I want to wish you all very welcome to this presentation of Sandvik's third quarter results, 2010. And that includes, of course, the audience we have here in Stockholm, but also the audience in our international audience. We will do as normally done in these events. We will have a short presentation of the results made by our CEO, Lars Pettersson, and after that, we will follow up with a Q&A session, where also our CFO, Ola Salmén, will participate. And I think that we have roughly one hour to spend on this, and I would like you, Lars, to start with the presentation.
Jan, thank you very much. To all of you, again, welcome to this presentation. Well, we have just, as you know, finished the third quarter, and this continued to be a quarter with a very good sequential growth over what we have seen now for three, four quarters. We saw most markets continue to improve on an organic basis, and we saw a growth for all of the business areas. We had an operating profit of just above SEK 2.5 billion, or a margin of 12.5%. We had a very high cost efficiency still, and increased volumes, a very good product mix development, but a number of items affecting comparability with about SEK 200 million in the quarter. I will come back to this later on.
The currency effect for the quarter was a SEK -280 million versus the third quarter of last year. This was a significantly higher number than we had guided for, and it was a significantly higher number than what we actually guided for, even in our capital markets day. Ola will come back to you a little bit with issues around this and more details, but this was certainly one of the more negative aspects of the third quarter. A more positive aspect of the third quarter, however, was the fact that the net working capital in relation to sales now dropped to 27%, in spite of the fact that this is a third quarter, where normally the net working capital to sales increases as a consequence of lower invoicing.
This was done partly because of a better operating profit, but also because we continued to reduce our net working capital in terms of inventories and on the receivable side. This led us to having an operating cash flow of just shy of SEK 4 billion for the quarter, which is, I would say, by far exceeding the best third quarter we have ever had, and actually matches the best quarter we have ever had as a group. And even cash flow after acquisitions and investments was just shy of SEK 2.9 million. Again, a very, very good number, something that also reduced our net debt in a significant way.
If we look at the different markets, you can see now that we continue to grow in Europe with 20%, in North America with 35%, South America with 27%, Africa with 30%, and in Asia with 32%. And the only negative region from this point of view was Australia, - 5%, where we have very strong comparison numbers on the project sales invoiced in the third quarter of 2008 to 2009. You can also see from this number now that actually Europe, for the first time ever, even if we have continued to grow at a rapid pace, is now less than 40% of the turnover for the company. Indicating, of course, the fact that I have further described of a move south and east of our business volume.
At the different customer segments, you can see we enjoyed growth in all areas, with the exception of Mining and Construction project business, which was the slowest business to slow down, both from an order intake and an invoicing point of view, and of course, for natural resources, also the business that is slowest to come back, affecting order intake and invoicing in Mining and Construction compared to the third quarter of 2009. Here, the activity level is increasing, and I expect and hope that we will already in the fourth quarter see better numbers, both on the order intake and invoicing side. But this business is not likely to improve in a very significant way until we move into next year.
If you look at the sequential trend compared to the previous quarter, you can see that we enjoy flat development in the construction market, in the automotive market, aerospace, and, as I said, in the projects business. Whereas engineering, mining equipment, mining aftermarket, and the consumer-related business has continued to strengthen. Looking at the order intake, we are now enjoying a continued growth on a sequential basis, but we're also still about 11% shy of our previous best third quarter, which is now back in 2008, just before the drop in the market. Nonetheless, indicating that we are continuing to build backlog. On the invoicing side, we are also continuing to grow, but here we are on a group average, 18% below the top level where we were in 2008.
In this area, you can say that in Mining and Construction, for mining equipment, we're pretty much back. Mining aftermarket sales and consumables are well above, whereas Tooling and Materials Technology are developing around this area of 15%-20% below the peak levels, though with a very positive trend. For the operating profit, it continued to strengthen, of course, compared to the third quarter of last year, but we are enjoying a slower and less of a margin in the third quarter as compared to the second quarter, and I will give you a little bit of background to why that is the case.
But again, just as I indicated initially, I think the big positive effect we had, and perhaps the most, in my view, most important and significant aspect of this quarter, is the very, very strong operating and free cash flow that we enjoyed. As you can see, now, CapEx in relation to depreciation continues to stay well below 100%. And included in this number is the investment we are making in steam generator tubes for the nuclear industry, which is prepaid. So actually from a cash flow point of view, this number would, on real terms, actually be lower than indicated by the curve. And this is a development that we expect to see going into next year as well. For Sandvik Tooling, we saw a continued sequential demand in most markets.
Europe continued to develop, very much driven by the export industries, a good, strong development in Germany and Northern Europe, but also in parts of Italy, in the UK, in the aerospace sector, and parts of the French economy. In North America, we continued to have a very strong development and very robust, I would even say, surprisingly strong development. We are gaining market shares in North America, but also there is a strong underlying development in North America's engineering industry, driven to a very significant degree, also by exports. In Asia, we continue to see a good continued development.
