, and we are actually, as we speak, increasing the capacity in Primary, open up the bottleneck for bar steel and tubes. And this is, as we go in the future from a strategic point of view, it's not a major headache for SMT to change the way of working in Primary, and I think that we will utilize this system in quite a good way for the next coming years. The enablers, very quickly, I just wanted to have the opportunity to state that we will continue working with step change. It is a performance management system, it's definitely an engine within SMT.
Business system is our way of working, where we have the most important tools and continuously educate our people in operational excellence. And leadership, which I believe is the most important key success factor going forward, both to address the challenge we have in safety, but also to take us to the next level in growth. Summary. This is what I would like you to remember from this presentation. The strategic direction for Materials Technology, safety, this is really something that we have our mindset to do, and we will do that. Continue the materials evolution, stick to the core, continue to do this and nothing else, and to capitalize on that, and on the same time, grow the energy segment.
Step change has delivered as planned, and we will continue to do work in accordance with that way of working, and then also growth. I think it's time for us to really step out of the boot camp that we have been in for step change and show the world how that we can grow, and that we can do even more with SMT. And this will put SMT as a long-term value-creating business area for Sandvik, and we will have a stable profitability over the business cycle. So that's that ends the presentation, and I would like to hear with you if you have some questions or comments, maybe. Yeah?
Please wait for the microphone before you ask your questions.
Yeah.
at this session. Thank you.
Okay, yeah, I mean, there's historically been a lot of talk about the capacity utilization in the smelting operations, and so you're not talking too much about that now, about filling up the capacity.
Mm-hmm.
But are you still operating sort of on a sub-optimal level, and should we see, despite, I mean, you have pretty low volumes now, so should we expect to see a pretty good earnings leverage if we get volumes up, sort of no matter where it is?
Yeah. I think that it. We have quite a low volume right now, and I think the leverage for SMT is definitely there to utilize the capacity that we have installed, and that is not something that we have done fully yet on this level. But on the other hand, it's not. I think it might be so that you could interpret Primary as a problem, as a headache for SMT, that we need to find ways to utilize Primary. But that is not the way it is according to how we see Primary nowadays.
I think that Primary will be fully utilized the next coming five years, and to some extent, it is even so that in order to deliver in accordance with the strategy that we have, that we need to free up capacity in Primary. They need to improve productivity yield in order to be able to deliver on the strategic plan. So we don't have a lot of free capacity in Primary that we don't utilize.... Yeah, right now we have free capacity almost everywhere, to some extent, but not so that it is that you can pinpoint Primary as the problem. We have free capacity in tube also, and we have low volumes from a market condition, so for market condition also in wire and strip.
We have free capacity, and that is something that we can leverage on if the market sort of if it gets better.
And also, Petra, just to mention what you also talked about, I think the capacity in the new finishing capacity that will open up also our primary bottlenecks that we have right now, both to grow the bar business, but also to support the really critical growth in tube, and especially the oil and gas sector. That will be very, very important.
Yes, there's been several attempts to turn around this business before, and there are always a lot of discussions about these A, B, and C products, and phasing out the C products and get the mix right, so to say.
Mm-hmm.
Do we see over the past few years now, the mix, where you talked about energy being actually growing over the past few years, has it been an extremely good mix for you as well, for these past few years that helped you get some tailwind in this product?
Maybe if I start, then maybe you can fill in also. I hope we have the same picture. Now, I think if you look at the step change program and the fact that we have delivered in accordance with the plan, it's not so much based on mix, actually. It's, it is so to some extent that the energy part of the portfolio has grown, but it's also so that we have dropped more than expected within wire and within strip. And, so I think that to some extent levels out. It's not... But I definitely see so that we need to do more when it comes to this in the future.
We haven't really done everything that we have made sort of a decision to do when it comes to looking into the to the product portfolio and A, B, C products.
I think you're perfectly right there, Petra, and I also believe that we have definitely more potential in the mix side. And what we have also seen during these times is that the market has been tough, so we have, in some way, not been able to drive the mix change, especially within the more standard accord assortment. So there, it's been really important to keep up the volumes and to avoid under absorption.
Thank you. Can you talk a bit about the nuclear tubes kind of delivery profile, and maybe how much that has helped the better performance, you know, this year? Then what, what's the outlook for volumes for the next couple of years based on the current framework contracts you have?
Yeah. I think you answered very good on that question last session, so can-
Yeah, I can start. I mean, if you talk about this year, of course, nuclear tubes are important for us, but it's not the main driver for its profitability. What we did in the second quarter here was to reduce and to write down the backlog of the orders, which we believe is not coming after Fukushima accident. So we have really adjusted and the backlog to also the products that we see in China that will come. However, what we also did was, of course, also to adopt the footprint. So here, we're going to move the production to the tube mill 2012, and mothballing the old steam generator tube mill, in and starting. We, we're going to end the production here, mid of 2014.
It's also said that if demand comes back, and if it's really a strong push going forward, there is also possibility to open up that production again. We are not closing down anything, but we are really mothballing that, ensuring that we're not destroying any equipment.
But do your deliveries in nuclear grow from this point forward? Or if they had the growth, and they kind of come back down, I guess I'm trying to understand what the shape of your delivery profile looks like.
Mm-hmm. I, it's, it is so that we have, we still have a quite big order stock when it comes to nuclear, steam generator tubing. And what we-- it's a long sort of process for deliveries. I think what we see right now is that there won't, this will not change rapidly. So that is why we have taken this decision to mothball one of the tube mills. Because then we have to make a decision to transform that production to some other part of tube or to stay in the steam generator tubing position.
But it's also so that, looking ahead from an overall perspective, it's also so that the capacity utilization of tube as a total is not necessarily down because of this decision in steam generator tubing, because this capacity can also be shifted in other direction if you look at the whole process chain. As one example is that we are opening up tube capacity in primary. So it's quite a complex system. From the old days of Sandvik, I've had the view that in the old tooling parts, product development and R&D were very market-oriented, and it was no use developing a product that were not at least 20% better than the product it replaced, and so on. Whereas in materials technology, it was more free on the R&D department, so to speak-
Mm.
-and then up to the marketing division or marketing segment to sell whatever it was.
Mm.
And now when you have a new structure within a more organized and centralized R&D, do you see that within your division it's more sort of customer- or more market-oriented product development, or is it a real change for you?
It is. I think the main change for us is, it's more correlated with step change and the fact that we see that to stick to the core business, that affects R&D quite a lot. Because, and, because now it's more the core for SMT is tube, strip, and wire, and we had a lot of R&D resources also consuming resources for Surftech, for Medtech, and, and, all those initiatives in the past.
So, but I believe that, I mean, we can always learn from the other business areas, but to really have a good product development regarding things that we can commercialize quickly, I think that is something that we have always strived to do, but I think that we are better at that now than we have been. But then if you talk about the group initiatives on R&D, then that I really welcome. I think that is a great thing to do, but it's Olle Wijk, you know, who is the head of that department. So I think it's. We recognize a lot of what is driven also from the group perspective right now, and I think that helps materials technology.
Okay, I think that needs to be the final question, and we're just on time. I can take more questions at the crayfish party tonight. And also at the wrap-up. Or coffee. And the wrap-up. Yes. Yeah. Okay, thank you all. Thank you.
Thank you.
Thank you.
Welcome. Have a seat. Yeah, we thought we'd just open the door and just sort of get some air in the room before we start, so. So we good to go? Okay. Ladies and gentlemen, welcome to the Construction presentation. My name is Anders Kjellberg, and I will, together with my colleague, Joanne Cook, take you through the presentation today. Safety first. In the event of an emergency, or if you hear the alarm, please proceed in an orderly manner through the emergency exits. There is an exit out the way you came, through the reception and out into the front where the roundabout is. Another escape route is through the glass door, through the production building, through the application building, around the back, and also to the assembly point at the roundabout.
There is a defibrillator close to the reception, and the reception team is trained in first aid training. In the event of an emergency, you also have the option to call the Sandvik emergency line or the Swedish National Service in terms of emergency number. We wish you a safe day and a safe travel. Let me briefly introduce you to myself. My name is Anders Kelberg. I'm Danish. I've worked seven years with Sandvik. In the last two years, I've been the Vice President for business development for the Sandvik Construction business area. Prior to that, I worked 10 years as a management consultant with Bain & Company, advising industrial companies and private equity companies on developments. I've worked out of London, Stockholm, and Shanghai in that time.
When we look at the construction business, the construction business can be a very dangerous business, and so we are committed to EHS, environmental health and safety. And in fact, we have the target to achieve zero harm. Welcome. Okay, the emergency exits are around the back where you came and also through the glass door over there. And so when we look at our lost time injury frequency rate, we can see that we have a rate of four, which is down from 25 in 2005. That is a significant improvement, and we intend to continue that journey, and in fact, bring that down to less than one. The LTIFR is more than just a number. It's a tool. It's a tool for one of the most important things in our lives, our own personal safety.
