Ladies and gentlemen, welcome to the Sandvik Teleconference. Today I'm pleased to present Olof Faxander, CEO, Ola Salmén, Chief Financial Officer, and Magnus Larsson, Vice President, Investor Relations. For the first part of this call, our participants will be in listen-only mode, and afterwards there will be a question-and-answer session. Magnus Larsson, please begin.
Thank you very much, and a warm welcome to you all on this reporting day for Sandvik. My name is Magnus Larsson, succeeding Jan Lissåker as Head of Investor Relations about a month and a half ago. That's the only change, though, and this next hour will follow the usual pattern. Olof will give a presentation of about 10 minutes, and then we open up for questions and answers. Without further ado, Olof, please go ahead.
Thank you, Magnus, and welcome everybody to this telephone conference with the presentation of our Q2 results. If we turn to the second slide and start with some quarterly highlights to start with, we can conclude that we overall had, I would say, a strong market for the Sandvik Group, but it was fragmented in some areas. Mining continued to see very strong demand, and we also saw strong demand for Machining Solutions, but the growth rates are flattening out there somewhat. We have seen fragmented demand in the quarter for Materials Technology, and that's really a situation that has been there for a number of quarters and hasn't changed dramatically over the last few quarters.
On the other hand, Construction has seen a deteriorating market picture, which also Venture has, so that's, I think, the only two areas that have really changed somewhat to the negative during the quarter here. But it is clear that the uncertainty in the world around us has clearly increased as the quarter has progressed, and of course we're all following what's happening, among others, in Europe with the euro crisis and the slowing growth rates in China and so. So we, of course, have a significant readiness in the group even though we haven't taken any clear such steps yet for weaker market conditions.
The invoicing for the quarter was high at nearly SEK 26 billion, and that, in combination with, I think, a good, very good progress with implementation of our strategy and especially the cost savings, resulted in an EBIT of over SEK 4.2 billion for the group. That meant a profit margin of 16.2%. Annualized, looking at the quarterly results, we had a return on capital employed of 24.2%. Looking at the rolling 12 months, we had 17.2%, but that number is, of course, in terms of with the significant one-off items we had in the second half of 2011. Turning then to slide number three, you can see the geographical developments for the group.
And maybe the most interesting number here is the -3 for Europe, where you can see clearly the effects of a weaker market development in the European region, and that's driven especially by the southern part of Europe here. In other parts of the world, we continue to have quite strong growth rates. Many of the areas were driven heavily by our Mining business area in areas like South America, Asia, and Australia. North America continued to develop significantly better than the European market, and we had a strong positive development in North America. Turning then to slide number four, you can look at the developments for our various customer segments here.
The strongest developments and positive developments there is really with the Mining area where we see a flat trend compared to the previous quarter, but strong growth rates and invoicing compared to the same quarter last year. And then, well, most areas have continued to develop positively on a year-to-year basis, with the exception of some weakness in the engineering sector, which is affecting machining solutions, and then consumer-related areas, which over a considerable period of time have been weaker for the Sandvik Group. The strongest development, which has been especially positive for machining solutions, is in aerospace compared to the preceding quarter here. Then turning to slide number five and our order intake, we had a very strong order intake for the group in the second quarter, exceeding SEK 26 billion. And we had a fairly normal amount of Mining system orders at SEK 1.3 billion.
The year-on-year change in comparable items was 0% for the order intake for the group here. Turning then to slide six and our invoicing, we reached an all-time high level of invoicing for the Sandvik Group and an 8% increase in comparable items compared to the preceding year. So a very, very strong quarter in terms of invoicing for Sandvik. Turning then to slide seven and our EBIT. Our EBIT amounted then to, as I mentioned earlier, to over SEK 4.2 billion, and that's clearly the highest EBIT that the Sandvik Group ever has reported. The EBIT margin was 16.2%, and the annualized return on capital employed then 24.2%.
Looking then on slide number eight, the cash flow improved compared to the preceding quarter and preceding year, but still we had a certain amount of capital being tied up in our net working capital, so this is maybe an area where we could have hoped for somewhat better developments given the very strong results. So that's an area we need to continue to focus on over coming quarters to try to improve our net working capital levels for the group. And this is displayed on slide number nine, where you can see that we've had a slight upward trend in terms of net working capital as percentage of sales. We're still, compared to our historic rates five, 10 years ago, on a reasonably low level, but we maintain our target of 25% here for the group and will continue to work towards that over the coming quarters here.
