Warmly welcome everyone to this presentation of the third quarter results from Sandvik. My name is Magnus Larsson. I am Head of Investor Relations. I am here together with Olof Faxander, CEO, and Emil Nilsson, the new Chief Financial Officer. This presentation will follow the usual pattern. We will start with the presentation by the CEO for some fifteen minutes or so, followed by the usual Q&A session. We've got one hour in total. But before we start, we've got a new member of our IR team that is going to be a spokesperson alongside with myself, as of today, actually. So please, Oskar, if you just step up a little bit and wave. Very nice. So from now onwards, you can call either him or me with any questions you might have. Very good. But now, without further delay, Olof, please go ahead.
Thank you very much, Magnus, and welcome everybody to this presentation of our third quarter results for the Sandvik Group. See if we can move forward here. So if we just look at some quarterly highlights here to start with, I think we can conclude that in terms of the internal work, it's progressing very well in the company. We actually delivered the highest cash flow that we've ever delivered in a quarter in the Sandvik Group's history. And also the significant turnaround plans in especially Sandvik Materials Technology and Sandvik Construction continue to deliver results. And I think you can see really measurable effects of the efforts they've been making within those business areas, where both of them, despite drops in sales, have managed to increase their results.
The EBIT for the group landed at just over SEK 3.3 billion. That, of course, I think is also a good result, considering that we had both headwinds from currency and also quite significant negative metal price effects affecting the result negatively in the quarter here. EBIT margin landed at 14.2%. If you analyze the return on capital for the third quarter for the company, it's landed at 20.1%. At the same time as we are continuing to work with our strategy in the group and develop those initiatives, the market trend has, of course, shifted in the world around us. We already talked a bit about that with our second quarter results, but those changes in the market sentiment have become more evident during the third quarter here.
The most notable difference is that we've seen a clear trend shift in the mining industry, which has been a strong driver of growth up to now for the company. But here, we're seeing that market a much slower or lower level of activity now in the third quarter for the Sandvik Group and generally in the industry. Machining Solutions also sees lower market activity. And when it comes to Materials technology and construction, well, we have for quite a few quarters now seen quite weak market conditions for these business areas, and those weak market conditions have continued. When it comes to Venture, which consists of a number of very different businesses, we have a quite different development also for the various businesses.
Some seeing more positive trends, and some seeing more tough market environments. Looking globally, if you remember already from the second quarter, we saw, already in that quarter, a negative sales development in Europe. It was down 5%. That trend has continued into the third quarter, and we have a decrease of 8% for the third quarter this year compared to the third quarter last year. So clearly, the effects of the ongoing Euro crisis and so are visible in the development of sales for the Sandvik Group. And actually, for the first time in the company's history, now Europe represents less than one-third of our sales.
And I think that long-term trend of rebalancing of our markets and where we have faster-growing parts of the world and slower growing parts of the world, that will continue, and we need to plan and develop our business and business model to adapt to that kind of environment. In other parts of the world, we saw reasonable growth in invoicing, and clearly, in this picture, North America sticks out, which has continued to have a very strong development. And as you know, North America has been recovering very strongly out of the financial crisis, and Sandvik's sales development has been very positive, and in this quarter was 22% higher than the same quarter last year.
Looking at our customer segments, first, if you look at the colors in the pie chart, they demonstrate the development of invoicing, and mining continues to have a very strong development of the invoicing compared to the same quarter last year. Of course, here we have a longer order stock, so reductions in the number of orders takes a longer time to feed through into actually affecting the invoicing of that business area. We also have positive developments in the energy sector and automotive sector. But if we look at the trends compared to the previous quarter, we now have negative trends in the mining, engineering, construction, and automotive sectors.
Really, the only exception where we see a continued, very strong positive trend for within our markets is really the aerospace market, where we've seen continued strong, positive growth. Order intake landed just below SEK 22 billion, and that was a drop of 10% compared to the same period last year. And within the order intake, we had SEK 1.7 billion of major mining system orders in this quarter. Invoicing, on the other hand, in price volume terms, comparable items increased by 2%, and that means actually we had the strongest invoicing in the third quarter ever in the company's history. So still invoicing was very strong in the quarter.
Then if you look at EBIT, it landed at SEK 3.3 billion and an EBIT margin of 14.2%, and that results in a return on capital employed. If you take the rolling twelve months of 19.5%, then one must remember that both Q3 and Q4 last year had significant one-time items, one-off items affecting those results. Maybe it's a bit unfair to annualize the Q3 result, which is always seasonally a weaker result compared to other quarters. But then if you annualize that, you get 20.1%.