We saw a very strong development from the energy sector, umbilicals, oil and gas, but predominantly, of course, you can see now also that the rate of order intake and the number of projected nuclear plants in the world is continuously being upgraded, and we received a couple of more very important orders in this area. And general engineering has continued to develop here as well. We have a positive continued price effect, not on the peak levels where we were in, in 2007 and 2008 of 3%-4%, but at least a few percentage points. An operating profit of 16.1%, based on a good cost control, better volumes.
If we include the items affecting comparability of about SEK 100 million and some one-offs with currencies, we had an underlying like-for-like comparison margin of, yeah, somewhere between 18%-19%. Net working capital shrunk to 26% of invoicing. For Mining and Construction, the very strong global recovery has continued, driven by a very high demand for metals and minerals, but also, of course, by very high metal prices, driving profitability in the market. Mining continues to be significantly stronger than construction, where the activity level, in spite of the big stimulus packages, has not yet taken off. Asia and Africa are the strongest markets for Sandvik, and a very strong demand from the aftermarket in terms of consumables and services. High metal prices, of course, now continues to support increased mining CapEx.
The order intake, excluding major project orders, increased 28%, and the operating profit of SEK 1.2 billion or 14.5%, based on a good cost control, the better product mix. And again, disregarding some of the one-offs, I think we are now at peak levels in Mining and Construction in a historic perspective. But again, we had a negative currency effect of SEK 100 million in the third quarter. Here, we have reached our objective of 25% of net working capital to sales already in the third quarter, which I think is very well done. For Sandvik Materials Technology, we saw also a continuous increased demand, where energy and mining are strong drivers.
In the mining sector, as you know, we are the predominant player in supplying mining, rock drilling steel to the market, not only to Sandvik, but to most of our competitors as well. North America, Europe, and Asia are also here, the strongest markets, and we have continued to receive additional orders to the Chinese nuclear industry. Just as a side show, I think you have maybe already seen that the Chinese government has now upped the number of predicted nuclear plants before 2022 to 110 plants, more doubling than the previous forecast. On the portfolio management side, we have created a joint venture based on two separate joint ventures with Carpenter Technology on powder manufacturing and powder technology-based products to be delivered into the market.
An important area for us going forward in terms of being able to supply more sophisticated alloys and components to the markets in the future. We had an operating profit of SEK 200 million, or just shy of 5%. We had a big seasonal negative effect. Some of it is a normal negative effect based on the fact that we have the summer shutdowns and the maintenance programs, but also some startup issues, especially affecting July and September or July and August, which partly were offset in September related to... It's a very complicated chain of manufacturing operations to be started up, and we had some problems here. They have, by and large, been solved by September.
And also some other issues affecting comparability with about SEK 50 million, not the least related to the setting off of a profit sharing to our employees. Here, the net working capital increased to 33%. Again, this is very much affected by the seasonal effects we have on the invoicing side, something which will definitely go down in the fourth quarter. If we look at the quarterly figures, then, we could see that the order intake increased 23% in price and volume compared to last year, and invoicing 21%. The EBITDA improved to SEK 2.5 billion and the margin to 12.5%. And again, we're coming back to the cash flow, the operating cash flow of SEK 3.9 billion and the free cash flow just shy of SEK 2.9 billion....
If we look at the bridge analysis, I think the most important number, perhaps, in this figure is the fact that the profit margin, you can see that the margin effect on additional volume here is just, is 75%. I think this is a good indication of the fact that we continue to retain the cost savings, the predominant part of the cost savings that we generated in 2009 are still kept. We are increasing a little bit on the headcount as a relation to, our increased business activity in Mining and Construction. It's mainly service and sales personnel. We are increasing our marketing and sales capacity in China, and to some degree in the production as well.
And we have hired additional personnel related to the investment we're making in the nuclear sector, in Materials Technology, in order to be able to facilitate the startup of the new investments next year. And finally, we are adding a fifth shift to part of our operations in SMT to meet demand. So all in all, disregarding those cost increases, I think we are having a good control, cost control and retaining pretty much costs in relation to what I expected coming into 2009, even if the business has developed better than we expected. Again, I think one of the big successes in this quarter was the reduction of working capital.
As you can see, thanks to the very strong efforts in the group, the strong focus and the well-implemented processes now, we're on the way to meet our objective a little bit sooner, I think, than we originally anticipated. So if I summarize the third quarter, we saw a continued market recovery. We had a seasonal decline, which was partly offset by the sequential improvements. We actually managed to grow. We had an operating profit for the underlying which improved, a positive product mix, and a positive price effect. We improved on the capital efficiency, and we had a very, very strong cash flow. So with that, I would like to invite Ola to come to the stage, and we're open to take your questions, please.
Okay. Thank you, Lars. As usual, we will have two microphones here in Stockholm to take your questions, so please wait until you get the microphone before you raise the questions. We will also invite the international audience, of course, to raise questions here. So raise a hand, get your microphone, and after that, you can pose your question. We have one here. So we start with a question here from Stockholm.