Turning to slide number 10, you can see the bridge analysis from Q2 last year to Q2 this year, and the marginal improvement on the additional sales was 35% for the group. Currency effects were positive, over SEK 150 million in the quarter, and structure and one-offs had a negative impact of SEK 225 million then. All in all then, that meant this result was 4.2 billion for the Sandvik Group. Looking then more specifically at our various business areas and starting with Sandvik Mining on slide 11, we had continued very strong demand for Sandvik Mining. We continued to take large Mining system orders and had an order intake of SEK 1.3 billion in the quarter, and that was especially driven by one major project that we took for coal handling in Asia.
After the quarter ended, we also received a further order, which we announced this morning for SEK 900 million, and that will be reported in the Q3 results that we report on, or in the Q3 order intake, I should say. The profitability, driven by the strong development in sales for Mining, increased very significantly to a new record EBIT level, a new record EBIT margin for Mining at SEK 1.8 billion in EBIT and 18.3% EBIT margin. Return on capital employed was nearly 45% for the business area, and that is, of course, annualized on the quarterly results then. Net working capital increased somewhat from 25%-27% for invoicing. Then turning to the next slide, slide 12, Sandvik Machining Solutions.
We continue to see demand on a high level for Sandvik Machining Solutions, especially the aerospace sector has been particularly strong for Sandvik Machining Solutions, and we see continued strong development in North America for the business area. Asia has had a more mixed demand with China being weaker, and we, on the other hand, have seen some positive developments in areas like South Korea and Japan. Europe has been really flattening out in here, which is a weaker market scenario based on the ongoing euro crisis. We see a stable and strong profitability for the business area at somewhat over SEK 1.8 billion and an EBIT margin of 24.6%.
The annualized return on capital for the quarter was 36.5%, and also here net working capital increased somewhat to 26%, and this is mainly driven by the normal seasonal buildup that we do in anticipation of the summer shutdowns that we have in our European facilities during the vacation period. Turning then to slide number 13, Sandvik Materials Technology. Well, here, I think we can conclude that the step-change turnaround program is delivering according to plan, and I think the management in Materials Technology is doing an excellent job in delivering on their plans, and the cost savings here continue to develop ahead of the original plans that we had drawn up.
The market picture continued to be mixed, and this is a situation we've really seen for materials technology over several quarters now, so it's not really a deterioration, but a continued fragmented and, in many areas, fairly weak market situation. We saw stable demand in the oil and gas sector and weaker demand for standard products and consumer-related products, which is a similar picture that we've seen in preceding quarters. The profitability, despite a somewhat drop in invoicing, increased to SEK 415 million, and that resulted in an EBIT margin of 9.9%, and included in that number is a negative metal price effect of SEK 68 million. Annualized, this resulted in, based on the quarterly results, return on capital employed of 11.4%.
Turning to slide 14 on Sandvik Construction, we see a continued successful turnaround here as well, and I think also in this area the management has been doing a very good job in improving results and development in this business area. The market has been challenging for construction, and they've seen a weakening demand trend during the quarter with increased uncertainties in Europe and mixed demand in Asia. Despite this market situation, we do see an improvement in EBIT from SEK 95 million the same quarter last year, to SEK 222 million the quarter this year, and that resulted in an EBIT margin of 8.6% in the quarter. The integration of the acquired Chinese crusher manufacturer Shanbao is progressing well, and that has influenced the EBIT positively compared to last year.
The return on capital employed annualized for this quarter then is 14.4%, and Sandvik Construction was the only business area that managed to reduce its net working capital as a percentage of invoicing compared to the same period last year then from 31% to 27%. Sandvik Venture, on slide 15 then, showed very strong operational efficiency here and improved its profitability despite weakening demand, so I think also here a very strong performance from the business area. The EBIT margin landed at 18.1% and the EBIT at SEK 341 million, and this was an improvement despite then a lower invoicing compared to the same period last year. The return on capital annualized for the quarter was 17.9%, and here we had a fairly high net working capital as a percentage of sales at 40%. Turning then to slide 16 and the summary of the second quarter 2012 then.