Cash flow, as mentioned, was the highest in the company's history, actually only by SEK 1 million, but still the highest, and beating the last time we had a very strong cash flow was in 2010 here now. So that's a very positive development, influenced by the result, of course, but also positive developments in our net working capital in the company. The net working capital in absolute numbers actually decreased for the group compared to the preceding quarter. So we did have a positive development there, and especially Materials Technology and Machining Solutions had good trends in their inventory developments. But due to the lower sales, still the net working capital as percentage of sales increased for the group and reached 30%.
Looking at the bridge analysis, we have to start with, as I mentioned, significant one-off items in the third quarter last year, so they, of course, need to be taken into consideration when comparing the two quarters, and also significant currency effects, both affecting the invoicing and the EBIT. If you exclude these effects, we had a quite strong operational leverage on the increase in invoicing on price volume terms at 36%. So the SEK 740 million resulted in an increase in EBIT of SEK 270 million. Looking more specifically at our different business areas here, Sandvik Mining then had a very strong invoicing.
It increased 14% compared to the same period last year, and this is, of course, on the back of the very strong order stock we have for that business area. But we did see a trend shift in demand, which is seen broadly across the industry currently. The only market which saw positive development and which is still very strong is Africa, and that's driven a lot by metals like gold, for example, which is still at very high prices and attracting a lot of investment into that kind of mining. Major mining system orders were at SEK 1.7 billion, and due to the shift in the market sentiment, we're of course increasing the focus on both our costs and our working capital in the business area.
The EBIT increased somewhat up to a little over SEK 1.5 billion. The EBIT margin, on the other hand, was somewhat lower at 15.9%. Return on capital employed for the rolling twelve months, and mining didn't have any significant one-off items, landed at 39.3%. And if you annualize the most recent quarter, we're at 37.3%. Net working capital did increase as percentage of sale for the mining business area. Sandvik Machining Solutions delivered a very strong cash flow due to well especially a reduction in inventories that was evident in the business area. But we did see weakening demand in most major markets except maybe North America, where we saw a considerably better trend.
We have launched in the quarter and are working also during the fourth quarter to launch our mid-market initiative. And as one step in that, we are moving Dormer from the business area Venture into Machining Solutions as of the first of January next year. And we will relaunch a dormant brand that we have within the Sandvik Group called Carboloy, to address the mid-market, and especially markets like India and China. And this will be sold in a limited product range through distributors and with no technical service really into the markets to meet that kind of demand where that exists. The profitability landed at SEK 1.3 billion for the business area, and the EBIT margin at 20%. Despite the inventory......
reductions, net working capital as a percentage of sales did increase up to 29%, compared to previous year of 25%. Sandvik Materials Technology showed very good cash flow, and that was especially due to inventory reductions that happened in the business area. And this business area did succeed in reducing net working capital as a percentage of sales compared to last year from 39% to 37%. So I think that's a good, strong, positive development. Another strength within Materials Technology is that they had a result, an underlying EBIT margin of 8% compared to in comparable items, 4.3%, a year ago. So the efforts made within the Step Change turnaround program, I think, are bearing fruit, and you can clearly see that in the development of the financial numbers for the business area.
The metal price effect was quite significant, minus SEK 96 million for Materials Technology. Looking at the market, really the only area where we saw some positive or stable market development was oil and gas sector, while the other market areas developed in a more negative way. We are expanding the Step Change turnaround program due to the continued weak market situation, and we will increase the efforts within that program by a total of SEK 300 million now going forward, on top of the already announced plans that we have. Looking then at Sandvik Construction. Here, also for construction, we saw continued market uncertainty and quite weak market development. Low demand in Europe, mixed demand in Asia.
Also here within construction, due to the continued weak market situation, we are increasing the focus on the turnaround program and looking at how we can expand that further, even though we have not defined a specific number for that effort at this point in time. Looking here then, again, for construction, you can see that they're bearing fruits from the efforts they are making. So despite the drop in their turnover, they are increasing their results from SEK 99 million last year up to SEK 230 million this year, resulting in an EBIT margin over 10% and a return on capital annualized on a quarter of over 15%. So again, I think considering the market environment we're in, a very good performance from the construction business area.
Net working capital was also, in this business area, successfully reduced as a percentage of turnover, compared to last year, and dropped from 31%-29%. Then finally, looking at Sandvik Venture. Here, we have a mixed market development in Process Systems, which is one of the star businesses we have really in, in the venture portfolio. We had still very high market activity and a positive development. Geographically, we saw improved demand in Europe for the venture businesses, but a decline in Asia and North America. The profitability landed at SEK 283 million, and the EBIT margin at 17.1%. It's difficult with the comparability here since we had significant one-off items affecting the venture result last year.