We see that when we raise the awareness of safety, we perform better. For example, in India, which is a tough environment, with a lot of dangers, also in the construction business, we have 200 of our construction colleagues who have managed to run over 500 days with zero accidents, and they do that by constantly working on the awareness of safety, not only for our own team, but also for our customers. When we look at the construction business area, we can see that in 2012, we had a sale of SEK 9.7 billion, and a return on capital employed of 13%. With the construction business area, our core competencies are breaking, drilling, and crushing.
Within those competencies, we target 25,000 customers around the globe, both in the premium and in the mid-market segments, both construction contractors and quarry owners. What we do is we have a global footprint, a global supply footprint, and a local service delivery model. Construction business is ultimately a local business, where our customers will buy our equipment and need local service and support for running the equipment. What we see is that in the business we're in, we have strong synergies in terms of our customers. As you'll see in some of our displays, our quarry customers will both use breaking, drilling, and crushing technologies. We also have different synergies in distribution, as well as in the supply chain. What is also characteristic of the core competencies that we target is that there's a large life cycle focus.
What we mean by the life cycle business is we talk about service, tools, consumables, and spare parts business. That's a business that today, for construction as a whole, is roughly 40% of our business today. What we do is we deliver that through our direct sales teams, through our distributors, and with and through our OEM customers. When we look at construction and the construction business area, it was established in 2012, and when it was... Or in the end of 2011, beginning of 2012. When it was established, it was established as a turnaround business with the mandate to improve the margin. As a consequence of that, we've been working on that to improve the business. Here are some highlights of the achievements we've done.
First and foremost, we have taken out 1,000 of our employees, which has been necessary in order to improve the competitiveness of the overall business. In parallel to that, when we launched the construction business area and established it, we made a conscious decision of investing to accelerate sourcing savings capture. What we've managed to do in the space of that time is renegotiate over 500 contracts and really generate a lot of sourcing savings. Furthermore, we've strengthened the competitiveness of the construction business. We have launched 47 new products into our various niches at a faster time to market than what we've ever done in the past. In fact, our time to market has been reduced by over 50% of what it used to be in the past.
A great example of a new product launch is our CH550 cone crusher, which is the state-of-the-art in cone crushing. It is higher productivity and higher technology than all the products we've had in the past. Since the launch of this product in 2013, in April this year, we've sold 25 units in Europe, America, and Asia, and it starts to become quite a good seller. What we aim to do is expand that range. We have one size of that model today, and we intend to expand that to different sizes as well. This sets the industry standard in cone crushing today. Also, we have strengthened the business in terms of our distribution, and we've added 65 new distributor agreements. We've moved from one brand to four brands.
We had the Sandvik brand. We entered the Shanbao brand through the Shanbao acquisition. We relaunched the Rammer brand, and you'll see some posters and scale models over there of the Rammer brand, which is the best-known brand in premium breaking in the industry. And we've also launched Bretec, which is a brand for the mid-market breakers, and I'll talk a little bit more about that later. We have also successfully integrated the Shanbao business, and I'll touch on that a little bit later as well. Sandvik recently bought 80,000 m² of land in Pune, in India, and Construction will participate in developing that land for increasing our best cost country sourcing and supply.
If we summarize, we have created a much stronger foundation for future profitable growth through these activities, and we'll talk more about that in the coming presentation. When we look at the team, we can see that in October of this year, Dinggui Gao will join Sandvik to lead up the construction business area, and he brings with him a wealth of industry knowledge from working with American, European, and Chinese companies. His most recent position was with the MAN Group, where he was the lead representative from the MAN Group in the Sinotruk joint venture. In addition to that, he has held general manager positions at the Honeywell Automotive Parts and Eagle Ottawa companies in China. He also spent 10 years with Bosch, of which three were spent in Germany, developing key accounts globally.
Joining the team is also Joanne Cook, who will introduce herself shortly. About a year ago, we also took the decision to change our approach in terms of how we manage our markets and hired in Kauko Juuri, who has 32 years of experience in the construction industry from Sandvik, as well as developing other businesses. What we did was we went from three market area presidents to one to increase efficiencies and make faster decision making. What we also did was we appointed a mid-market, a product area mid-market, president, Mr. Yang Yi, who brings with him 28 years of relevant experience from Sandvik, Atlas Copco, Shenyang, Ingersoll Rand, et cetera. What he also will do as part of the mid-market president is he is the CEO of the Sandvik business, who will talk a little bit more about that.
Other appointments include a new VP for HR, as well as a new VP for sourcing. Our VP for sourcing, Mr. Anders Svensson, has joined the mining team to help mining accelerate the sourcing savings capture like he did in construction. And what we've done is we've handpicked a person from his team to continue to lead the charge in accelerated sourcing capture, also within construction. All in all, we would say that we have a very strong and strengthened team to lead construction into the future. When we look at the market, the construction market is a huge market. $7 trillion is the construction business, 11% of the world GDP, and within that, there are many segments. And within that, you have the construction equipment business, and within the construction equipment business, you have the target niches that we target.
And we target a business valued within breaking, crushing, and screening of roughly SEK 140 billion. There are no market indices that track that in those specific niches, specifically, and so we follow other indicators. One indicator we follow is the Off-Highway Research Construction Equipment Market Index. And what you can see here is the black line is the index of the world development. And what you can further see is when the construction business area was established at the end of 2011, the trajectory and the forecast was one of growth. And so we were looking at a turnaround plan in a growing environment and set up a plan for that. But as we stand in 2013, we can in fact see that in reality, the market has gone down by 17%.
The market has continuously been downward adjusted, and we now stand in a situation where the latest forecast is one that is down 17% over what we started when we launched the construction business area, but also a market where there is a prediction that there will be modest growth. When we look at the market and the forward-looking, what will be the characteristics of the forward-looking market? Well, it will be one where the global economy and the global customer base will become a lot more important than in the past, which was much more North American, European-centric. It will be one where the mid-market becomes a lot more important, and consequently, cost competitiveness becomes important. It is one where technology is important to improve productivity and also service offerings.
Also, the continued increased importance in environmental health and safety, as well as CSR, Corporate Social Responsibility, and in particular, the anti-corruption compliance issues that are becoming even more important and apparent throughout the world.
Just a quick one.
Yes.
You highlight or over highlight this morning that it continues to decline over the short term. Can you highlight which areas seems to decline?
Well, we've seen that overall the market has declined, and naturally, we know that, for example, China, in 2012, China tanked over 2011 and went down by a -40% in the construction industry. We see that this year, China started to come back, but then in May, June, July, we saw that the, the credit, you know, the credit issues in China, and then China got hit again. And overall, we can see that, you know, have we bottomed out? Will it further go down? Time will tell, but we believe that, that, that based on the latest, based on the latest estimates from the experts, that we're looking at a market that now will have a moderate growth going forward from all markets.
Yeah, I guess, perhaps I'm wrong, but I, when I look at the recent Chinese data, they're actually looking more positive.
The latest PMI data from China shows an up, but if you look a month or two back, it was negative, and it's bouncing, you know, back and forth. What the latest research says here is that China will continue at a high level. We have to remember from where China came from. And so in this index, you know, it's in fact, India, that, you know, they expect to be growing at a lot faster pace. China will now continue to develop, but they are not expecting any major pickup. At best, it will continue at a high level. Okay. Now, I will hand over the word to Joanne Cook, who will take us through the financial update.
Okay. Thanks, Anders. Good afternoon to you. Just a few words to introduce myself. My name is Joanne Cook. I joined Sandvik Construction business area on the 1st of August this year as VP of Finance, so I'm new to the construction business area, but not new to Sandvik. I've been with Sandvik 14 years, predominantly in the, what was tooling business area and mainly in finance management positions, but more recently in the last two years in general management positions. I've also lived, well, I'm British, but I lived in the U.S. for a couple of years and also in France. Okay. So just some words on the financial numbers before I hand you back to Anders. The order intake and invoicing trends since 2007, there are a couple of points to note here.
I would say that during 2009 to 2011, we can see that we had a respectable growth year on year of approximately 9%. And then during 2012, this really flattened off, as you can see on this orange line. We had a good order book. The order intake was dropping towards the end of 2012, but due to a good order book, we were able to hold up a good, good vol, good volumes in 2012 and slightly above 2011. However, coming into 2013, with a lower order book, it's been more of a challenge on the volumes, and we've—we are at best flat in first quarter, second quarter, compared to the previous year, but that's certainly declining on the order intake.
We expect, based on the last couple of months on order intake, that we will have a challenge going forward in the next, one or two to three quarters maximum. And following that period, we expect then to see the market, returning more to the growth and us taking some market share. But we will be faced with a couple of tough quarters. So how does that look on, in terms of the, geographical mix? And if you remember Anders' graph on the off-highway research, more of a balanced mix going forward, but we're still 56% weighting in North America and Europe. And both those regions in quarter two are actually positive compared to the previous year. When we take the half year, it's, much flatter. The challenge has been, of course, in Asia, and that's a smaller percentage weighting for us.