Well, we had a strong and high invoicing for the group, and that, together with good developments and achievements in the new strategy, contributed to an improved profitability for the Sandvik Group, which was actually a new record EBIT level for the Sandvik Group. All in all, I would say that we saw fairly stable demand on a high level, but in the world around ourselves, we see increased uncertainty as the quarter progressed here, and of course, we have a readiness to deal with the situation if the market would deteriorate during the second half of this year. Also, I should mention that we appointed a new Chief Financial Officer who will be joining the company during this autumn, Emil Nilsson, and he's coming from the Ericsson Group here where he's currently employed then. So that was all for me.
Let's return to slide 17 and then open up for the Q&A session here.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad and enter a queue. After you're announced, please ask your question. Our first question comes from Mr. Andreas Willi from J.P. Morgan. Please go ahead, sir.
Good afternoon, gentlemen. I have two questions, please. The first one is on the seasonal ramp you talked about ahead of the summer shutdowns in some of your European plants. Given the uncertain economic environment, particularly in Europe, why did you do a normal seasonal ramp? Some of your competitors specifically didn't ramp up in Q2 not to go into the summer with the usual seasonal inventory. So what's the reason for ramping up in Europe?
The second question, maybe if you could help us a little bit with the modelling going forward in materials technology, given also the weak topline savings coming through nickel charges potentially in Q3, Q4, how should we look at that in terms of the positives and negatives for the second half? Thank you.
Well, seasonally, with building inventories, we have our outages, and I mean, we still see strong demand. We have not seen a downturn yet, so even though we need to have a certain readiness for that, we still need to service our customers and, of course, maintain our sales here. So that's the background of why we've built up the normal seasonal inventories for, for example, Sandvik Machining Solutions. We had some more extensive maintenance work in Materials Technology during Q3.
We're revamping the large extrusion press in Sandviken, so that's also caused the need for some extra inventories within materials technology then. So that was the first question. The second question, well, we have our guidance for the metal price effects, and for Q3, we expect, at the price and currency rates we had at the end of Q2, an effect of around SEK 25 million then for Q3. When it comes to the savings, I would say that the majority of the savings, the target savings, have been achieved within SMT. We still have some smaller parts of that, but I think you can assume that by the end of Q2, we had achieved the bulk of the planned savings that we had for the group then, for the business area.
Then what we've indicated there is that we will save close to SEK 1 billion during 2012, and our aim was to be at that run rate by the end of this year, and around half of those savings relate to Sandvik Materials Technology. That's our current plan, and we have not changed that in any way. However, of course, if the market would deteriorate here going forward, we may well consider additional efforts to adapt to a different market situation, but we have not taken any such measures, I should say.
Thank you very much.
Okay. Next question then.
The next question comes from Mr. Alexander Virgo from Berenberg Bank. Please go ahead, sir.
Thanks very much, and good morning or afternoon, I'm sorry. Two quick questions, please, if I may. I wondered if you could run through some of the bridges for the divisions.
I'm particularly interested in why machining solutions saw a negative price volume impact on the EBIT and also what the structural one-off adjustment in the mining business was. And then the second question, please, just on the end market outlook for S&T. How does that look in Q3 and Q4 given the mixed commentary that you've seen so far?
Well, looking at the bridges, they are in the presentation that is available to you, and it starts on slide 26. The one-off item, the main one-off item we saw in Sandvik Mining was a small tax-related reservation that we did in the business related to South America mainly. So that's the first question regarding mining here then.
When it comes to machining solutions, well, that's more related to that these are very small numbers and very small changes, SEK 175 million on a nearly 7%, well, a little over SEK 7.4 billion turnover, so that's why we've achieved a negative number here. We also, of course, if you take materials technology and venture, which is on the next slide where we've actually had a decrease in sales and an increase in EBIT, the model doesn't really work for that, of course, since we are not just looking at the regular operational leverage in those two business areas but are seeing the effects of the ongoing improvements in turnaround programs in those two business areas.
For Sandvik Construction, also, we have an operational leverage there exceeding 100%, and that is, of course, also an effect of the ongoing restructuring program, so that's why the numbers look a bit strange, one could say, for Venture, Construction, and Materials Technology. I hope that answers your question on the bridges here.