Peder Frölén , Handelsbanken. With the cash flow, you now reached a net debt to equity on 0.8. You have a target to reach 0.7. My question is really, are you now starting to look at acquisition after a couple of very strong quarters in terms of cash?
I mean, Sandvik, we never really shied away from making acquisitions, not even during the heat of the recession, as you remember, where we managed to acquire Wolfram Bergbau last year. And I can, as a side show, just say that this has developed in an extremely good way for us, both on the growth and profitability side. So we have continuously looked at acquisitions. I don't think the change in net working capital, in net debt changes our attitude to acquisitions in any significant way. We are, we're continuously looking for acquisitions. I wouldn't say that the appetite has changed to the better or the worse. It's pretty much there.
Okay, thank you.
One more question from Stockholm.
Hello. Johan Trocmé from Nordea. Two questions, please. Ola, could you just comment a bit on the tremendous improvements you've seen on the cash flow side? Have you... I, I think you alluded to, Lars, that you've progressed a little faster and better than you anticipated. Do you expect that there will be any setbacks from this, or is this a new sustainable level from which you might even raise the ambition further at some future point?
If I start with that one, if we look at the net working capital development, that has been indeed, as Lars was saying also, that development has been very positive and also faster, actually, than we anticipated. Whether we should change that objective or not, it's too early to say, but I would agree with Lars to say that we will reach that target sooner than we expected from the beginning, really, which was 2012. In terms of cash flow, we will continue to have a good cash flow, basically coming from a strong result, but we should expect that the net working capital will, in absolute terms, increase when the volumes are continuing to increase.
So we won't see a reduction in net working capital, as we have seen in this year and last year, in absolute terms any longer. But in relative terms, it will continue to decrease.
My second question, Lars, if you just reflect for a moment on your market position for the group, I mean, now that the financial crisis is hopefully behind us, and now that Sandvik is back into, by historical standards, very good and solid financial shape again-
Mm.
What do you think has happened to your market positions through this period over the past two, two and a half years? And, and, and from today, what opportunities do you see, if any, looking forward for Sandvik to further improve those positions?
I think once again, I mean, this is not the first recession I'm through, and I think I can draw pretty much the same conclusion that I have drawn through the recessions we were through ten years ago, or Asian crisis or the early nineties, is that what happens in a crisis like this is that you normally strengthen your market position more than you can do in a strong business climate. In, as you say, the strong players in the markets get to be a little bit stronger. I mean, we managed, in spite of a rather complicated financial situation, a very high debt, to make a very strategic acquisition. We continued to build five new manufacturing plants in China, which were operational as we came into this year.
We managed to continue to hire people, not the least in China, and many other, I think, very offensive moves that we managed to do last year in spite of the difficult situation, that many other players in the market who were in a weaker situation were unable to do. And of course, we're harvesting from that now, and should harvest from it over the next few years. So I think all in all, our market position has significantly been strengthened.
Can it strengthen any further, the way you see it from here, or have you gone as far as you can go, you think?
No. The day I think that, I think I should do something else.
Okay, thank you. I think we should invite the international audience to this Q&A session. Operator, can we have some assistance?
Certainly. Please press star one to ask a question over the phone. Take our first question from Fredric Stahl of UBS. Please go ahead.
Good afternoon, gentlemen. It's Fredric Stahl here from UBS. You have to bear with me here, because it could be a bit long-winded, but if you look at Tooling and your current margin, let's say that the clean margin is about 18% in the quarter, and then compare with the kind of profitability you did at the peak in 2008, and look at where the volumes are relative to that, to that point back in 2008, so we're about 15% below the peak levels right now. It looks to me, when I play around with the numbers, that you will need operating leverage that is higher than what you normally achieve when we're a couple of quarters into the upturn, to be able to beat your previous peak margins.
Should we expect operating leverage of 60%-70%, even as we go into 2011 and through 2011? Or are there reasons why Tooling is not a business with higher peak margins today than it was than from them, for example, the other divisions?
Just answering your question the other way around. Given the very significant cost reductions that have taken place in Tooling that are of a structural nature, I mean, there's been a number of... And I would say—I wouldn't say the final one, but as, you know, we have one more issue now with, with the fact that we're closing one plant in the U.S. and taking the cost for it. Those costs are, of course, of a non-recurring character, and, and driven by the fact that we have continued to have a positive price effect. As we increase utilization in this system, I mean, I would be very surprised getting back to the same peak margins if we don't beat the, well, peak volumes, if we don't have a better margin.
It's fair to say that you still have, you know, productivity gains and that you can hold back costs as your volumes increase through the next couple of quarters?
Absolutely.
Thank you very much.
Fredric, remember that we are still well below our installed capacity when it comes to volumes, and that sort of secures the high leverage for a number of quarters going forward.
Sure, I understand that. Thank you.
Okay, thank you. Another question from the international audience, please.