Quarter two results this year. Just taking the quarter compared to Q2 in 2012, we have a relatively flat order intake. Price volume is +2%, and we have a hit on currency. And invoicing, as I've mentioned, we're having a tougher time on the invoicing now, and this is -4% in the quarter compared to the previous year. Actually, for the first half year of 2013, the price volume compared to last year is about -8%. And as I say, this is the tough quarters we've got coming towards the end of the year. Despite that, we have been able to maintain a 6% EBIT level on these volumes.
With all the restructuring that was done in 2012, we've lowered that breakeven point, so we've been able to maintain a more positive return on capital employed. So that's given us some stability in terms of holding up this volume fluctuation. So what happened between 2011 and 2012? I mean, you'll know that construction was in a turnaround period. Starting with an EBIT of 1% in 2011, we had some one-offs in that year that wasn't repeated in 2012. But the biggest plus came from the productivity focus and the turnaround focus. So this was sourcing savings, moving some of the equipment purchases to best-cost countries, and also headcount reduction. So this has really lowered the overall cost base.
There was some positive volume, but relatively, 2012 to 2011 was not a big increase in volume. We finished at 8% EBIT in 2012 with a return on capital employed of double digits. So where has that led into 2013? And what we've seen now is, although we've continued with more incremental savings on the productivity, and we will continue to do that, we've been hit purely hit on volume, and that's affected the EBIT by around two percentage points. We've also have a negative effect of currency of approximately one percentage point, and this has been about half a percentage point on EBIT. We will continue to do the housekeeping and really to, make adjustments in the cost base where possible.
The biggest part has been done last year, and had we not done that, this would have looked a much tougher picture for 2013. As I say, we will continue to do the housekeeping to get into even better shape for when the market does turn. We expect it to turn positive in 2014 as a question of timing. So we closed 2013 on 6% EBIT, with a return on capital employed of 10%, and we still focus on efficiency in the net working capital, despite having the volume drop. Okay, I'll pass you back to Anders.
Thank you, Joanne. When we established the construction business area at the end of 2011 and beginning of 2012, we established the eight building block turnaround program that some of you may be familiar with from previous capital market days presentations. What we thought we'd do now is take you through where we are in that program. The first five of the building blocks have deal predominantly with cost efficiency and operational excellence, and the last three, more about strengthening the business and the growth. Before we go into the specific turnarounds, let's take a step back and reflect on the restructuring that we've done in all the business building blocks.
Basically, we've taken out 1,000 of our employees, which represents 20% of our workforce, both in our permanent workforce as well as in our third-party workforce. What we're doing now is additional measures to take out fixed costs based on the fact that the volumes are coming down. In fact, two weeks ago, we closed a conclusion to take out over 20% of the workforce in a supply site in Finland, and more will be announced when we're ready to do so.
We've restructured the market areas, and we said we went from three market areas to one, but we've also restructured some of the sales areas where we've launched the construction, construction business area into 28 sales areas, and we've taken that down to 24 sales areas to get the synergies, but also still to keep the local feel in touch with the construction business. In parallel to restructuring the construction business, we have increased the capabilities of the team and had a high focus on increasing the capabilities. We've made 25 new level three appointments just in the last eight months, of which 10 are made by external hires of high potential individuals from Atlas Copco, Caterpillar, Hitachi, Metso, McKinsey, Vestas, et cetera. A team to help us continue to drive and improve the business going forward.
When we look at the turnaround building blocks in particular, we see that we have made good progress. When it comes to the A&S cost efficiency, in 2011... At the end of 2011, we set an absolute target of what we wanted to take out in A&S costs... by 2014, and we now stand in 2013 and say, that's done. Unfortunately, the volume has changed, the goalpost has changed, and so we need to do some further adjustments, and we'll be announcing that when that's ready.
When it comes to the equipment cost, efficiency, we can say that we have achieved 30% of our supply from best cost countries, excluding the Shanbao volume, meaning that some of these scale models you see here, in reality, the real equipment has been made in Jiading and Pune, in our Chinese and Indian facilities, 30% of it. What we see is great gains from that, and what we intend to do is further increase our best cost country supply to actually move to a target where the majority of our supply will come from that in the long term, and we'll come back to our long-term plans in a little bit.
When it comes to the tools, consumables, and services profit lift, we can see that we have improved our gross profit by 8 percentage points from 2011 to 2013. That business and product area is now profitable and to the extent that where we want it to be, and the target there is to grow the business. When it comes to net working capital, we have reduced the net working capital percentage by 2 percentage points. And what we need to do going forward is continue to reduce that because we're seeing reductions in the volumes, et cetera, which will hit ultimately the percentages. But ultimately, when the business turns, we will also see a good benefit from leverage of growth.
When it comes to sourcing, we said that we had invested in capabilities to accelerate the sourcing savings capture, and we've seen that. In 2011, we set a sourcing savings target that we wanted to achieve by 2014, and we can see that when we stand here today in 2013, we've already achieved that target. And what we want to do is continue to accelerate that program, as well as ultimately also to leverage from growth when the market turns. Overall, we have achieved or are on a track to achieve the building blocks in terms of cost efficiency and operational effectiveness. But the reality is that we need to do more as the goalposts have changed and the volumes are coming down.
When we move forward into building block number six, that's about increasing the competitiveness of our business. We have massively increased the competitiveness of our business. In fact, we've launched 47 new products over the last 20 months, at a faster rate than what we've ever launched products before in the past. When we look at our breaker line, we have 17 premium breakers, of which 16 are less than three years old. A few years ago, we also launched a mid-market breaker, and we launched three models. Over the last 20 months, we've expanded that line by five, so that now we have nine mid-market breakers. We've recently given that a brand, the Bretec brand. So we now stand with a completely new line of premium and mid-market breakers.
In addition to that, if we look at our mobile line, two-thirds of our revenue comes from new mobile equipment. And what we've done is we've upgraded the fleet and have one of the most modern fleets in the industry. We have what we call the 1 Series line. An example of that is the QJ341, which is a mobile jaw crusher, considered a workhorse in the industry. And that new platform of the 1 Series involves better control systems, upgraded power packs, better, more modern equipment, more reliable equipment. Another example is the QI441 PriSec, which is essentially an impact crusher on a mobile chassis. And what we've done is we've taken our new PriSec impact crusher and put it on a mobile.
The impact crusher, the PriSec impact crusher, has been developed in a way that it's modular to configure and can be configured to different sizes and different applications. And so while before, what we used to cover in terms of capabilities with 11 impact crushers, we can today cover with two PriSec impact crushers, and we've then pruned the old range of the 11 and become a lot more cost-effective and modular. When it comes to drilling, we've also made a lot of progress and a lot of product launches. One example is to launch the soft rock drill bit, and what you can see is the button is sharper, allowing for faster drilling and penetration in soft rock environment.
That opens up a space and gets us a lot more competitive, not only in the hard rock, where we're extremely competitive today, but also in the soft rock, becoming a lot more competitive there. We've also launched a new RH460 down the hole, deep drill, top hammer. Oh, sorry, down the hole hammer. And what that is, is then strengthening our position in the DTH segment, the down the hole segment. And we've not only launched rock tools into the down the hole segment, we've also launched products, equipment into the down the hole segment of the drilling. We've launched the DI550, of which you will not see a picture of here now, but that's a larger premium drill for mature markets, typically, as well as launching the DH350.
This drill has been designed by Chinese engineers in China for the Chinese market and emerging markets. It is, in fact, the first product to be launched out of the Product Development Center in Jiading in China for across that serves both mining and construction. We're now currently going through a launch phase of launching that into China, but also it was displayed at the Bauma Africa Fair last week in Africa and created a lot of attention there as well. Also, in the drilling equipment, you'll see the DC125R, the drilling Commando. The C stands for Commando. This is the latest launch in our family of the Commando drills, and while it is relatively small, when we look at our equipment, we in fact sell a lot of these, and we're actually quite happy with that.
It's a segment of the market that we dominate, and with this new line, we really set the industry standards in terms of versatile small drilling rigs. So with these product launches and a lot more, we have really increased the competitiveness of the construction business area, and we take market share as a consequence of that. In fact, we believe we are taking market share as a consequence of the new product launches, as well as our sales boost approach in the building block number seven. When we look at the building block number seven, we then set out, when we set out the construction business area, to recognize that construction is a local business.
And so we took out all the regional layers and empowered the front line and empowered the 24 sales areas, and created a direct line from the sales areas back to the product lines. And in addition to that, also created an end-to-end product line accountability, which, for example, means that a salesperson today has an accountability for a specific market area and a specific product, clear targets, clear goals, clear accountability, and visibility. What we also do is continue to implement our multi-channel, multi-brand approach. We've talked about our multi-brands and also with our multi-channels. We run with a lot of distributors, we've added many, and we will continue to add to fill the white spaces. And we have also improved our capability in distributor management with dedicated resources to help us to do so.
And finally, with the service, we've had a strong push over the last year and a half to professionalize our global approach to service and to really make that a strong business. And ultimately, what we need to do going forward is continue to serve our customers better and develop that business, and I'll come back to that in a short while. When we look at building block number eight, there's really a lot that has happened that has been very exciting in terms of the Shanbao development. We bought a very strong asset. We bought a market leader in Chinese mid-market, in Chinese mid-market, crushing and screening. And upon taking over the business, we've improved their EHS performance, we've improved their product quality, we have injected new management team members and key talent. We mentioned Yang Yi to be the CEO of the business.