Well, I guess, I mean, as we look at Q3 and the fact that you're going to see probably lower volumes on the topline in machining solutions, I mean, how should we think about the drop-through?
Well, as said, I mean, we were more or less on a flat level, and we had more or less only SEK 25 million price effect, so I don't see any reason why if we had increases or decreases on intake or sales that that would be any different to our historical level.
The reason you see this percentage here is just that it's more or less a flat level, and there are very, very small changes here. So the model becomes very difficult to use when you have very, very small numbers, and especially, of course, when you have, for example, ongoing turnaround programs like we do in material technology and construction. You cannot use that straight off there.
Sure.
Then the second question. Is it okay if I move on to that then?
Yeah, please.
Yeah? The end markets, well, I mean, we don't give huge guidance, but I mean, especially in the end markets, which are energy-related, we see clearly better developments on standard products, and areas which are more consumer-related, we have seen quite weak markets for several quarters now. We don't really see that changing in any significant way right now here anyway.
What we hope will develop to the positive going forward here is the nuclear sector, and this review, we hope, in China will be concluded by this autumn, and hopefully, that will then mean that they will start to release their investments into new nuclear power plants, which will be beneficial then for Sandvik Materials Technology. So that's, I guess, the main area where we hope to see some positive development going forward. Otherwise, well, development depends a lot on how the world around us develops here. Then I must say it's always difficult with these summer months because during July and August, with the vacation period in Europe and for areas like Materials Technology and Machining Solutions that have more than half their sales in Europe, it's very difficult to judge how the market is trending.
You don't really get that picture until you get into September and our customers have started operating at more normal levels again.
Okay. Great. Thank you very much.
T hank you.
Our next question comes from Mr. Klaus Bergelin from Nomura. Please go ahead, sir. Yes.
Good afternoon, gentlemen. It's Klaus Bergelin from Nomura. I have three questions, please. Firstly, on the gross margin. Last quarter, your gross margin was down slightly with the beat versus expectations coming mainly from SG&A. Now, the gross margin is up slightly. How should we interpret the improvements here? Do we already now see the effects from better mix in S&T and from lower manufacturing costs in mining? That is the first question. The second question is really on growth in Asia.
SKF yesterday said that volumes in Asia, they could be up slightly back in this year or maybe in the first quarter of 2013 just by the effect of easy comps, say, keeping the current run rate of volumes flattish. If you would do the same exercise, when do you think your volumes can go positive in Asia, thinking particularly about machining solutions here? And then the third and final question on corporate costs. Trying to understand other EBIT, it's yet again double the normal run rate. Can you talk through here what you expect going forward? Thanks.
Okay. I'll answer the second and third one, and Olof, I'll hand over the first one to you then, but I'll answer the two others first.
First, when it comes to corporate costs, we have some extra costs related to, for example, our 150-year anniversary costs here, yeah, and some other items, but we will have a somewhat higher rate with the new structure that we have in the group. But it's somewhat higher than what you can expect longer term, but it won't be radically different than that. When it comes to Asia, well, I mean, we don't really want to give longer-term outlooks on the developments on that market here. It has been clear that for, for example, machining solutions, China has been developing considerably weaker during this year so far than what we've seen historically here with very, very strong growth rates. China is, of course, in the midst of a political change.
There have been some reductions in interest rates in China, and we'll have to just see what effect that will have on the general Chinese economy, but they are, as you know, clearly lower growth rates than they have been historically for the overall Chinese economy then. Then maybe I'll hand over to you, Olof, if you have anything to add on.
Yeah. Okay. I'll talk a little bit about the gross margin. They're really very small changes, I would say, in the gross profit, and we saw a slight improvement in the gross margin for this quarter compared to the first quarter, but there are small movements, and we have some effect also, of course, of the strategy work that is carried out, so we see some effect also on gross margin on that even though it's minor.
We also have a positive currency effect that also shows in that number, but again, I would like to stress that it's rather small movements that you see in the gross margin.
Yeah. It is a small movement, but I'm thinking particularly on mining here. Your margin in mining is up over 100 basis points year-on-year despite aftermarket sales falling year-on-year, so you have a worse mix. To what extent is this improvement driven by high factory load given the high deliveries and how much it's down to execution?
Well, I would say it's a little bit of a mixture there as well. We have a positive currency effect, but we also have, I would say, 50/50 if you say, a good load because the market is really strong. So those are the main reasons, I think, for the improvements in mining.