But the return on capital here was annualized 15.1%, which also is a reasonable level, I think, for venture. Net working capital increased quite significantly as a percentage of sale, and this is driven a lot by us continuing to have a successful development of our recycling programs for used tungsten carbide or cemented carbide inserts and products at the same time as we saw a market slowdown. And developing the recycling business is a strategically important thing for the Sandvik Group, since the availability of tungsten and being able to recycle is very strategic issue for us. So therefore, we, despite the weaker market, will continue those kind of efforts here, and that then has had a consequence on our net working capital here.
So if you summarize the third quarter for the Sandvik group, well, we have had a stable profitability and actually a very strong, cash flow for the third quarter. At the same time, the market, has, the market environment is, is gradually changing for the worse, and the macroeconomic uncertainties that we started to see in the second quarter have been, been, really more strongly manifested now in the third quarter. And the biggest trend shift that we really have seen is in the mining industry, which has gone from a period of very, very strong, growth to a much more, cautious, type of market that we see within mining right now. I'd also like to mention, two executive, appointments.
I should say first, we are thanking Anders Thelin, who is retiring from the company after serving his whole life really with the Sandvik Group, as lately as head of Tooling and finally as head of Venture. He's retiring at the end of this month, and he will be succeeded by Tomas Nordahl, who is already a member of the group executive running strategy, IT purchasing, and financial services efforts within the group. And also, Mr. Anders Thelin has been coordinating our R&D efforts on a group level. And as part of our strategy, we are taking a stronger grip of having more common and group-wide R&D projects, and we've strengthened the R&D board's role within the Sandvik Group significantly over the last year and a half. And therefore, Mr.
Olle Wijk will take over those responsibilities from Anders Thelin, and he will be part of the extended group management team of the group, then taking care of coordinating the various R&D efforts in the Sandvik Group. And they're, of course, very important for our long-term future development of the company here. So before we open the Q&A session, I would like to welcome Emil Nilsson, who is also a new member of the company, and it's your first quarterly report. But you're present here, so maybe I thought you could take the opportunity to introduce yourself a bit.
Yeah, thank you very much, Olof, and good afternoon, everyone. I'm of course very excited about being here. I've just completed my first, first month and a half in the company and in the industry as well. Just moved back from Austria with my wife and two daughters that are just about to turn six. I come from the telecommunications industry, where I spent basically my whole life, working life, and that is 16 years. I've been with Ericsson, and I've been most of my time abroad. So I've been in North America, I've been in South America, and most recently then in Europe. I've also had a variety of roles, not only finance related.
I've been both in sales and in operations, so I hope that that's a good experience to bring when we want to connect finance to the business and really make sure that finance is an integrated part of the business and support all the stakeholders that finance has.
Okay. Thank you, Emil. So then, Magnus, I guess we open up for the Q&A session.
Very good. Thank you, Olof. Thank you, Emil. Your duties are not really finalized yet. I'm sure we have some questions. So operator, could we have some assistance with the first question, perhaps?
If you have a question for the speakers, please press zero one on your telephone keypad. We have a question from Mr. Alexander Virgo at Berenberg. Please go ahead.
Yeah, good morning, or good afternoon, I'm, I'm sorry. Two questions, please. The first one, just on the cash flow and thinking about the balance of the year, are you going to be focusing on reducing those net working capital percentages into the end of the year, and therefore, we should expect to see, excuse me, we should expect to see the production rate cuts putting pressure on margins in Q4? And then the second question, just in terms of the launch costs on Carboloy, how should we think about factoring that into our costs, I suppose, for Q4? Thank you.
Okay, well, firstly, we will have a continued ambition to improve our net working capital as a percentage of sales. I unfortunately don't think we will meet our 25% target by the end of this year. And how successful we will be in reducing our net working capital will, of course, depend a lot on the market development, because if we have a weaker market, it's of course more challenging to reduce net working capital. But already this quarter, we have started to adapt production rates and reduce production rates to our current sales rates. So that we plan to continue in the fourth quarter, and as said, I mean, these efforts are already ongoing in the company.
When it comes to launch costs, Carboloy, they will not have a material effect in 2012 on the company results. And since this is a model where we will use a lot of existing setups, and the plan is to sell this material or these products through distributors, mainly, we will not have the same type of sales cost as we do, for example, with Coromant in the market. Okay?
Okay, great. Thanks.
Very good. A question from the floor? Yes.
Good afternoon, Peder Frölén, Handelsbanken Capital Markets. My first question is, if you please could share some thinking behind the mid-market sort of push on the Carboloy and Machining Solutions business, which market are you thinking of addressing first? Your ambition there, size of the market, market share, that would be very interesting, I think. Secondly, on your savings, back in September last year, you took SEK 1 billion or so in provisions, and if I don't remember it correctly, mostly was short-term provisions. And maybe you could shed some light that you have achieved most of the short-term savings as of now, and in conjunction with that, maybe describe what we could expect from the slightly longer term initiatives, as you mentioned, R&D, purchasing, stuff like that. Thank you.