We have also, for example, put in place Neil Hirst to be the R&D manager, driving the new product development. Shanbao has launched seven new products in the last year and a half. That's more than the product launches they did in the preceding five years. In fact, when we look at these product launches, we can see examples of them there, cone crusher, impact crusher, jaw crusher. They've developed to be both applicable in a stationary environment, but they're ready to be put on a mobile chassis. So the story of Shanbao is a story of growth. Currently, it's growing over last year. What we see is we want to continue to take market share in China. While we're the market leader, it is still quite a fragmented market there, and with the new products, we are taking market leadership.
We are also helping Shanbao improve their parts business. In the premium business, we're a lot stronger in our parts and consumables business. Shanbao, with their state-owned history, was more of an equipment business. And so we're looking to improve that. We will also. Shanbao will have a mobile product standing as a prototype very soon, and we will internationalize Shanbao's business. And a consequence of the growth from the internationalization, they're going into the mobile, the parts, and the market share gain in China, we'll see that we're going to invest in their low-cost operations. Reflecting back on the eight building blocks, we can see that we have fundamentally improved the foundation for profitable growth going forward.
When we look at our strategy going forward, we intend to continue to focus on niche construction businesses and to set the industry standard for EHS benchmarks. When we look at our business, we have market leadership in the premium breaking business, and we're expanding into the mid-market business. Yes? Environmental, health, and safety. Okay. So what we have is, we have construction being a dangerous business and our commitment to catering for that. When we look at our premium breaker business, we are the market leader there. And we are also entering into the mid-market breakers organically. What we have here is very strong positions in top hammer drilling, and we're strengthening our position in down-the-hole drilling, as well as in drilling for the emerging markets with products developed out of China.
What we also have is a very strong position in, in stationary crushing, particularly cones, and we have launched the newest cone technology that's available, and we're looking to expand that. We're also looking to expand our new platform of mobile crushers, and we're looking to expand the mid-market leadership of Shanbao in, in China internationally. When we think about international expansion, you know, construction is a local business, and so we need to, to, to strengthen our local service delivery and distribution leadership. Ultimately, with the ultimate goal of delivering attractive returns on capital employed, like we've done in the past and like we also do today in certain parts of our segments.
And when we look forward in terms of our strategic priorities, we've defined five strategic priorities for the business going forward: to continue with cost efficiency, to take out fixed costs as needed, to Accelerate the purchasing savings, and when it comes to competitive footprint, to consolidate the supply chain, as well as increase the best cost country supply ratio. And when it comes to service as a business, to continue to serve our customers and grow that business through better availability, clarity in products, et cetera, et cetera. And when it comes to sales boost, to continue to take market share through our globally local approach, our multi-brand, multi-channel approach, and our accelerated new product development and new product launch program. And ultimately, also then, to pursue mergers and acquisitions and partnerships, selectively to strengthen our core business and expand our core business.
If we take a step back and reflect on construction, we target globally. We target niche construction businesses, and we target leadership in those. The niches we target represent SEK 140 billion of business potential. The construction business is a long-term growth business, driven by population growth, urbanization, infrastructure demand, and wealth creation. When we look at that business and look into the past of how we have performed within construction, we could see from 2005 to 2008 that we grew the business by 18% organically with double-digit EBIT and double-digit return on capital employed. Our target is to return to that performance. Today, we're stronger than ever. We have lowered our break-even point. We have a lot stronger control on net working capital.
However, short term, over the next few quarters, business is tough, and so we are taking the measures to continue to develop and adjust the business accordingly. Mid to long term, we believe we will return to profitable market share gain based on better service, better market coverage, and better products. Thank you very much for your attention. I now open it up for a Q&A. Yes.
I'd like to ask about your, your drilling. I have to whisper now. For your, your drilling rigs, what, what level of overlap is there with the, the mining division in terms of, you know, product development or, you know, manufacturing? Is it completely separate, or is there still, you know, a fairly close relationship?
There is some overlap. The reality is we're in the same family of businesses, and we can then... We have the luxury of choosing to work together where it makes sense for both parties. And when it comes to equipment in general, not only drill rigs, you could say that as exemplified by the examples of the equipment standing out front, mining equipment is generally a lot larger than the construction equipment. So the synergy really lies in the technology and the supply chain. So for example, in Tampere, we assemble drill rigs for construction that are smaller. Those workers that are assembling the smaller drill rigs also could be shifted over to assemble larger drill rigs for mining.
The Pantera that you see that's launched out there, I believe part of the control system is also being used in some of our larger construction drills as well.
But the facilities are shared?
Some of the facilities are shared.
Yeah.
Some of the facilities, construction takes the lead, and some mining take the lead. Mining takes the lead in rock tools, facilities, and so all our rock tool supplies come out of the mining business area. We have also, sites that predominantly serve the construction businesses with some overlap to mining as well.
Okay, got it.
Yes?
Two questions, please. One on your presentation, actually highlighting the continued softness in construction. Is that effectively implying a sequential decline in orders, or are you more referring to year-on-year orders?
It's, I would say, year-on-year orders, although we have seen 2012, towards the end of 2012, we had a quarter-on-quarter reduction, leading in Q4 to a difficult period. That did bounce back at the beginning of 2013, but still a slightly lower level compared to 2012. So it's relatively flat at best, I would say, but the last couple of months have been difficult also. So-
So again, that could lead to a sequential decline as well?
Yeah. Maybe in Q3, Q4, we expect a tough couple of two or three quarters, and some of that's driven by the customer financing issues, too.
I was a bit surprised in Q2 by your drop-through, as I would call it. This is the slide where we see the EBIT bridges-
Mm-hmm.
Per division. For your division, it was about 55%. Is this a normal level of drop-through, or is that something which you think is a bit on the higher, on the lower side perhaps?
I think it was a bit on the high side-
Yeah.
in that quarter.
What do you think is a more normal level as a drop-through for your business?
We look at 20%-30% leverage-
Okay.
-normally. However, that drop in Q2, I mean, there was some underutilization there as well, but 20%-30%, normal leverage.
Yeah. Okay, thank you.
Yeah, two questions also. I mean, one, you talked about this business that had double-digit margins in the past, and if I understood you correctly, and now, I mean, in 2012, which was a decent year, you had 8% margin with a lot of productivity savings coming through. So what, what's this—what has changed structurally with the business since those double-digit margin days?
We can say that we had, relatively speaking, more volume back then. We've made some acquisitions since that development. So obviously, volume is one story. The other story is the emergence of mid-market and the importance of cost. And finally, we can also say that, you know, during 2012, we were in the midst of completing our turnaround program. So the full effect of the turnaround program, we didn't see full through into 2012. We would argue that, you know, had we decent volumes now, we would be double-digit EBIT.
Yeah, and then the second question would be that, you talked about the tools and consumables and service business-
Yes.
Now being profitable after an 8% sort of gross margin improvement. So it suggests that margin levels in that business are still quite low. So why, why, why is that? Why is such a... I mean, tools and consumables and service is normally a pretty good business, but why is it still a relatively low margin business for you?
Let me clarify. The tools, consumables, and service business margin is not 8%. It has improved by 8 percentage points.
No, no, sure, you said that.
Right.
But it's, you said it's now profitable, so the-
Well, parts of that-
It wasn't profitable before.
Right. Parts of that business was, sorry, parts of that, business was not profitable, and parts of that business was very profitable. And what we've gone in is to make sure that the entire portfolio of businesses within that space are now profitable. So-
Just looking to the mining division, they talked about-
Can you please wait for the microphone? Thank you.
... Yeah, when we talked to the mining guys, they talked about the need to cut eight-12 manufacturing plants globally within the next three-four years in order to improve their footprint and supply chain. So since they are very correlated to you, do you see a need to cut additional plants going forward, or is that integrated with your plants, or?
Obviously, when mining goes through a consolidation of the production facilities and the benefit that will come out of that, that will also hit construction. All the rock tools are supplied by mining, and some of the consolidation you'll probably see in that space. However, we have our own consolidation program running. We're very clear what it is we need to close, and we will be announcing that when we're ready to announce that. So we will, in addition to what mining is doing, also be driving consolidation.
Okay. On the purchasing side and so on, are you working very, very close to them in order to improve your performance there, and also on logistics and stuff like that?
Well, obviously, in certain areas, we work together. When it comes to purchasing, we put in place a team and invested in a team to accelerate the purchasing savings capture. And the person who led that team in construction has only within the last month moved over to mining to lead a similar program within mining, which allows for us to work a lot closer with mining in terms of accelerated purchasing capture. We have to remember that the mining business comes from many years of rapid growth, where their focus has been on participating in that growth, and now the priorities have probably changed.
Thanks.
You have a question?
Yeah, I'd just be curious as to how the parts and consumables business has developed during the order downturn that we saw, and what kind of growth ambitions you have going forward?