Okay. Sorry, not to be provocative, but if the factory load then or basically volumes should come under pressure in 2013, then that sort of that margin boost you have from factory load can then reverse, so this is not sort of the 18.3% margin is not the new floor, basically, for mining?
I don't really I don't do any projections of what will happen in 2013. We see an improvement in mining, and we see also improved efficiency, of course, in that business area. So it's not only that the load is that the market is helping us. We're also doing internal work that helps this.
Thank you.
Our next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead, sir.
Yeah. Good afternoon, everyone. It's Ben Maslen from Merrill Lynch. A couple of questions, please.
Firstly, as you say in the report, Olof, Q3 is normally weaker seasonally. What kind of margin decline would you say was normal across the divisions given the new divisional structure? I know you use time banks in some areas to smooth it, but what would you say is a normal seasonal development across the business?
Well, Olof, I don't think we have any we don't give any guidance on that.
No. No, that's right.
We don't do that.
Okay. Thanks. And then maybe I can just follow up on the mining margin, which is very strong, and you talk about the internal efforts that you're kind of working on at the moment. You haven't done a lot of kind of headcount reduction in mining.
Can you just put a bit more color around what you actually are doing in mining to make it more efficient and get this margin up? Thank you.
Well, I mean, we are reviewing our production structures, trying to optimize where we are producing different products. We're working a lot. We're continuing to try to develop our service and aftermarket business. We are looking at focusing our sales efforts into regions where we have the best growth and profitability opportunities, so. But I mean, in mining, we are seeing such strong growth, so there, it's not about a sort of general cost reduction. It's trying to both deal with the growth rates and at the same time trying to optimize our supply chain and so.
And here, I mean, Sandvik Mining has built a lot through acquisitions of many, many different businesses over maybe the last 10 years or so, and of course, that structure offers a lot of opportunities to try to optimize flows going forward here and find more efficient production routes and optimizing the production footprint and so. So those are kind of efforts that we're looking at here.
Thanks. And then so just to clarify the bridge point, so you did actually take a SEK 75 million extra cost in mining in the quarter?
It wasn't all SEK 75 million, but that's the main part of that one also.
Great. Thank you very much. Thanks.
Our next question comes from Mr. Peter Sjöland from Handelsbanken. Please go ahead, sir.
Thank you. Good afternoon, everybody. Three quick questions, if I may.
Firstly, you mentioned that on machining solutions, you mentioned that you produce slightly more ahead of demand than you usually do in the second quarter due to some internal issues that you want to keep a safety inventory and stuff like that. How that? It was more because of the seasonal buildup for the vacation period and especially EMO then during Q3, yeah. Okay. So it wasn't more than normal because I read it into that, but okay, that answers my question. Secondly, Olof, you mentioned corresponding to the first quarter that everything went your way in the first quarter, right? And now we see another quarter with a strong margin. How would you sort of comment on the second quarter? Was it sort of normal, or was another quarter that everything went your way profitability-wise? That's sort of my second question.
Finally, and maybe most importantly, regarding net working capital. From history, we have heard about efficiency measures many, many years, and I'm just sensing what are we actually going to do in order to take down trade receivables and inventories, and do you have the tools to do that given the lack of succeeding the last couple of years? And is it possible to try to quantify your ambition here in the coming half or year or so in absolute terms, trade receivables of maybe SEK 24 billion and inventories of SEK 25 billion, stuff like that? Because we have been fed with ambitions for many, many years, but it doesn't seem to happen, so could you elaborate a bit on that issue, please? What are you actually doing?
Okay. Yeah. Well, firstly, with the strategy, what went our way?
I mean, I think we've gone through quite significant restructuring and change process in the group, and I think most areas so we had surprisingly few, really, disturbances or challenges with that, and all, for example, negotiations and definitions of the new organization and so landed very quickly and in a very good way, so. That's what really helped us a lot in Q1. What also helped us in Q2 is, of course, the continued good developments with our strategy implementation but also very strong invoicing, so a strong development in the market that helped the strong results we had in the Q2 as well, so.