Take a question from Ben Maslen of Merrill Lynch. Please go ahead.
Yeah, good afternoon, everyone. It's Ben Maslen from Merrill Lynch. Three questions, please. Firstly, on the mining side, you have a bigger exposure to coal markets than some of your peers, and we've seen weaker comments from some of the U.S. players that sell into those markets. Can you just say how demand in the coal mining market is developing at the moment? That's the first question. Secondly, I know you say you're gonna, on the Mining side, gonna deliver more large projects in the fourth quarter. Would you expect that to have a negative sequential effect on the margin, or do you think you can offset that with the normal operational gearing? And then just finally, on Materials Technology, can you just talk a little bit more about what's going on in terms of demand for standard products?
You say you're walking away from business that is more low value- added, and I understand that, but doesn't that mean that the overall utilization rates you have in your facilities, just stay, you know, suboptimal, and that just keeps dragging on your margins? You know, when, when will you get to the right combination of a good mix and high volumes? Thank you.
Well, first of all, on the Mining sector, the Coal sector, I think it's driven by a couple of different. One of them is that our business there is driven by the fact that more and more of the coal mines need to mechanize and upgrade their equipment. Secondly, of course, you have still a growth in demand for coal. And again, remember, our exposure to North America coal is very small, really. The predominant part of our sales into the coal market is in Africa, Australia, and China and India. So in those markets - and also, you have the safety issue here. I mean, there's a lot of issues in the coal mining market which are being addressed. So I think from us, the coal demand has continued to go up.
Okay.
If you last look at the, well, depends on how quickly I don't think in the fourth quarter we will see a huge drop-down on the margin based on the increased share of a project business. That could occur going into next year if we start to invoice very big projects in a given quarter. Then again, I think it's important to remember, it has a very, very positive effect on return on capital employed. Since it's all prepaid. So I think I think it's important not to focus only on the margin side there, but to recognize that it's the return on capital employed, which is really driving that business. But I don't expect it to have a huge impact on in the fourth quarter.
On SMT's demand for standard products, this is a market, though, that is has come under a rather significant amount of price pressure in the market, not. Again, we have decided to gradually grow our A and B products to a bigger and bigger degree, have the capability to discontinue this business. We're rather far ahead in that process, and I would say that we are moving into a situation right now that on a selective basis for standard products, we have an agreeable margin, whereas there are parts here that we are, as you absolutely correctly are commenting, stepping out. But it's not having a significant impact on underutilization of our manufacturing system. As a matter of fact, on the contrary, we have just upped to five shifts in our steel smelting and rolling plant.
That's an indication, actually, of increased utilization rather.
Okay, so as a follow-up on that, sorry, the mix running through the business at the moment in, in SMT is a good one?
It's better and better, absolutely.
Okay. Thanks very much.
But you are right, in that standard products, there is a strong price pressure in the market.
Okay. Thanks, Lars.
Thank you. Should we come back to the Stockholm audience, and we have a question on the floor here?
Yes. Anders Ericsson, SEB Enskilda. You say that you have negative currency effects relating to balance sheet revaluation. But I think the SEK 200 million you give us, that's a year-on-year number, since I think you had a negative corresponding effect in Q3 the year before, it makes it a little bit difficult to interpret. So if I put the question like this: How much higher would your EBITDA this year have been, had you not had this revaluation effect?
Okay, yeah, you're right there. We had a negative revaluation effect also last year in the third quarter, and if we just take the revaluation effect this quarter in 2010, that was about little more than SEK 300 million. So if you— That, that's the amount really that you should take away in terms of looking at this quarter only, and the currency effect. It's the bridge that is the SEK 280 million.
Okay, thank you. And also, if I may, on SMT, could you please again confirm how big the effects were from the production problems you had in the startup phase, and what you see as an underlying margin in Q3, and if there is any reason why we shouldn't expect a normal seasonal improvement in Q4?
I would say there's about one to two, somewhere on a percentage or somewhere between 1 and 2 percentage points on the margin.
Okay, and any reason
No.
For why that?
No, no, I mean, again, I mean, this is something. It worked very well in September, and I don't see it. We're not having a production shutdown, that's so I don't see we will have any startup problems either.
Okay. Thank you very much.
Mm-hmm. Another question here in Stockholm?
Yeah. Hi, Mats Liss, Swedbank. Just coming back to production, you're going forward in the fourth quarter. Well, the simple question, I guess, how will you sort of— Have you... The daily production rate compared to the third quarter, are you still? And maybe a comment for all three business areas.
I would say, basically, we are now in a situation where we are no longer underproducing. Even if we had a very good reduction of net working capital and inventory in the third quarter, it was very much related to the fact that we had summer shutdowns. So manufacturing rates as of the end of the vacation period and going into now, the fourth quarter, will be pretty much in balance with the order intake and the sales rate, which means that we will continue to grow manufacturing at the same rate that the underlying growth.
And the cost of under absorption during the third quarter, could you comment?
I would say there was no significant
Number.