Well, we won't comment specifically on product areas, but we can say that all our businesses have been impacted by the downturn. It is in particular, as you can see from our five strategic priorities, we put service, including parts, including tools and consumables, as a priority to grow that business going forward.
But, put it this way, do you see wide spots in terms of adding distribution points and thereby outgrowing the equipment market, if you take a four-five-year view?
We see, fortunately, we see wide spots nearly everywhere. We are a global business. We are in many parts. We have strong positions in Korea and Malaysia and Canada, et cetera. But when we do the map, and we have done the map of the world, we can see wide spots in certain geographies and certain product lines. And so that's part of the construction growth story. That's why in the past, we've been able to outgrow the market, because we have, you know, the coverage of the wide spots as an action in our sales boost priority. Any more questions?
Yeah, just can you give us some on North America in terms of... Yeah.
Trend, trends in North America.
You would like to know about trends in North America. What we see is long term, North America still has population growth, urbanization, infrastructure development. And so long term, we believe that North America will deliver growth. To the extent it will be rapid, fast, double-digit growth is unclear. Right now, we can see that the rebound in 2011, that we saw in North America, has somewhat slowed down. It is still exhibiting some growth, but probably not as fast as historically. So we do believe in long-term growth for North America, but not at a fast pace. Okay, well, that wraps up today's session. Thank you very much for your attention, and I wish you a continued good day.
Thank you.
Thank you.
Are we all here? So when is the bus to the crayfish party? So we have some time. That's good. Welcome to Sandvik Venture, the presentation of Sandvik Venture. Thanks for taking the time. Being in the afternoon, I hope you had coffee and a sugar cake to boost you. I'll start with this recap of this. I know you must have gotten this quite some time now, but unless you or if you have forgotten what Magnus says, it's out through this door to the left, to the right, and then the rally point between the Pantera drill rig and the tent. And I still haven't heard that we will do a drill today, so if the alarm goes, that's the way we go. Okay? Good. So I'm new in this role, so I thought a small introduction.
Some of you probably have been here before with Sandvik and covered Sandvik for quite some time. So I joined Sandvik in 2011, October, actually. I've been here about two years. First year, I spent... The first year and a half, I spent with strategy and IT and sourcing. That's been my focus areas. Then in November 1st, I took over venture and started to work with Sandvik Venture management team. Hello? No problems. And before that, I spent a lot of time with a company called Boston Consulting Group, so that's my background. I also have Jan Öhman with me here, who's our CFO. Now, when I defer, because I've only been here since November, Janne is the go-to guy who has more history to speak from.
Now, what we wanted to do today, or what I wanted to do, to talk a little bit about, you know, where- what's Venture? I get a lot of questions around, is Venture only the place where we have these PAs that were left over, if you want, from the other BAs, or is there something more to Venture? So I'll spend some time to try to give our reflection on that, and how we will operate that. And then, of course, we will move in more to our priorities right now, how we see growth evolving, within our portfolio.
Now, if we use this and try to not get stuck too much on all the detailed words, we essentially were set up to be able to have a management structure to manage smaller businesses within Venture, businesses that we drive independently, so standalone businesses, as opposed to integrated business areas. You know that the Wolfram, Process Systems, DI, and Hard Materials, they were previously part of Tooling and SMT, and now within Venture. The general idea was that within Venture, they are our core business. Within the previous business areas, they were a little less of core business, to put it that way. That means for us that we can really put emphasis on them. We put resources, we follow up, we support these businesses with great care, I think is good to say.
It also means that we have an opportunity to benefit from the Sandvik Group, but at the same time also ensure that we do not, if you want, overwhelm these businesses with the Sandvik Group, with central initiatives, with policies, et cetera. To some extent, it is different to operate if you're a smaller company versus if you're a bigger company. So we try to strike that balance, get all the benefits, but at the same time, find the right balance. Last but not least, we believe, or I strongly believe, that we offer an environment where we can bring in businesspeople, businesswomen, businessmen, to drive businesses, huh? The smaller businesses. It offers you an opportunity to be a leader of a complete business.
And that, as a career path, you can do in Sandvik, but it takes a bit longer time before you can do that on a big scale in a business area. Here, we can do it earlier with these, more smaller, mid-sized businesses. So that's a key aspect of it as well. So in essence, we're put into place to drive growth, profitable growth. You'll see in our priorities, and hopefully, you bring that out as well, that that means, you know, we have plans for growth, we think a lot about what customer segments, what offerings, et cetera. Of course, we also are prudent when it comes to cost and capital. But essentially, what we try to drive is to really ensure growth of the businesses we're responsible for.
As for agenda, I'll go through in the introduction a little bit of a flavor for those of you that don't know Venture that well, or maybe need a refresh in terms of the mandatory size and these things, what we offer customers, that part. Then I'll touch upon the Q2 results, and then hopefully spend the bulk of the time around the priorities going forward. This is typically a question-driven group, so I'm not attempting to keep the questions to the end. Please feel free to ask questions when they pop up. It's better that way. Make sense? Good. Okay, so Sandvik Venture's 2012, roughly, if you think about size-wise, SEK 6 billion in sales, 18%-19% EBIT margin, 70% ROCE, and a little bit short of 3,000 employees.
That's bulk of things, the size we speak about. In terms of maybe the more interesting part, what we offer our customers, we have a big range. We have independent businesses. So we start with provision of tungsten, tungsten-related, raw materials, basically. They come in different forms, but essentially, we provide tungsten to, to ourselves, so a strong part internal supplier and to external customers as well. We provide process equipment based on steel belts, but also equipment that actually, handles whether it's, chemical compounds, food constituents, that needs to land on the steel belts. We'll talk a little bit more about that, but that's sort of process equipment. And then we provide real critical, super hard and Hard Materials into different industries, where that has a real impact on productivity. So three buckets of, provisions to customers.
On top of that, we have this small, small layer of Sandvik Venture management team. And I think between Janne and myself, we're about a little bit more than a handful of people, of which some are shared between group strategy and venture, which I will explain a little bit further down the line why that is. So in that sense, like, if you were here last year, Anders Thelin referred to, it's still a very lean management model to manage the size of that business. Last year, there were a number of commitments mentioned from Anders and Janne in that time at Sandvik Venture.
Summarized on this side, we said Venture will keep a high level of attention, put in a high level of ambitions in the product areas that we have, essentially saying, "This is our core business." Even if it weren't maybe the core business before, now it's core business. Crisp strategies for each product area, so what to do, how to do it, roadmaps must come into place, and that should lead to growth and, of course, value creation. If we look at what we have done so far this year, I have to say, I think it's a good accomplishment, and I think it's a sign of a team that's quite driven. So if we try to go through this list, Dormer, as you know, was one of the original parts moved over from tooling into venture as a result of the 2011 strategy.
During the year of 2012, that was pretty much transformed into a standalone entity, stronger linear cost structure, and a focused product portfolio. When that transformation was done and completed, Dormer was essentially returned to what is now the Machining Solution as part of their mid-market strategy. So that's a closed chapter, but I think it's a good illustration of what focus, attention to a business can do if it really comes into the core of management. Secondly, we have worked quite extensively now with working out the product area strategies, which means, you know, very clear and explicit choices on customer segments, which offering to provide to the customer segments, roadmaps, milestones to follow up on, et cetera. So that's clear.
There's a block, if you look to the third and the fourth point around, capacity, supply chain, et cetera. So we have made two, we have two major investment programs, one in Sandviken for Process Systems, which is really the leveling capacity for steel belts. You'll see that if you travel about 500 m that way, you'll see a new house. It's a very important investment for our sake, to be able to grow a bit, really, or deliver on the growth in Process Systems. The second area is, to increase the recycling capacity in Wolfram. As you know, the raw materials for Wolfram as a part is our own mine. It's sourced raw materials from other mines, and it's scrap. We need that recycling capacity.
And given that that's a more important part, or if you want, of the raw materials chain, we also need to ensure that we have capacity to take care of that. So those are important steps. At the same time as we're investing in capacity, we're also optimizing our own supply chains, of course. Two examples or two changes we've done this year. One is, for Sandvik Hard Materials in Australia, we're closing down the manufacturing unit there. That's in the making right now. The other one is, Diamond Innovations that had two major plants, one in Ireland and one in Worthington, Ohio. We're consolidating that into Worthington, Ohio. Partly driven by cost and asset rationalization, but this one also very much to bring close, you know, bring R&D and production closer together.
So R&D and a lot of the important customer groups sits closer to North America. Moving the Ireland production back to, or back to Worthington creates a tighter bond between R&D, production, and customers, which is important to that business. So we've done that. In addition, more on the growth front, we have decided to combine Diamond Innovations and Sandvik Hard Materials into one entity, focus very much on driving growth. So this is much more about finding opportunities for R&D, to joint R&D, getting a better sales coverage, getting a stronger product management. It is less about overall finding cost synergies, more about really getting critical mass to drive growth. We will talk, or I'll talk about that a little bit soon. We, as you saw from the press release this morning, we have acquired a company in the composite space related to Process Systems.