Well, with the mid-market, our ambition is to especially address the mid-market needs that exist in markets like China and India, for example. So this is not a broad global thing that we're planning at this stage, but there is a need in these markets where the mid-market actually is growing faster still than the premium markets. By having a product with this more limited product range, a totally different sales model, and in that way, a totally different offering of products than we do in our premium brands, we think that we can complement our brand portfolio in the company in a good way without having adverse effects on other parts of our business.
Will this make it harder, sort of, to cut the inventory or increase the capital efficiency in Machining Solutions, maybe using the product tail here towards the mid-market? How should we think about that?
I don't expect that to have any negative effects on net working capital, and this will be, as I said, a much more limited product range with a totally different availability and service in that sense. So, it will not require the same net working capital investments as our premium brands do, where we have much higher service offerings and availability offerings to our customers. Secondly, about the savings, well, my view is by the end of Q3, we have achieved roughly or more or less fully that run rate of SEK 1 billion, that was or roughly SEK 1 billion that we set up in our previous plans.
Then we have expanded these ambitions for the materials technology with an additional 300, and we are also looking at what steps we can take within the construction business area. Then, of course, depending on the market development, we may need to take further measures, but they are not planned or decided at least right now. But given the, I would say, increased market uncertainty, we are, of course, looking very actively at different scenarios within the company, how we can adjust our cost base without compromising our long-term ambitions in different areas. Within areas like IT and sourcing, and so we have, of course, plans and ambitions to reduce costs.
I think, we're developing very well in those efforts, and just before the summer, we, for example, announced an outsourcing contract with IBM in the IT area. So there are a lot of efforts going into reducing all this kind of general administration and support costs that we have in the company. These are, however, not included in the SEK 1 billion target that we set separately as a pure, so short-term cost-saving target.
Very clear. Thank you.
Okay, next question. Jake Morgan, Erik Bergman. I just have a question coming back to net working capital. Which part or which component in the equation is your challenge, and which measures have you launched to address these?
Well, I mean, clearly, inventories is where we have the key challenge. And, I mean, one trick is, of course, to produce less than you sell, then your inventories come down. But it's also, of course, about having the right products in the inventory. And so, I think we've had good efforts and developments in, for example, Construction and materials technology. I think our biggest challenge is in the mining business area. We have made certain recruitments of people to put on the management team of the business area, amongst others, one person coming from the Kone Corporation, which is, I think, very successfully been through a restructuring of their supply chain.
So we're trying to complement with competencies and, of course, detailed plans about how we can have a much slimmer supply chain than we have today. Then one must remember the challenge we have in our mining business area is that we have acquired a lot of companies over the last, say, 10 years, and fully integrating them and getting that to run as a smooth, integrated system requires a lot of work, and there's no quick fix in that area to address it.
Thank you.
Question from the international audience?
Just behind that
Operator, please, a question from the international audience.
We have a question from Mr. Lars Brorson at DNB. Please go ahead.
Yes, good afternoon, everybody. I have three questions, if I could. First of all, Olav, if I can just follow up on the earlier question in regards to inventory reductions, can I ask you to give a little further divisional detail here? Specifically, can you elaborate on the expected impact from inventory reductions and lower production levels in the sequential margin development in Q4 relative to what we saw in Q3, particularly in Machining Solutions and Mining?
Well, sequentially, we have a strong integrated business model in machining solutions and in materials technology. So, if you're thinking about under absorption of fixed costs, that is, of course, a challenge with low production rates in machining solutions. And, as we trim inventories, or if we need to do that more significantly, that does, that underproduction does result in an under absorption. The mining business area, which is more an assembly type of operation, has a much more variable cost base and is less sensitive to those type of under absorption effects compared to machining solutions.
But specifically in machining solutions, you obviously overproduced slightly in Q2 and underproduced in Q3. On a seasonally adjusted basis, what do you think you'll be doing in Q4?
...Well, I mean, we ought to still have an ambition to reduce our inventories. Then what production rate that results in is, of course, very dependent on the market development, and especially in Machining Solutions, we have a very short order stock where we are continuously selling on a daily and weekly basis, which is then. And we need to adapt our production rates rapidly as we see shifts in that. Mining is quite different, and here we have an order stock of 6-9 months still within the business area. So even a weaker market development, if it doesn't result in very significant cancellations, will not necessarily affect the invoicing in the near term.
You can see that very clearly in this quarter, where invoicing is up 14% despite a drop in order intake.