Number on that, on that one.
And then, well, you mentioned your nuclear power plant supply-
Mm-hmm.
I guess it start in 2012, but could you sort of how much will it affect 2012?
It's too early to have a strong opinion about ... I have to say, we haven't gone through the budget and the forecast for 2012, so, and 2011 yet. So I think it's hard to give you a hard number. What I can say is that the first step, basically doubling our output, is now being utilized in the fourth quarter. We are have started up the manufacturing now in the first step, which doubles our output, and we should start to see some effects from that now in the fourth quarter. I'm afraid I'll have to come back to give you a bit more solid number as we meet next time. I don't. I can't give you a good number today.
Okay. And finally, just about the FX or currencies again, how much is the underlying effect, and how much was the receivable effect of calculating down to current rates?
Coming back to Anders' question, if I may answer that in two ways. The bridge between third quarter last year and third quarter this year is SEK 200 million. But if you just look at this quarter, this year, it's about SEK 300 million, a little more than SEK 300 million.
And the part of that figure that won't be repeated in the fourth quarter, if we sort of keep the current rates, how much is that?
That's the whole. I mean, this is due to the movements of currency rates this quarter. So if they don't move, there will be no such revaluation effects. But we... Of course, we will have a negative currency effect if the currencies are on the same level as they were end of September, compared to what it was in the fourth quarter last year.
Okay, thanks.
Thank you. Another question from Stockholm floor. We have one in the front here.
Yes, Anders Roslund, Ålandsbanken. I have a question rather regarding the Q4 result. You talk a lot about seasonality in the third quarter. Normally, wouldn't you ramp up production in, ahead of coming bigger revenues in the fourth quarter, especially in, in, Mining and Construction, and but also in the Steel division? How do you cope with the stronger fourth quarter?
I don't think we don't really have a problem. As I said, we have increased headcount a little bit. We have moved up to a fifth shift in the steel manufacturing and rolling plants, and we have added some headcount in preparation of what we see as an increased growth. But given this, we have a very good delivery security, I would say, across the board in the group right now. So I don't see it being a problem to sequentially just increase output by productivity.
Okay, and in the construction and mining division, would there be more project business then?
The project business, as you know, is from Sandvik, predominantly a business where we design, whereas we don't produce on the project side, anything. Everything there is outsourced. So it's done on a turnkey basis, and it's also hired in or rented in personnel who does the assembly. So in that area, if we start to ramp up on the order intake, and as we are ramping up on the invoicing side, it's predominantly done by external suppliers and personnel. The design office we have intact.
Thank you. Let's move back to the international audience, please.
We have a question from James Moore of Redburn . Please go ahead.
Yes, good afternoon, everybody. It's James at Redburn. Just two questions, if I could, and they're both longer term, sort of conceptual questions. You, you've talked about the organic drop-through of 75% this quarter. It was around 100% last quarter. It's a big number at the moment. There are lots of things that drive that, from volume, price, mix, over/under absorption. As you move forward into 2011, and maybe 2012, and you think about the issues in 2010, some of which may drop out, some of which may continue, what do you think is the right conceptual level of incremental margin at the organic sales level for the group? Secondly, you talk about really good U.S. order growth in the quarter, and we've seen some of the U.S. macro data, like durable goods, weaken.
You're normally quite sensitive to the general industrial production environment. Why do you see a bit of a disconnect between your positive results there and perhaps some of the, the less positive macro data in the U.S.?
Well, first of all, I think, I think the best way to think about the margin progression and the margin effect is, as long as we continue to move back up to the level where we were at the peak, we can achieve this with a very good—with a, with a kind of margin progression that you have seen up and until today. Not necessarily a hundred percent, because there were some, you know, you open up some, some reserves you have made, so, so they add, of course, to the margin effect. But going forward, what we have seen in this quarter, somewhere in that area, as long as we are in Tooling and in Materials Technology, in the areas, moving up to the level of where we were, you, you can pretty much calculate on that level.
When we go significantly above and beyond that level, of course, then we will have to start to invest again. That. When that happens in time, James, is very much dependent on how quickly the market continues to grow. But I think the best guidance I can give you is that given coming up to those levels of sales, that's pretty much what we will see. In Mining and Construction, the situation is very different. Here, on both the equipment side, especially, what we're seeing is, of course, the fact that we are very heavily outsourced, so the margin effect is much less. We don't have that much fixed cost ourselves, so the margin effect as we continue to grow in mining is much less.
There we have, on the equipment side, already met the peak level that we were at in 2008, and on the mining consumables, we are actually by far exceeding it right now. There we are already well above, and might probably have to make some minor investments in terms of coping with the increased demand. Your question about the U.S. is very interesting, and I actually took the time to spend a week in the U.S. to meet with some economists there to try to dissect the numbers and understand why we are experiencing such a tremendous difference compared to, I would say, what the more aggregated GDP numbers and durable goods numbers would indicate.