This is a technology bolt-on, really, which, again, I will talk more about soon. So if I please take a step back, I feel that, you know, coming back to the previous commitments in 2012, we have delivered quite a lot on those. And, you know, for those that thought that we put these PAs into a little bit of a sleeping list and called it venture, I hope this is a good sign that that's not the case, huh? It's a very, very devoted team in the product areas and also on the venture level to drive action and really deliver on the mandate for profitable growth. That's how this should be seen. Okay? In terms of financial update, the Q2 results, these have been published, so you've seen them before.
Essentially, we had SEK 1.3 billion in sales, and we delivered an adjusted EBIT margin of around 14%. So that's the SEK 182 million, and a rolling twelve-month EBIT ROCE of 9.2%. Okay, good. So my focus area or my passion is, of course, and how do we take this forward now in delivering on the mandate, on the task of driving growth? And we get a lot of, I can take that up front, a lot of questions around what are the targets and all these things. And I guess the best way for us to answer that is we don't have really a different set of targets than the Sandvik group in terms of growth. Olof went through that, return on capital employed, and these things, huh?
But we focus those targets on these, on these companies. What we essentially do then is we work pretty much with three things at Venture. First, of course, we work with our existing portfolio, you know, Wolfram, Process System, and the DI, and the Hard Materials... to grow that, to focus the business really on the most attractive customer segments, to get the product offering, the service offering that's relevant for the customers, and facilitate that as much as possible. Plans are in place, so that is a lot of, if you want, performance management and support along those lines. In addition to that, we do two other things. We work extensively with group R&D and with group strategy, and there, of course, are some synergies with having part of the venture team also being involved in the group strategy work.
And they come in two, two shapes. One is to really look at technologies that Sandvik Group can be involved in, but be fairly early on saying, "How do we commercialize it?" If you think about venture, we are really a management structure to be able to take care of ideas that can come out, and commercialize them earlier. So instead of sequentialize this, really early on, start to think about, okay, so how do we actually do a business about this? How do we create an entity around this that can actually drive it forward? How do we scale it up? Those kind of questions. And similar to technology research, there might be capabilities we have in one business area or in two business areas that we can apply to different customer segments.
That would then, given the logic we've had on defining business areas, not be pursued in those business areas. Venture can pursue them. Of course, we don't make these decisions ourselves. This is, these are group decisions, but Venture would be the entity actually making it easier to make a business out of these ideas. And I think that's actually, you know, that's a new thing for Sandvik in that sense, compared to what I've seen before. I think clearly, Sandvik has a lot, lot of capital here, and a tradition in, in strong R&D. I think we have a strong history also of expanding new businesses, but we haven't really had an entity that's okay, this is where we actually can get management teams around this and, and scale it up with a focus.
Underlying all of this is, of course, to find which are the customer segments, the customer needs to actually serve. You know, we try as much as possible to avoid this thing of having a great idea and then finding, if you want the customer problem to, to solve, but start with the customer segments. And therefore, I thought it would be relevant, actually, to bring a bit of an examples, at least. What do we do here? If you think about that, you know, there are at least, there are many segments, but here are three example segments that are key for a venture in our business mix. And I'll go through soon and exemplify the products.
So oil and gas clearly has a strong underlying growth rate, exemplified by a rig, but clearly, we are active in close to refineries, but we're also active with our materials and our applications in the extraction industry. High underlying growth, respectable earnings, good ability to actually handle demand swings so that it doesn't translate into a volatility of earnings, and a spectrum of opportunities where we provide real customer productivity. Similar with machining, you visited all the, I mean, Machining Solutions, so you know what that can drive in terms of growth. And then this is a box trying to exemplify consumer initiatives. This happens to be food and Process Systems, that's where we are quite active.
What I thought I'd do is talk a little bit around a couple of products, so I can make it clear how we think about this. So sulfur granulation, besides the folks that I know come from Sandvik in this room, I don't know how many of you have looked at those solutions from Process Systems. So essentially, this is a core, you know, core equipment in terms of steel belts and an equipment that processes a waste, early on waste product that becomes sulfur pellets. So basically, in a refinery, there's a waste product. If it's a sour oil that we treat, sulfur content, that before, you know, they basically dumped at the side of it, now we can transform into a salable product, the sulfur pellet, or we, the customer, can transform that into a product.
So it becomes a cost that transfers into a revenue stream for them. Very much thanks to the process equipment from Process Systems. So again, touching a very interesting end industry, good productivity, value creation for customers translates into good business models for us. Second example, diamond cutters, which comes very much from Diamond Innovations, Hard Materials. I'm getting older, so I can't really see in distance. I'll take the chance that you don't see it either, but this piece of equipment has a dark diamond coating in the front, a carbide piece in the bottom. This sits on a drill bit, so when you actually drill for oil, for gas, et cetera, this is the piece that touches the rock. If this breaks, wears down too quickly, that means poor, poor productivity of drilling.
Upside is that when it doesn't break or when it doesn't wear down too much, you get a significant contribution for drilling productivity. Diamond, carbide, sweet spot for us in terms of product in this field. Again, drives customer productivity to a significant extent. In a customer segment, that's highly, highly interesting. So we focus our attention to those segments, try to see how we can use these equipments in those segments. Traditional approach for Sandvik in machining, of course, the super Hard Materials for metal cutting, that's part of the general idea behind Diamond Innovations, still is and still has a major productivity component. And then the last example, many of you might have seen this, the can tooling. We have the, this high cylinders there that really punches out aluminum cans. Soda, but now also more and more to package food in emerging markets.
So underlying trend, very strong growth, and a very good business as such again. I could go on with this, but I think, again, what we try to illustrate is that we work very much from the segments, try to understand what we can offer, and then drive that out in these businesses. And hopefully, the other point is you see there's plenty of opportunities in this area. Okay, if we take this into the product area focus, I mentioned that we decided to combine the Diamond Innovations and Hard Materials. You know, the research we have done, the strategy work we have done, indicates very clearly a very strong overlap in customer segments.
Many of the products that we have, may it be these kind of products, for oil and gas, may it be the sort of, you can't see this either, but, metal cutting tools with a little tip of diamond, or of course, combinations of carbide and diamond in different forms. Sometimes on wear parts, it's a customer dialogue where you say, "Well, should it be in carbide, or is it worth actually putting diamond on it from a wear profile part?" For us, coming with a combined product portfolio and R&D power, we've become a much stronger partner to our customers. So that's really the idea behind this. We have appointed a new management team for this business to really ensure that we, where it makes sense, combine forces. It will be led by a gentleman called Johan Israelsson.
You may have met him before. He was, up until July 1st, the President of Americas for Coromant. So strong commercial background, proven leadership, very much in an environment that is technology and R&D driven. So in that sense, smack, smack in the center for, for this business as well. So we're very happy about that appointment. Again, this is done to drive growth. The focus here is not only at least to drive cost synergies. There might be cost synergies as well, but really what this is about is today we have two separate R&D teams, or yesterday we had. Now we have one R&D team that can focus on the combined offer. Sales and marketing, now we can combine our, our footprint here. Product management, similarly...
If we find these opportunities to be more rational, we invest them to actually drive even more out of the R&D engine here. This for us is a big step, and as you saw on this previous slide, or maybe you didn't notice it, it is 1,800 people in this, out of the 2,700 for Venture. In that sense, of course, this is a very important piece of the puzzle. For Process Systems, well, you remember steel belts, process equipment, it's been a lot of which focus areas to go to, which customer segments to focus on. We mentioned the most important ones here, from oil and gas to chemicals, construction and furniture, fertilizer, food, and composites.
To drive this, a lot actually has to do with—I mean, there is globalization potential left in this business. I think that's the easiest way to put it. So if we can put more sales guys out in more parts of the world, we can drive growth. If we can add on to that service personnel that can be more proactive and really be with the customers more, we can support the sale of the next generation, plus the aftermarket business in this. So that's really an important priority here. Then, as we mentioned, we need to also have the capacity to deliver for that growth, so that's a leveling investment. Then, TechnoPartner Samtronic, the acquisition we announced today, is, as I said, really a bolt-on to this, to the existing process system setup. It's a German company.
It is fairly limited in size from a Sandvik point of view, but a very important piece of the puzzle for Process Systems. So 35 employees, roundabout, as you see, around EUR 30 million in sales. It will provide us with a technology that complements our range in composites. It will provide us with a strong team of engineers, of course, as well. And I think what we add to the business is really we have a good sales network, service network, that we can facilitate this business with in terms of sales, and we can join forces on the engineering side for product development to really take a step forward into the composites area, which in itself is a, is a very attractive area for us. So again, strengthening the growth potential of process system is, is a, is a key priority for us. Okay?
For Wolfram, you know, it is, Wolfram is a key strategic internal supplier for us, raw material supplier. So a lot of our focus here is really to make sure that we have productivity in this machine, that we deliver quality and consistent quality of the raw material to our customers. Doesn't really matter internal or external, it's the same recipe, and these are typically long-term customer relationships where optimization between supplier and, and customer is important. So that is what we work on here. And then, in addition to that, as recycling becomes a more important raw material, it's also important for us to make sure we have the capacity to have that part as a mix in our raw material flow.... Good.