That's clear. Thanks. Secondly, if I can ask you, too, the trend shift you're talking about in mining, you saw a 26% year-over-year decline in your base orders. It looks like it's quite broad-based geographically, but looking just at your equipment, i.e., if we exclude the approximately 40% of mining, which is aftermarket, and the 20% which is system, and just look at the say 40%, which is equipment, can you put some numbers around the declines we've seen in the quarter, ideally by metal or minerals? For example, what have we seen in coal and iron ore? And maybe you could talk a little bit about the trends that we've seen so far in Q4 in that as well.
We don't really give numbers or details on that level. But if you look at our split, we have roughly a quarter of the business in coal-related markets and 17% in iron ore-related markets. So that gives you a flavor of the overall split. Then when it comes to iron ore, it is very heavy in the systems business, but there we have roughly 65% of our turnover, which is oriented towards iron ore mines in the Mining Systems business. So that's hopefully that gives you some picture.
Yeah. Finally, if I can just ask two Machining Solutions, obviously a relatively strong quarter in North America, with a 9% growth here, clearly a strong performance, certainly relative to the performance we saw yesterday by Kennametal in North America. Would you say that's primarily explained by different underlying end market exposures here, or do you believe you are taking market share in that market?
Yeah, it's, I don't want to stand here and benchmark against Kennametal, but I think our, we have a very strong organization in North America, which has been doing an excellent job. So it's possible that we've been taking some market shares in that area. But, we've also increased our exposure very significantly to areas like, for example, aerospace industry, which to a great extent is located in North America. And that industry has not seen a downturn as we've seen in most other parts of the market in this quarter. It's continued to grow and develop positively. So there we might have a mixed difference compared to other competitors influencing us positively.
Thanks.
Thank you very much.
The next-
Yes, a question from the floor here in Stockholm.
Okay, Anders Roslund, Swedbank. What do you see in Materials Technology? You had both a somewhat weaker mix, and you stopped production, and despite that, you reached 8% margin. What do you see short and long term in that business? And also include the nuclear question. What happens in China? We have heard news that they are going to start invest again in nuclear stations.
Well, firstly, with the, well, were you asking about the mix of products within?
Yeah, you had two problems, mix, and you stopped production in Q3.
Mm.
Despite that, you reached 8%. What will happen then? What about the mix? I guess you will produce more normally now in Q4.
Well, that will, of course, depend on the market, but it is correct. We did have a actually extended summer outage also for Materials Technology in Q3. We exchanged the large extrusion press in Sandviken, so we had a longer stop than we normally do in Q3. So and of course, if we, Materials Technology is our business area, which is most sensitive to volume shifts. So if we have a pickup in the market and a higher utilization rates in our mills, that turns very strongly into increased profitability for the business area.
We will, of course, to achieve the kind of targets we set out in the Step Change plan, need to also see some improvements in the market and not see this prevailing over a long, well, a very long period of time. When it comes to nuclear, it is correct, yesterday or today, there came news out of China that they were going to release certain nuclear reactors. It is a considerably smaller investment than what they originally had planned. But I still think it's a positive sign that they have decided to release a few nuclear reactors, and they are going to use the Generation III technology, the latest technology also in those reactors, which is good for Sandvik, since...
They are using the highest specification available today for nuclear reactors. And then our products, of course, are needed in those kind of investments. But so a small positive step with the announcement that came today, yesterday, but still very far from where we originally hoped to be with the nuclear sector.
Very good, thank you. Operator, please, another question.
We have a question from Mr. James Moore at Redburn. Please go ahead.
Yes, good afternoon, everyone. I've got three questions. On the inventory drop of SEK 1.1 billion, could you say what work in progress and finished goods movement was in the quarter, excluding currency and raw material, and how that looked by division? And then secondly, on the divisional bridge on page 27, in the Machining Solutions division, you talk about a negative SEK 80 million structure and one-off effect. I'm assuming there was no acquisition in there, and that you had 20-30 million charge in the quarter for the Russian footprint. So that suggests that last year there was a positive SEK 50 million effect. But I think last year, you talked about having no effect, and that Seco actually had some charges. So I'm just really trying to understand that SEK 80 million number.
That's correct with the SMS, that we did release a reserve that we had last year, which positively affected the results a year ago, and that's in the SEK 80 million. So, I'm sorry, that's correct, as you state. So the SEK 50 million does come from that item. When it comes to the net working capital detail, well, we don't publish numbers on that level of detail, and I would ask you to discuss that maybe more in detail with Magnus, and he can share what detail we can share with you, with regards to our net working capital.
Okay. Could I then ask something else? On mining, you said the organic decline was orders 26%, excluding major orders. Could you give us a rough flavor of the equipment versus the aftermarket within that, and whether the pricing is lower in those orders than those in current invoicing?