And I think the basic, just to summarize a very long explanation in a short way, is that, the U.S. manufacturing economy is, is developing in a very good way compared to the service economy or consumables or, entertainment or leisure or whatever, based on the fact that U.S. manufacturing enjoys a much better competitive environment now, both on the import and export side. They never went to the excesses on the cost side, and they are also rather well invested. And I have to say, at the last IMTS exhibition that we had in August, September here, I think that the attitude around the manufacturing companies was very, very strong, and I think that was also reflected by very high activity in the machine tool acquisition side.
So all in all, I think the U.S. manufacturing economy is probably the one developing the best in the U.S. now, whereas anything related to services or consumption is significantly down. One has to dissect the U.S. numbers quite a bit to get to understand this.
Just to follow up on that, you see that environment in the U.S. continuing with the visibility, albeit limited, that you have over the next, you know, few months and into next year?
Yes. Knowing that we never give a forecast, I can say that up until today, we have not seen any signs of weakness in that progress.
Interesting. Thank you very much.
You're welcome.
Thank you, James. I think we take another question from the international audience, please.
Next question comes from Johan Eliason of Cheuvreux. Please go ahead.
Yeah, hi. I have a question regarding Tooling. You say that you have SEK 100 million charges related to costs as closure of the Crystal Lake, but then you also say Crystal Lake is SEK 50 million. So, what else have you done in Tooling that you highlight?
...There are a number of smaller issues there that, you know, that adds up for the rest of the SEK 50 million. Housekeeping, I could say.
Yeah, and also-
But isn't it so that you always, every quarter now and then, do close a minor plan? So what sort of extra would you highlight in this quarter?
No, except from the closure of Crystal Lake, which is a smaller part of that SEK 100 million, you have also the part that is related to the extra provisions for profit sharings and variable salary systems you want.
But that you say is another SEK 100 million.
No, you have the currency effects on Tooling, and then you have the one-offs or the combination of Crystal Lake and these variable salary systems that aggregates roughly SEK 100 million.
Okay.
Yeah.
That's not what you're writing, but okay, then I have it correct.
That is what we are writing.
Okay, thank you. Another international question, please.
Move on to our next question from Natalia Mamaeva of Citi. Please go ahead.
Hi, good afternoon, everyone. Just a quick question, trying to understand the reason for margins decline sequentially in Q3 versus Q2 in Mining and Construction. Obviously, you talked about seasonality, but if you can be a little bit more specific, what else is there that perhaps we're missing? Thank you.
I'm not quite sure that I really heard your question. Could you repeat that, please?
Yes, the margin decline in Mining and Construction, from Q2 to Q3, and the main reasons.
I think in Mining and Construction, the main reason for the margin decline is actually the currency effect-
Yeah.
- which is,
Correct
... very, very significant.
Mm-hmm.
On top of that, as we have spoken about before, they also have the fact. And this is not there is a periodization effect in all of the areas, but predominantly in Tooling and Mining and Construction, which I think Jan alluded to earlier, is that given the fact that we're now starting to see a result for the year, which is significantly better than what we expected in the beginning of the year, we have to make provisions now for variable salaries and profit-sharing programs in the group on an international basis to be covered in two quarters, that in effect, had we known ahead of time, and we could have convinced our auditors early on that this was going to be the case, we should have taken them through all of the fourth quarters of the year.
So half of that reserve is basically to be taken out, if you want to make a comparable underlying estimate of our margins, and should have really been booked in the first and second quarter. This wasn't possible, given the fact that we didn't know what we know today. But in retrospect, that's the way it is. So about half of that total number there is related to something that is more of a, I wouldn't say it's a an error in periodization, but it's a periodization effect.
Thank you. That's very clear.
Thank you.
Thank you. Should we move back to the floor here in Stockholm? Any more questions? No hands risen, so we take it back to the international audience again. Do we have any more questions?
Take our next question from Klas Bergelind of ABN AMRO. Please go ahead.
Hi there, it's Klas Bergelind. Yes, three quick questions. Just firstly on SMT, can you comment on delivery times and whether you've seen any changes, obviously, given the order rate that you're having, and whether you're seeing any upwards pricing pressure? Secondly, if you can just comment on the, I guess, the personnel cost provisions, and how many more quarters we're likely to see such personnel provisions coming through? And will it be at a similar level as we've seen this quarter, or presumably, as your profits are rising, it's gonna be at a higher level next quarter? And that's most of my questions. Thanks.
Well, first of all, on the SMT, I, I would say delivery times have gone up in any significant ways. Still, we're not in a position where we are getting stretched to the point where we were in 2006, 2007, and 2008. There are, as I have mentioned before, some minor issues around components in the market. They're not huge, but there are some issues there. But basically, delivery time issues are not there. Price development is pretty much the same that we have experienced over the last few years. It was positive even in 2009, and it continues to be positive, but I wouldn't say that the pricing environment has developed to the point where you can charge anybody anything for anything. So it's, it's certainly not. It's, it's still positive, and it's lingering on.