So if we combine this, you know, come back to the start of this, you know, we have a very clear agenda for driving growth. That's our mandate. Of course, profitable growth, it goes without saying. We have spent a fair bit of time to really set clear plans, focus, deselecting some things, and really focusing on other things. I feel we have clear, clear plans for that, and, and right now, for us, it's, it's sort of delivery, delivery, delivery mode in that sense. There are some real key growth initiatives that we are working on. Some of them you've seen today, some of them we hope to present at, I guess, next year. There are some opportunities that we're looking at that are more still in the assessment phase in terms of like, could this be a new, new, exciting area?
Could this be something that we can capitalize more on? And then we will continue with these efficiency measures on the cost side, clearly, but also on the balance sheet side. If you think about it from that side, there are opportunities there as well. But I would say for us, this is more about continuous, prudent management and really making sure we are as effective as we could be in that sense. Okay? Very good. That leaves the floor for questions, and for those that don't have questions, I am also very open to advice. Yeah? Yeah. So the recycling-
Sorry, Tomas, I think we need to-
Yeah.
Use the mic.
Yes. Okay. No, I was just interested in your recycling capacity. Where is that located? So, yeah.
The physical location of that is in Austria at the Wolfram plant. So we had that already, and we're expanding that capacity. So that's where it is. In terms of if we do all of that, the question, if you-
For the Machining Solutions customers, do you undertake all the recycling? Is all recycling within Sandvik undertaken by Wolfram or Venture?
There are a couple of different,
Or are there recycling capacity within Machining Solutions?
There are a couple of different technologies in how you can do that, and a lot of it goes via Wolfram. There are also some other routes where you can use different sets, technologies to actually break down the hard scrap and the soft scrap into the raw materials. So, so the answer to that is a bit mixed.
Okay. But it sounds like most of the recycling goes back to Austria to get most of the inserts, right, and which is with the customers goes back to Austria.
You also have to, you know, for us, recycling is part of Machining Solutions. It's part of mining, it's a part of Hard Materials. We think about our flow, so it's not only Machining Solutions flow. But if it's converted within Sandvik, it would, to a large extent, be done via Wolfram, to answer your question. Other questions? Yeah.
Hi. Just a question on the Process Systems. You said it could benefit from globalization. Can you outline kind of the scope of, what can be done there, i.e., how penetrated the market is, how big it can be, that business for you?
I'm very sure that we don't guide on specifics like that, but I can say is that. That's a business that has an attractive growth potential. So we put the emphasis on that, and there are markets that haven't been geographically penetrated, and then there are segments that we can continue to penetrate where we are existing in other parts of Process Systems.
I mean, not to take it as guidance, but just rather to have a ballpark figure. Is it sort of are you halfway there? Are you not even a quarter way there? Are you looking for almost 10%?
For me, I've had the fantastic learning this day. You know, on the one hand, I understand that you want as much as possible in terms of numbers, and at the same time, we don't guide on that. So I'm not gonna give you a number, but I think it's an attractive business. We have ample opportunities to grow this business, and we'll put a lot of emphasis to do that. And hopefully, with what we have done and said, you see that, you know, we're not just saying, we're actually putting our actions behind that.
And just to another question, is M&A on the agenda for this business? And if yes, then where would you go?
What if I said no, and we had that press release this morning? Yeah, so of course, I mean, organic growth is on, on the agenda. M&A could certainly be on the agenda. There is no, no, we will not do M&A within Venture, if you put it like that. But of course, we have to, we have to have a good case and a, and a good strategy behind it.
Sorry, I mean, would you consider growing another leg within Venture, going into a different business if or business area, if you think that fits?
I would, we would consider that if we'd fit our criteria in terms of the segments, you know, again, high underlying growth, good earnings or business model, where we really can provide value to customers and hence, you know, get a fair share of that, and this aspect of, volatility of earnings, and that it fits... That we feel comfortable from a risk point of view and reward point of view, that Sandvik has something to add value here. That may be a capability that we have somewhere else, or a certain set of capabilities, a new technology that we have developed, but there, you know, we need to have that strategic link and competence link to be able to build something. That doesn't really relate to whether it's Sandvik Venture or not. I think that's prudent way of delivering on strategy.
... Yeah. Thank you. What was the rationale to move the Wolfram and the recycling business outside of old Tooling into Venture? You want to grow that business on your own, or do you feel that you want to disconnect it as a supplier internally?
Well, let me, this is part of history, which is slightly before I joined. But if you think about it from this point of view, Wolfram today is a very important internal supplier. The internal customers are Machining Solutions, mining, Hard Materials, i.e., other parts of the businesses. So it's, it's, it's important for Machining Solutions, but the other businesses are also important. And then many times it's actually quite adequate to, to make sure you, you move it out of, one of the businesses and can, and can drive it, quite independently. I'm sure there were other, you know, reasons and drivers behind that as well, to really, to get it right. But with the current BA structure being more customer-centric, it makes sense to lift that kind of business outside for those reasons, I think.
On the recycling business, we recently saw that your competitor, Kennametal, acquired ATI's business, and they've been trying to build out their in-house. I'm sure ISCAR is doing the same. What's happening to the competitive landscape on the recycling side?
Well, I guess, you know, we will have to see what happens with ATI, which I think you're referring to on the American side. We will have to see. I don't really have a, a good answer to that right now. I don't see that that would materially affect our internal business flows.
Is it a segment that you would want to continue to expand in? I mean, you said you, you're making some additional investments there. Is there scope for, to grow that business on its own merits?
To have the recycling-
Yeah, to grow it further.
I think that's important to have, first of all, because it will be an important part of the raw materials flow. But of course, an important part of our investments to drive that is to be a very relevant internal supplier as well. Not that I think materially I can answer. I won't discuss exactly who's their customer and, and, and these things here now, so.
Okay. More questions? Otherwise, we're getting closer to the general close of the meeting. Okay, then, thank you very much. Good luck with the rest of the day. Should we move a little more in that direction? Okay.
Okay, everyone, welcome back. I hope that you have had a fruitful day. For this wrap-up session, we've lined up all business area presidents, together with Olof and together with Mats as well. I will start with sort of giving you the word and an opportunity to ask any one of the ones on stage whatever questions you might have left. If you don't have any ones, I've got some spare ones that I can toss to them just in case, because I know that you may be tired after a long day. But I'll, yeah, at least one is fresh over there.
It's actually not fresh, but it's more kind of a clarification. But, regarding the cost-saving initiatives, and looking at your programs, I think maybe it's just me, but I need some clarification as to how much of the saving initiatives that you announced is already through the P&L, how much is left to go through the P&L, then how much of the new programs, I guess, is to add on top of that?
It's if you look in your pack at the slide I showed regarding the two restructuring programs, you can see the total, and then there's a column remaining. That's the remaining of the previous program that's still to come through the P&L. Then the mining restructuring program that we announced today, the SEK 500 million-SEK 700 million, what's coming in terms of our site restructuring, that's all to come for the future. So of the previously announced, the remaining part is, well, which you can see very clearly in the table there.
And then the 25 site closures or production-
That hasn't started yet.
That hasn't started, that's the future, and is-
Future upside.
Is supply chain plus cost reductions as well, I guess?
Yes.
Okay, thank you.
Anders.
Yes. Coming back to your-
Hang on there.
Coming back to your savings program, the future one. We have learned now that most of the closures appear to happen in Machining Solutions and mining. Is that the true interpretation?
Well, I mean, Machining Solutions and mining have by far the most sites in the Sandvik structure and are clearly our largest business area. So of course, the largest proportion of this savings program is gonna affect those two. The bulk or the lion part, even I would say, of the savings is affecting those two business areas. But we do see some opportunities in some other parts of the company as well. But more or less, mining and SMS, that's correct, yeah.
I guess it's too early to talk about any details about writedowns and specific cost items, et cetera?
In the SEK 3 billion-SEK 4 billion, there are, of course, non-cash items, like writedowns, and there will be cash items, like-
Mm.
- redundancy costs or so. We haven't chosen at this point to give a exact share of those two parts, but there are, of course, both those elements in those restructuring costs.
When will you start to communicate further actions within that program?
So I got that question, actually, we were talking here a bit earlier. I mean, we set out the frame. Someone was asking: Okay, why do you talk about this? Well, we have you all gathered here, and we have a chance to really talk about the overall plans of Sandvik. Then you will see this program coming through gradually over the years to come, over various quarters. There will be certain new closures announced, but and these costs will be coming over a period of time then. So, this was just to set sort of the overall frame and understanding of the direction we're heading in terms of our supply chain within Sandvik.
Okay. Thanks.
Just, a couple of questions. One on the, the savings. You talk about the 25% ROIC, and you talk about the fact that this SEK 3 billion-SEK 4 billion of charges over time is gonna affect, both the cost side and the supply side. Should we think of it as roughly half cost and half net working capital? If you think of the components to ROIC, is there one piece of it we should think of as being a bit more important?