I think those are the two main areas, but I mean, I think when it comes to the effects from the strategy and the cost base and so, I mean, we should expect that to persist, and then, of course, our invoicing levels and so depend on the market development, but I think we have strong market positions, and we're developing in a good way in the markets, and yeah, especially the business areas that have had quite tough market environments like construction and material technology have done an excellent job in navigating through those difficult market situations. So that's also, I think, surprisingly positive, right?
Thank you.
When it comes to net working capital, well, I mean, we brought it down, I think, very much through more short-term efforts and so and temporarily hit our 25% target. The really longer-term creates a sustainable reduction in net working capital.
It's sort of about redefining processes, finding better ways of working in the group, and that's, of course, something that will take some time to achieve that, and I think it will be challenging for us to achieve the 25% target by the end of this year. We are, however, I think we have an organizational structure that is better suited to deal with these challenges on net working capital, and we are creating much clearer supply chain functions with a totally different mandate in the organization within mining, for example, where I think we have some significant opportunities. So also, I think the coordination and structure within machining solutions, for example, is another area where we are improving.
So there's a lot of initiatives and work going on, but I mean, when it comes to net working capital, that's more something that will take I mean, it's really sustainably achieved at lower levels. I mean, we're talking more 12 months than quarters here before we can achieve something really tangible there.
Okay. Thank you very much.
Okay.
Next question comes from Mr. Colin Gibson from HSBC. Please go ahead, sir.
Thanks very much, indeed. Yeah. It's Colin from HSBC. I just wanted to circle back on two questions, please, if I could. Firstly, the answer you gave to Klaus's question about the other EBIT line, the group activities costs of nearly SEK 400 million this quarter. I just wanted to understand your answer to that correctly.
My interpretation of your answer was that we should expect this to stay at a high level for the remainder of 2012, then to fall for 2013 but perhaps not to fall all the way back to historical levels and perhaps be stuck more at around SEK 300 million than, let's say, SEK 200 million going forwards. If you could comment on that, that would be very helpful. And then secondly, I know we've talked quite a lot about working capital already. I just wanted to ask specifically on venture. You saw a big increase in working capital there during the quarter as a percentage of sales, nine percentage points, I think. Could you just comment very briefly on venture in particular, why that was? Thank you.
Well, with group costs, I mean, the cost for the 150-year jubilee in the group, they were mainly during Q1 and Q2 here, so I mean, that's already in the second half, those kind of costs dropped down. But I think otherwise, your assessment of the future levels is reasonable. When it comes to net working capital and venture, I mean, the big driver there is really Wolfram, which is holding a significant share of sort of the safety stocks for tungsten carbide, for example, machining solutions and so. So that's what's driving the net working capital higher in the venture business area. So it's that specific product area that when they sort of increase their inventory, that has a big impact as a percentage of turnover since venture is a small business area.
But they are holding things that historically would have been sort of on the tooling or SMS business areas working capital.
Okay. Understood. But is there any particular reason that that went up so much this quarter? If it's safety stocks of tungsten carbide, are you concerned about supplies?
No. Well, it's well, we've been looking at manufacturing rates, and yeah, there have been a number of different factors that have been affecting it in that way. But right now, we have somewhat higher tungsten carbide inventories than we would like to have longer term, and well, we will, of course, aim to reduce some going forward here.
Okay. Thank you.
Our next question comes from Mr. Phil Wilson from Redburn. Please go ahead, sir.
Hi. Good afternoon, everyone. It's Phil Wilson here at Redburn. Three questions, if I may. The first is on mining and your order development.
You saw a slowing from 40% to 6% in the second quarter. How do you see the order development for the second half if we exclude the SEK 900 million order you've talked about? That's the first question. The second question is on machining solutions, and organic sales growth of 2% was actually quite resilient, I think, and I noticed that NAFTA grew at +18%. What should we expect for NAFTA growth, sales growth in the second half? Should we expect it to slow meaningfully, or are you seeing share take from people like Kennametal? That's the second question. And then the third question, just returning to the SMT margin, the underlying clean 11.5% margin in SMT, how much of that is due to the savings that you've talked about, but also to what extent do we see some improvement in the ABC mix? Thank you.
Well, firstly, I mean, these market questions regarding the second half, we don't give guidance going forward. I think during the first half of this year for SMS, the strong development in North America has, like others, been driven by an effort we've been making in the aerospace area where we've seen a very positive development for the business area. When it comes to SMT, I would say the main part of the effort so far has been based on cost savings and those parts of the initiatives for SMT. We, of course, expect a positive impact from continued development of the product mix going forward as well. In the first half of the year, the bulk of the effect has been from the cost savings.