Well, we still believe we had a positive price trend for mining equipment in the quarter. Then, when these kind of slowdowns in mining CapEx happen, that affects, of course, our mining equipment much more significantly than it, I mean, the sale of new equipment, than it does affect the aftermarket. We, however, did have some effects on the aftermarket, which we believe are due to destocking within our customer base, and also due to, to some extent, to the extensive strikes that have been ongoing in South Africa, where very large numbers of miners have been on strike. That has, of course, meant that the mines have been standing still, and therefore not been using spare parts, consumables, and these kind of items here.
Thanks. When you say positive price, are you talking about orders or revenues?
Well, I'm talking about revenues, but I think it's the wrong assumption to make that we would have had a negative price trend on new orders. That's not the case today.
With orders dropping 30%, we're not seeing worse pricing?
No.
Okay, thanks.
Thank you very much. Another question, please, operator, from the international audience.
We have a question from Mr. Andreas Willi at J.P. Morgan. Please go ahead.
Yeah, good, good afternoon, gentlemen. The first question I have is the follow-up on mining in terms of profitability going forward. Obviously, you're not guiding on margins, but still it's with, with, with the components moving that dramatically, with equipment effectively collapsing, with aftermarket stable, with the improvement potential, do you have—do you think it's sensible to assume you can maintain margins, or is that already a goal that is difficult due to under absorption you will get or, or lower revenues you get in the equipment business? And the second question on charges, you indicated the measures you're planning to take. Should we already budget something for charges in Q4? And, if so, what's the size? Thank you.
Well, to start with, with forward looking margins, we don't give that kind of guidance from the Sandvik group. So, I'm not prepared to give numbers or share numbers on those ambitions. But we, I think your picture of the market is correct. The aftermarket is normally, in these kinds of environments, quite stable, and the drop comes on the sale of new equipment. So that picture is correct, and I still believe we have a significant potential within our mining business over the coming years to improve our supply chain, our cost efficiency, and so within that business area. When it comes to charges, maybe Emil, you want to comment on that?
What we're doing right now, we are looking into 2013, and we are in the planning cycle for next year. Of course, we're taking these new facts and the market situation into consideration. It's quite, it's quite difficult to read, actually, because we haven't had much, you know, many months since we saw this trend shift, especially for the mining business. We don't have the details of, you know, any of the plans at this moment. We have a concrete savings objective for Materials Technology, but, we will...
... during the coming month, and also now when we see how October comes in, and through conversations with customers, et cetera, we will sort of define what we have to do more in detail going forward.
On the mining side, what else are you waiting for? I mean, if equipment orders are down 26%, and if all the mining companies say they're cutting CapEx, what's the reason for waiting?
Well, in mining, as you saw, we still have a strong invoicing growth in the quarter. So, until a potentially lower order intake feeds through and significantly lower production rates, for example, in mining, there is a lag there since we have a, which is quite different from the other business areas, a quite significant order stock to work against. And that's how we still could have the 14% growth in invoicing in Q3 compared to last year, despite the developments we had on the order intake. So, but clearly, I mean, we are very aware of the market development and clearly considering what effects that will have on us and what potential measures we need to take, without, of course, jeopardizing our longer-term ambitions for the company.
Maybe I could just add to that, that we're not certain about how big the charges might be, that we will or will not take going forward. But that we have already started to reduce temps in the mining business.
Yes.
Thank you very much.
To comment also, when it comes to flexibility and costs, we of course, in a number of areas, also have time banks within the organization that we can utilize to flex when we have lower production rates over certain periods of time. Okay?
Okay, very good. Do we have a question from the floor here in Stockholm? While waiting for that one, please, operator?
We have a question from Mr. Sébastien Grutter at Société Générale. Please go ahead.
Hi, good afternoon. Three questions, if I may. The first question would be on the daily sales rate of inserts. Have you seen any deterioration through September, and how does it look like in October? Second question also on machining solutions. I mean, I would like to know what's going on in South America, as you are sharply underperforming the industrial production in the region. Is there anything specific we should know? And the final question on construction, I would like to know how much of the decline in orders reflect the lower demand environment, and how much reflect your strategy to exit non-core products? Thank you.
Sorry, once again, on construction, how?
The question is, how much of the order decline you've seen in Q3 reflect the lower demand environment, and how much of the decline reflects, in fact, your strategy to exit non-core, less profitable products in the division?
Okay, well, I can start from the beginning. When it comes to daily sales of inserts, the slowing trend that we've seen during September has continued in October, so, for the weeks where we have visibility here. So that's the update I can give regarding that. Well, South America, sales in general, I mean, you can see, as you saw on our geographical map, that we have a 2% decline in sales in South America, and that has been a region clearly developing slower for the Sandvik Group than other parts of the world. Construction, I wouldn't say that anything, or it's not a material impact. The big impact is not related to us exiting products within construction.