I'm getting a lot of these feeling questions to try to box things in. I mean, we've chosen at this point in time not to be more specific than we have, so I don't really have any more details for you at this particular moment, so.
Okay.
I'm sorry.
The other one followed off that, so I'll leave it.
Thanks very much. Now must be the time for that 3D printing question?
Okay.
Feels like most people are staying for dinner anyway, so it'll take a while. So I mean, over the last six months, I think a lot of people who want to IPO 3D printing companies have been going around talking to investors, and as a result, I think investors are genuinely worried that subtractive manufacturing, quote-unquote, you know, its days are numbered. So how should we view that risk in the context of Sandvik? Thanks.
I think there are both risks and opportunities, clearly, with 3D printing. I like to think that the opportunities are greater than the risks. To start with, I think I do not see that any time in the near future, we'll have a significant impact of large volume production, many parts going through a large automotive factory or something, that they will be 3D printed. It is still gonna be much more cost effective to use existing manufacturing processes. But 3D printing will probably create new business opportunities, and it will have a role in areas where you have probably short series and very complex shapes of what you are trying to produce.
For Sandvik, we are actually working a lot with what this could mean in terms of opportunities for us as a group. We have a few teams within our R&D organization looking at 3D printing and how we can use that as a valuable opportunity for Sandvik, both in maybe bringing products to market, but also so that 3D printing can create quite interesting new manufacturing opportunities for Sandvik. One maybe can print the basic shape for an insert in a totally new complex shape that we cannot do today, or we can remanufacture other parts that we are doing within our processes and offer our customers a better product by using that as part of our production process.
So, it's both in terms of offerings to the market, as well as actually an opportunity for us to rethink in our R&D. Okay, if we use this opportunity, can we actually develop an even more advanced product offering for our customers? So, yeah, as I said, I'd like to think on it as an opportunity, and I mean, this is exactly what Sandvik should be good at, capturing new technology trends, using our research base and the technical know-how we have in our company, and look at how we can build that as a new market opportunity for us. I don't know if Jonas or Thomas want to add anything on that?
I agree with Olof.
Okay, that's it. Thomas?
Yeah, I think, similarly. You know, we need to look at this as an opportunity space and the other side as well. And I clearly think it is an opportunity space, not only in what you mentioned first, but also in materials that we can provide and add these parts to the spectrum.
Yes. Thank you. Olof, there have been two cost programs, and now we have sort of a third one. How should we think of that? Is it a logical step, first, to focus on sort of getting the organization more focused, and then it comes to more strategic thing? Or is it so that we should... I think that there's more to it. You have find out that there's more to do, in better shape or more opportunities, worse shape or more opportunities, whatever you like to think of it. How should we think of this?
Well, to start with, our first two programs, especially the first one, was very much white-collar related.
Mm.
Excuse me. We were working on flattening out our organization. We had parts of the company where we had 13 layers between me as CEO and the most junior person in the organization. So creating a less hierarchical structure was one element in that. Reducing the number of matrix dimensions we have in the organization to create a clearer organizational structure with clearer accountability, also a key part of that. And the second program started to include a bit more sort of blue-collar related type of cost savings, and was much more mining-heavy due to the market situation as well in mining. And this last program is clearly an adaptation of our cost base to the current market environment in the mining sector.
So that's how you should look at these first parts. What we're talking about in the future here is really building a, as we said, a better Sandvik for the future. And, with the building blocks, focusing on our products and our research and development, making sure that we have the right offering to our customers, that we are setting the industry standard in all areas where we are active. That we, of course, use our resources in the best possible way, that we use our manufacturing footprint and try to optimize that, that we focus our CapEx in the right way. Continue to work with innovation and our people and organization to make sure they're delivering on these targets.
This is more, much more about building Sandvik for the long term, turning Sandvik into an even better company than, than we are today.
Okay, thank you. A direct question on mining. I just learned that the SEK 500 million-SEK 700 million in savings were more linked to estimates in production. So maybe, today, how much capacity for new equipment drill rigs has actually been taken out from some type of peak, including outsourced, in-source production, temps, and all of that?
If you think about our capacity in our drill factories, we are still running internally full. I mean, we are bringing in some of the outsourced that we've been having for the last two years as things grew. We didn't add capacity, we added external capacity. So in some factories, for example, in our French factory, we still have a large portion of our capacity outsourced.
So still some room for that left then?
Yes.
If you include that, how much have you taken down production capacity?
I think you're asking me how much has our sales dropped in drill rigs, or?
No, how much could you cope with for future sales drop, really?
Well, I think, you know, we will continue to adjust our capacity as it needs to be adjusted. And at the moment, we don't see a need to do more than what we've done.
Okay. Thank you.
Mm.
Just a question about the long-term nature of some of the programs you've outlined today. I don't doubt for a second that, you know, the aim is very laudable, and you're creating a better company. How do you, however, try to offset the risk that investors get the perception that Sandvik becomes some kind of Siemens of the North, a company which has done its best to redefine the phrase non-recurring over the last decade? I mean, what's the risk, in other words, that you have year after year after year, where you have what you call, quite rightly in Swedish, "...," but doesn't translate very well into English?
Mm-hmm.
Thank you.
Well, I don't follow Siemens in that much detail, but I mean, Sandvik has been doing this kind of manufacturing rationalizations of manufacturing sites historically also. And then we buy a number of new companies, and the number of sites continues to grow, and then we come into a situation where we do need to rationalize that again. And I think for many companies that have that profile, where you acquire and then you gradually need to rationalize your manufacturing, that's something you continuously need to do in the company.
But the risk that the charges... Sorry, the risk of the charges associated with that, then impact materially on earnings, not just for one year, but for the next year as well, and the next year as well. And the upside keeps getting pushed to kick down the road a little bit.
Well, I, as I see it, my challenge and our challenge as a management, is that the upside is not sliding away. So, that we can show and deliver, and that's my belief at least, that, I mean, as long as we're showing and delivering that these programs are giving the effects and the benefits, and they're measurable, then I guess you, as an investor, are following... Looking at Sandvik, will be happy that we are doing these programs, and that we can show that we are delivering value by, by doing this and creating a more effective business.... But, I guess the question which you're implying with Siemens is that they're taking the restructuring costs, but they're not delivering the upside, yeah? And of course, that's, we're, we're committed to, to make sure it's not gonna be like that in Sandvik.
I think all of us in the management feel very strongly that way, so.
I certainly wouldn't want to be quoted.
Sorry?
I said, you wouldn't want to be quoted.
Oh, okay.
Okay. I think it is very obvious that you weren't as tired as you have been in the years preceding this one. So we don't have very much time left, so I'm gonna skip most of my questions, but I'm gonna save the best for last, which is really what you believe each and one of you, and you can just switch the mic between you. What is the main takeaway that you think, from your perspective, that the participants here should take away with?
Well, first, I hope that you will take away that we take safety really serious, that it's something that we prioritize for Sandvik. And then speaking for SMT, that we are very well positioned to grow.
Okay, Petra mentioned safety, so I will not go into that. But, being new then in Machining Solutions, I think what I talked about, the very attractive metal cutting business, that's one thing, and that we have more to do, by focusing on our core building blocks. Really make sure that having the best product offering and the way we sell it, the way we interact with the customers. And then coming back to the question you mentioned, one of the key thing here is to have the most efficient supply chain. And I think for Machining Solutions, since we will do that, we will do this in a very structural way, not jeopardizing what we can do in the growth area. And then to gear up Machining Solutions a bit harder on growth, also, besides value growth, but also on the volume growth.
So that's a few takeaways that we are going to bring from Machining Solutions.
Thank you. I think safety goes for all of us, but what I hope that you take away today is that, you know, Sandvik Mining, we've started to deliver on our mandate and our promises. We're in a cyclical industry, and we're in a situation now where, you know, we have to adapt to the market, but long term, it's an attractive market. We have a strong position, and we have a great plan, a great strategy, and that the value creation we can deliver is going to be a very interesting journey going forward. That's what I hope that you take away.
Thank you. When it comes to construction, we have worked on the turnaround and delivered on the building blocks. However, the business is down, and while we have fundamentally improved the foundation for future profitable growth, we see a few, a tough few quarters ahead. However, mid to long term, we believe we will deliver profitable growth in the future, both in terms of improved service to the customers, improved new products to the customers, improved market coverage, and an improved cost position.
Thank you, Anders. So for Venture, I mean, I hope you take away that we have a very clear focus on where we wanna grow our businesses, how we want to do that, and that the plans are in place. So like many things, for us, that's really... We're in execution mode in terms of delivering on these plans and bring that growth. And on to you. I don't know. Maybe I'll just wrap up then, Linus, and I'd just like to thank you all for attending here today. We've been all very excited about sharing what's going on within our group and our plans for the future. And thanks for all the good questions, even though we haven't responded to 100% of them.
But we've tried to give as much clarity as we can around things. I strongly believe in this company and its future. We have a fantastic base. We're an innovative company. We are launching next generations of products that's gonna take us even further in our market positions, and I just think the potential within the Sandvik Group is really fantastic. And so once again, a big thank you for coming, and hope you really have enjoyed the day. Thank you.