Okay. Thank you. Just going back to the mining question, if you can't talk about outlook, are you able to just sort of discuss what you've seen in your tender activity right now and whether that suggests life might get better or worse in mining?
Well, I mean, we've seen a good development in Q2 for mining. I mean, the only sort of warning we've seen there is that exploration orders have been weaker during the quarter, and that can be an indication of weaker miner capex going forward here. So that has clearly been the case, and especially exploration in Australia but also in other parts of the world. We've seen a clear downward trend in order intake for the exploration area.
Okay. Thank you very much.
Thank you.
Our next question comes from Mr. Guillermo Peigneux Lojo from UBS. Please go ahead, sir.
Hi. Good afternoon, Guillermo Peigneux Lojo from UBS. Hello to everyone. Just a couple of questions. First, regarding mining, very strong order intake continues, and I was wondering whether you are happy with your current capacity or you will probably need further additions if you were to actually keeping this kind of order intake growth going forward. Second question is regarding tooling, kind of the same question. What is utilization rates at the moment and whether you can accommodate further growth when it happens or actually you will need to invest in the business in order to accommodate more demand? And then last, regarding mining invoicing, have you been invoicing any large orders in particular this quarter? Thank you.
Okay. Looking at capacity within mining, well, it's easier for us to shift capacity up and down in the mining area since it is a mainly assembly business. So there, we still believe we have a significant capacity to support the growth going forward. We will, however, consider also in the future doing investments which in part could be capacity-related but mainly about improving our footprint like the investment we did in Australia to create a more consolidated manufacturing footprint for the business area. For SMS, I mean, here, we still believe that we have capacity for further growth beyond our current levels here, so yeah, further growth doesn't necessarily need to trigger further investments in capacity even though we will need to consider how to develop our capacity going forward, and most likely, we're looking at developing our footprint towards regions like Asia and so to have more regionally localized production in the future.
Then mining invoicing, well, we didn't really have any significant projects or other items disturbing comparability in the mining invoicing number that we've shown for this quarter.
Okay. Thank you. Can I follow up with one question regarding R&D? It seems like very consensually, most of the engineering companies are rising R&D as we speak. Is there a reason why you are acting on R&D as we progress through 2012, or is this basically a normal step up?
I would say it's a quite normal development, but we are focusing of course, R&D investments are extremely important for the future of our company and, of course, maintaining our competitiveness against new competitors and so.
Is this competition, or is this basically your anticipation of it?
This is more an anticipation of future competition. So I mean, we need to continuously if we want to maintain the kind of margins we have in our various business areas, we need to continue to develop new generations of products. That's sort of part of our business model, especially in, for example, SMS. When launching the next generation of products is a big part, an important part of the business model with the continuous new product launches. We are on the group somewhat increasing the R&D effort with our new structure, and so we have increased the responsibility of the R&D board in the company, the group R&D board, and they also have a budget of their own. So we are going to drive more projects on a group-wide level where we see opportunities involving several business areas, and that may lead to some increased efforts in R&D going forward for the group.
Last question from my side, I promise. Shandong joint venture, when are you starting to see, or can you guide us a little bit on how would you expect sales to be progressing?
Well, we have now inaugurated that factory, so the sales from that should gradually start developing in August. And the Chinese coal market is, I would say, very attractive and gives us lots of opportunities for the future.
Thank you.
Yeah.
Our next question comes from Mr. Aaron Ibbotson from Goldman Sachs. Please go ahead, sir.
Hi there. It's Aaron here from Goldman Sachs. Three questions, if I may. So the first one is just on mining, and I hear you mentioned a couple of things on exploration, but I was just wondering if you could say something about whether large mining houses have changed their communication towards you.
It's very clear that they've changed their communication towards the market. So are they talking about more tougher price requests? Are they talking about less expansion, etc., as they are with the market? Secondly, just a quick one on net debt to EBITDA or leverage and whether, if this slowdown continues, you would consider a special dividend. Is that something you want to comment on, or are you going to refer to the board? And finally, just if you could qualify your sort of, should we call it an outlook statement, a little bit. You mentioned that macroeconomic conditions are increasingly uncertain, which I guess we can all observe, but are you referring more specifically to what Sandvik is seeing at the moment, and if so, what exactly are you seeing that makes you put this statement in? Thank you.