Then one must remember also when comparing the quarter this year and last year that we did have a very significant large project order one year ago. So that is affecting, of course, the comparability of order intake. So the drop is not as significant as you see in the numbers at first glance there.
Just to come back on the insert question, I mean, how does it compare in October compared to Q3 and machining solution of -2% sales? Can you give us some color on that?
The comment I have is that the slowing trend we've seen in September has continued in October.
Okay. Thank you.
Mm-hmm.
Very good. Thank you, operator. Another question, please.
We have a question from Mr. Jonathan Mounsey at Exane BNP Paribas. Please go ahead.
Hello. Yes, thanks. Just if I look at the balance sheet as disclosed today, it has net working capital as flat year-over-year. Yet obviously, the cash flow has a SEK 1.3 billion inflow. Could you just explain to me how that works? And as a second question, I think if we go back to the capital markets, when you announced the restructuring last year, you did say in the case of, say, SMT, where obviously now you've subsequently brought forward more restructuring, that if the business couldn't be turned around, say, within the next two years, it would be considered for sale. Is that a comment which still holds? You still, you know, particularly given that, you know, maybe the margin progression has actually started to move backwards, whether you would consider selling that business? Thank you.
Well, firstly, on the balance sheet, what was your question? The net working capital, I mean, it shrunk by roughly over SEK 2 billion-
Yes, but-
-compared to the previous quarter, which was a little less than half of that was currency related, and the other half was due to actual physical reductions of receivables and inventory, et cetera. But could you just explain what's, what's-
Sure, yeah. If you look on page 12, you've got Net working capital, SEK 26.8 billion for Q3 this year. Last year, SEK 26.8 billion, so 0 change. But obviously it's a big inflow in the cash flow, so why is that?
The cash flow is showing a sequential development, whether you are referring to a year-on-year one.
Uh, exactly.
Yeah.
The cash flow is, of course, in-
Sure
influenced by the changes in net working capital compared to the preceding quarter, not the preceding year, yeah.
Okay. And on SMT-
SMT, I mean, our strategy is, has not changed. And we have said that we're now running the Step Change turnaround program for the business, and that is our current focus. But we have said longer term that we would consider structural options also for SMT and construction, influenced by the developments going forward here. So that strategy that we announced one year ago has not changed since then.
In terms of what longer term means, is that 1, 2 years?
We said in the mid-term when we put out that release a year ago, so in the medium term-
Okay
... not longer term.
Thanks.
Very good. Thank you very much. Operator, please, another one.
We have a question from Mr. Martin Prozesky at Bernstein. Please go ahead.
Good afternoon, everyone. It's Martin from Bernstein. A few questions on machining solutions, please. I've heard all the comments on destocking, et cetera. I'm still not 100% clear on the margin development sequentially, the 20% versus the 24.6% from Q2. Can you give us a sense of just how much of that was due, the decline was due to destocking versus, you know, seasonal low production in Q3 versus the end market demand order rates, you know, coming out of the end of September? Just what, you know, what proportions of the margin decline was due to each of those? Then the second question, in terms of the Seco inventories, I think you've previously shown that they were at, you know, pretty much higher levels than Sandvik ones.
How far are you with the destocking of the Seco inventories? And then finally, on Machining Solutions, in terms of Carboloy, is this gonna be a mid-market brand, given that it's, going through distribution primarily? And will it be margin dilutive to the overall group, or will it be margin neutral?
Well, SMS proportion, I don't think we've shared any detailed numbers on that, have we, Magnus?
No. No, that's right. But you're right that we have a slightly declining demand, and that is one reason, and also a slight overproduction in the second quarter and a slight underproduction in the third quarter. And the magnitude of that shift has been higher than it, what it normally is in this season, and there you have the main explanation for it.
Yeah, due to that, we built some inventory more than we normally would like to do in Q2, and then we had to correct that in Q3, which led to more substantial underproduction than what we normally would have in the third quarter. Seco inventories, that process is ongoing, and I mean, that's one of the benefits, of course, with having the business integrated in, that we can do very significant benchmarking and comparisons between the various brands we have in our portfolio within machining solutions. In general, I would say the integration of Seco is going very well, and definitely according to all the plans we have drawn up, and we are on track to achieve all the targets that we have set up and publicized regarding that acquisition and integration work.
And then, Carboloy's margins, well, it will also be a totally different cost base for this kind of product since it is a very limited product range. We are not offering any technical support and distribution in the way we do with our other brands. So, we expect to have quite a significant profitability on that business as well, and fairly good margins, even though we would not like to maybe guarantee that it will be on the level of the premium brands, but still, attractive margins for the Sandvik Group.