On the personnel costs, I would say, given what we know today, that you could expect to see the same level in the fourth quarter as you saw in the third quarter.
Okay, now just.
It's basically done in such a way that we are accumulated cost for more of a maximum capped. We have a cap on these things, so we are taking the charge for a capped maximum contribution in terms of profit-sharing systems in the group. I think the only thing that could possibly happen is that if we were to falter, we would have to cut back a little bit.
That's right. That's right. If we are not performing as well in the fourth quarter, we might cut back a little bit on those provisions. But if not, we will have about the same provision for the fourth quarter as we had in the third quarter. And just to clarify that a little bit, the extra is the provision that we made this quarter that could actually be allocated to the first two quarters of this year.
Just due to the fact that we actually increased our profitability so much, we did have, we did do the provisions for the third quarter. That was actually should be allocated also to the first and the second quarter. So normally, when things are developing as good as it is today, we will have provisions for these kind of variable salaries, of course.
Mm-hmm.
Okay, one quick follow-up. On Tooling, you talked about incremental margins, let's say, normalizing... suppose you get to around SEK 25 billion, I think, in.
Mm-hmm.
in revenues. When you say normal, clearly, with so much having changed in terms of costs, et cetera, what is a normal incremental margin? Historically, we're looking at 45%. Do you think that's correct going forward, you know, once you cross the SEK 25 billion-
I think historically, you're right. I think the incremental margins in a more historical perspective, as we have continued to invest to meet the increased volumes, but also added personnel to grow in new markets, we have to remember that. We've always, in that period of time when you speak, we have also had very aggressive cost increases as, as investments in terms of market capacity and sales. But all in all, I, I would presume that we continue to do that as well. So 40%-50% is a pretty good number to use.
Okay, thanks.
Okay, I think that we have another question internationally.
Take the next question of Nico Dil of J.P. Morgan. Please go ahead.
Good afternoon, gentlemen. I'd like to ask three questions, please. First one is on slide 13, you highlight the incremental margin for the group. I'm just wondering what you're putting here in the one-off or the structural costs on the EBITDA line here. I think it was about SEK 330 million. Second question is, I'd like to come back to the question on SMT asked earlier. The margin currently here is at around 14.5% or so. You know, you previously highlighted that you wanted to step this margin up-
Mm.
Closer to your peer, Atlas Copco. Wondering sort of what the target is here currently, given that project sales might be coming back a little bit next year.
Mm.
I see that the I feel that the upside is a bit limited here, as far as I understand. Third question is, you probably know that the guidance of Kennametal. Do you believe that they are in line, above, or below your current thoughts about the outlook?
Well, I think you can also-
Well, if we start with the structural and one-off cost, basically, the SEK +330 million, as you see there, that's basically lesser restructuring cost this quarter than what we had in the third quarter last year. And it's also positive reversal provisions for obsolescence reserves. Those are the main things we have in this one-offs for this year in the bridge.
On the SMT margin of 14.5%, I think, first of all, it's important to remember that about 60% only of the business of Mining and Construction is comparable to Atlas Copco CMT business. So, I think that that's an important aspect of what we do when we make a one-on-one comparison. But, first of all, if we have to look at the currency effects, et cetera, where is our margin? I mean, we have, of course, an objective to raise the margins. We don't have, for this business area, a margin objective. We have an objective on return on capital employed, the 25%.
And the reason why we focus more on not on the margin, but on the return on capital employed, is that, given the fact that the project business has such a high yield from that point of view, we think it's a more appropriate number to focus on, because margins might pop up and down a little bit based on the mix, and it's not really relevant in terms of what we do generate as shareholder value in the end. So I think from that point of view, we don't have a margin objective, but we should certainly get and pass our objective of 25% return on capital employed.
Mm-hmm.
-already next year. About the Kennametal projection, I don't think I mean, it wouldn't be correct to comment on a specific company's outlook. The only thing I can say that on the North American market, given all the statistics that exist from CCMA, the Cemented Carbide Manufacturers Association, Sandvik's share of that total pie continues to increase.
Can I just ask one follow-up question, please? On the one-off cost that you flagged for this quarter, I seem to think it's about SEK 100 million or so. So basically the SEK 200 million in extra provisions are not taken into account into that structural line. Is that correct, Ola?
What extra provisions do you mean? In the SEK 100 million, it's as Lars was mentioning, the closure of the Crystal Lake plant in the U.S., and there are a few other minor housekeeping issues there as well. But we didn't do any extra provisions. What is in the bridge, in the structural one-off column there in the bridge, is that we have lesser restructuring costs this year than we had last year. That's why it's a plus there.
Mm-hmm, mm-hmm. So the variable costs on the salaries are not included?
Those are separately.
Okay, thank you.
Mm-hmm. Okay, thank you. I think we have at least one more, two more questions internationally.
Take our next question from Guillermo Peigneux from Morgan Stanley. Please go ahead.