Mining changed communications. Well, I mean, we're, of course, hearing the same things as the mining houses are communicating externally. Beyond that, we don't really see any significant change here. I mean, the main difference that we've seen in the mining market lately is this change for order intake when it comes to exploration, so. But I mean, going forward, we still believe that the need even if expansion slows down in mining, we still see a big need for automation, mechanization of mines, improvements of costs and energy efficiency. So we still believe that that trend will continue even if the very strong capacity expansions will not be there in the same way or if that would change in the future, so. But we don't see any dramatic change in communication to this point in my work model.
I mean, especially dividends, we have no such communicated plans right now, and that will be I mean, well, it's not on the agenda at the moment anyway, so that's something for the future then. Then when it comes to our guidance, I mean, we're talking more about the or it's not really a guidance to the future. We're just concluding that the uncertainty in the world around ourselves has increased. When it comes to our business areas, I mean, mining has continued very strong. SMS, the growth rates are flattening out at a very high level, and SMT sees a continued fragmented market picture, which SMT has been seeing for quite a few quarters now. Areas where we've seen a deteriorating situation has been construction. The markets have become worse during the quarter and also for parts of venture, which has been affecting them as well there.
So that's our sort of general the summary of our general market picture at this point in time.
Okay. Thank you very much. If I can just sort of follow up slightly on that last one. So when you're looking at, for instance, machining solutions, have you seen any development over there sort of in June or over the last few weeks or in your communication with your large customers that make sort of you see this elevated level of caution, or is this basically only referring to lower order intake for the quarter as a whole and what we all read and see in the papers and PMIs, etc.?
Yeah. It's more related to what we read in here in the papers or what we all read. I mean, I think I mentioned earlier. I mean, July and August are very difficult months to judge with the vacation period in Europe, so. For a business area like SMS with more than half its sales in Europe, that region has a big impact, and it isn't really until September that you really get a clear picture on how things are picking up again after the vacation period, so. We haven't seen anything to date that has made us act radically differently from what we've been doing in the past, but I don't think that we will really have clarity on if there's a trend shift in the market until we get into September when production is starting up in Central Europe and so on and the pace that is starting up there.
Okay. Perfect. Thank you.
Very good. Let's take one last question then. Yeah. Next question comes from Mr. Sebastien Gruter from Société Générale. Please go ahead, sir.
Hi. Good afternoon. Just two quick questions. My first question is about venture, and you have I mean, within venture, on materials, Diamond Innovations, and Wolfram supplies, the machining solutions business. And I'm just wondering if we should look at the weak divisional order intake and the higher inventory as a negative leading indicator for the upcoming demand in the cutting tools industry or if I read too much in that. And my second question is just about inventories. Should we expect Sandvik to cut inventories in Q3, or should you produce in line with demand?
Okay. When it comes to I mean, the developments of Wolfram for our own business anyway, I would not conclude that the buildup there has anything to do with the change in the market here, so. And Wolfram is, to a great extent, an internal supplier of tungsten carbide here.
I mean, one thing which is building and which we need to considerably balance is the share of our recycled inserts compared to the APT we're buying from China, for example. So when we have a lot of recycled inserts coming in, then we need to cut the purchases of virgin material. So there's always a balancing act going on with the inventories of Wolfram, but I think it's we would be taking it too far to read in a downturn in the cutting tool industry into the inventories of Wolfram. Then when it comes to the inventory in Q3, well, I mean, we have a buildup, and that starts shrinking away towards the end of Q3, so. And it's really when we come into Q4 that you start to see a return to more normal levels based on the summer buildups here, so.
There should be some decrease during the second half, but it would be during the autumn months then that you would see that gradual decrease.
Okay. Many thanks.
Yeah. Okay. Well, thank you very much, everybody. I don't know if you want to wrap up, Magnus, or.
Well, that's what I intended to do. Thank you. And thank you very much, everyone. And the hour has come and gone, and thank you all for listening in. If you have any further questions, just give me a call or drop me a line, and I'll be doing my best to serve you. Otherwise, have a good day ahead.