Thank you. Just one follow-up then on, on Seco. So when would the inventories then be normalized? Will it be by the end of the year, or will it be end of next year? Can you just give us a sense for how long that destocking process at Seco will continue?
I'm not prepared to give a timeline at this point in time regarding that answer.
Thank you.
But, it is a prioritized effort within the Seco organization right now.
Thank you.
Thank you very much. A question from the floor here in Stockholm.
Hi, good afternoon. It's Guillermo Peigneux from UBS. A question on mining and a little bit comparing your previous structure to the current structure in terms of distribution. Back in 2008, if my memory serves me well, your warehouses, your inventories were located very close to the mines. Then you changed strategy towards a much more rational global distribution network with three main locations, from which you basically distribute to the main production sites. I was wondering, how far are you on that process, and whether you still hold inventories at the mining point, that you could, at some point, have to write down if the demand environment doesn't evolve correctly?
Well, I mean, we still, to a certain extent, have inventories out at mine sites, but we are and have made significant changes also in our supply chain. Today, anyway, we feel that we have, even though we still are not happy with inventory levels, we still feel that we have a better grip of what we have in inventory and that we have the right products in inventory. And we did a big cleanup of the inventory, of course, just a few years ago with the financial crisis. So, my belief is that we're in a better state with inventories today, in terms of what we have and so on, and a smaller risk of inventory writedowns than what we had in the past.
Yeah. A second question regarding the joint venture with Shandong on coal. Could you comment a little bit of the current environment in China, coal equipment demand?
Yes. Well, I mean, I think that's been, so far, a quite successful joint venture. We earlier this year announced a very significant order that the joint venture got in China, and that business has been developing in a positive way. And China, I think, still has a strong ambition to, well, become less dependent on imported fossil fuels and also, of course, increase the standard of how they're operating their domestic mines. And therefore, I think for an equipment supplier like Sandvik, there's a lot of opportunity in China going forward as they mechanize and modernize their mines in the country. And you still today, quite often see newspaper stories about big mining coal mining accidents in China.
I think longer term, that would be not acceptable in China either, to have those kind of safety standards that today exist in many mines, so those very low standards.
Last question, have you seen any increased competition in wear, wear parts, spare parts, or consumables?
For the mining equipment?
Yes.
Yeah. Not, not really. I mean, there are competitors in that area as well, but I wouldn't say that there's been any significant shift over the recent period of time in that area.
Thank you very much.
Mm-hmm.
Thank you very much. Operator, we still have a question?
We have a question from Mr. Aaron Ibbotson at Goldman Sachs. Please go ahead.
Yes, hi there. Just one follow-up question, actually, on mining, and it was a little bit of your regional exposure and your comment on sort of going down broad-based and everywhere outside of Africa. So if I look at your order intake, it seems like it was up 70% Q on Q in South America, and 36% year-over-year in mining, which I believe is dominated by copper. And then I saw it was down 50% Q on Q in Africa, and down 30% in Australia, which is sort of dominated by coal, I guess, in Asia, and iron ore and coal in Australia. Same picture year-over-year for those two.
So just trying to see, are you seeing sort of difference between, say, the copper and then, I guess, gold, platinum space in Africa, where you seem to be flat Q on Q and year-over-year? Or is it broad-based, as you write in your release? I'm a little bit confused between the numbers and your commentary, I guess.
Sorry about it. I mean, metals like gold and platinum and silver are developing still, I would say, in a quite positive way. The biggest negative trends are for minerals like iron ore and coal on a global basis.
On the copper side, because you're up 70% Q on Q in South American orders, 36% year-over-year, and I assume that's primarily copper, but I don't know for sure.
Where are you now? Sandvik Mining order intake, quarter-on-quarter-
Yeah
... is +54%, but that increase includes a very significant mining systems order. So excluding major orders, it's actually down 16% or-
But if you look at the reported number that you had last quarter, it was about SEK 1.1 billion, I guess, and now it's SEK 1.9 billion, so. But that's a couple of major orders.
Orders. Okay. Yeah. Well, I think this large mining system order is affecting comparability there. If I remember correctly, it was SEK 900 million, that order that we took in Latin America during this third quarter here.
Okay. Thank you.
So, the mining system orders do complicate comparability since they're very significant, and if you get a big order in a quarter, that can. So I think you should exclude that when you look at the development in the underlying business.
Okay. Thank you.
Okay. Is that clearer? I hope so.
Yeah. Fine.
Thank you, and thank you very much. Our hour is up, and I thank you for attending virtually or physically, and we will see you again in one quarter's time. Thank you very much.