Hi, good afternoon. It's Guillermo from Morgan Stanley. A couple of questions. First, regarding your run rate of orders, sorry, your run rate of savings, can you give us an update on what level are you in terms of that SEK 8 billion savings target that you have? So I guess it's less than SEK 8 billion, but could you give us a level? And then secondly, all these provisions and profit sharing agreements, are those part of those SEK 8 billion savings? I.e., basically, do they are they part of the temporary cost savings that you were getting that add to those SEK 8 billion? And then the second question is regarding more your equipment units volume for Mining and Construction. So just looking at equipment, not aftermarket or consumables-
Mm-hmm.
Would you say that your volumes are still far below, far below peak levels in terms of orders? Thank you.
Okay. First of all, it's very, very difficult to comment on the rate of savings. I mean, this is a little bit of an academic exercise if you try to get into it. The only thing I can say is that if you look at the contribution of profit to sales of 75%, it's a very good indication of the fact that we are retaining at least half of the cost savings on a structural basis. I don't think I can give you any more detail on that, unless you have something to comment on there, Ola?
No, I don't know. The further away from 2008 and 2009 we get, the more difficult it is, really, to pinpoint all the cost savings exactly where they are. You have to look at the incremental margin and the total margin going forward.
But you are correct that the fact that we last year cut back very heavily on profit sharing and, of course, and on variable salaries, they were a part of the SEK 8 billion savings, but they are also included in our projections to come back and are included also in our statement that we will retain more than half. So that I want to be clear about that. They are included, but we have also included them in our statement about retaining half of the total cost level. On the equipment side, volume in comparison to the peak, we are actually just a little bit above the previous peak level.
In terms of... Sorry, in terms of, volumes, in terms of units-
In terms of units.
Adjusted by pricing, forex, everything?
For the mining area, yes. For the construction area, that's not the case. But for the mining area, that's the case.
Okay, thank you.
Okay, I think we will finish up with one last question coming from the international audience, please.
Last question comes from Arnaud Brossard of Exane BNP Paribas. Please go ahead.
Hello, everyone. A few explanations again on currency, please. The SEK 280 million negative effect was far, was far from your guidance of a SEK 150 million positive effect on the 15th of September. I understood this was partly due to, the revaluation effect on the balance sheet. Was that not factored in your, in your two thousand-- in your guidance on the 15th of September? That's my, first question. The second is, are such effects factored in your guidance for the fourth quarter, and how confident are you that, this forecast is accurate?
Okay, on the first question, I’m the first to admit that it was unfortunate that we didn’t have the fully updated latest FX forecast and FX situation when we guided... When we answered the question, really, we didn’t guide, we answered a question at the Capital Markets Day. So, that was unfortunate, and that was the reason why we have—we’re on the positive side on the FX guidance already in September.
There was also a very sharp strengthening of the Swedish krona at the end of the quarter in September, and that is the main reason behind the sharp decline in the revaluation or the sharp revaluation effect. That revaluation effect is not included in the guidance that we do for the fourth quarter, because it would be impossible to do that. What we guide with the minus, around SEK -200 million, and you must understand this is rather difficult to forecast. But what we include there is the effect that it should be if the currency rates are as they were by the end of September.
Okay.
Is that okay, Arnaud?
Yes.
Thank you. Okay, I think that we are ready to sort of finish off this. We have one, one more question from the floor here in Stockholm, so that will be the last one for today.
Hi, [audio distortion] from Nordea. Just one question on your CapEx plans. Have you at all changed or updated your plans for this year? And what do you see for next year, given what you know now?
Our CapEx plans for this year have not been updated. I think we will actually come in slightly below our own forecast for the year. I think that we are rather well invested, I would say, in most areas. CapEx plans for next year, we are still projecting to be well below depreciation. We haven't finalized the work for the budget or forecast for next year, but we would certainly still stay well below our depreciation. We are, from a capacity point of view, extremely well invested, I would say.
Okay, thank you. Before we end this session, I think that I would like to take the chance to give you some housekeeping still, including the guidance for metal price effect for the fourth quarter, which is maximum SEK -100 million. We have the net financials being kept at SEK 450 million. We have a currency effect, excluding the revaluation that might come during the quarter, but still SEK -200 million as an official guidance. CapEx, last talked about that. Tax rate, 25%-27%. And just to be clear about the other numbers that might have been misunderstood here during the call, we had for the group SEK 100 million in these extra provisions, of which around SEK 60 million relates to Tooling. Most of the rest relates to Materials Technology.
We had another SEK 100 million in one-offs, of which the biggest single part is the closing of Crystal Lake, and then we had some other issues around that. So all in all, SEK 200 million on the group, SEK 100 million on Tooling, of which SEK 60 million was provisions, and the rest was one-offs. Okay, and the next time we will be here, it will be on the second of February, I think, where we release our Q4 report. And until then, have a nice time. Thank you very much for coming.
Thank you very much.
Thank you very much.
Enjoy your weekend.