Sandvik AB (publ)

Ann Sofie Nordh - IR Björn Rosengren - CEO Tomas Eliasson - CFO

Klas Bergelind - Citi Guillermo Peigneux - UBS Andrew Wilson - JPMorgan Markus Almerud - Kepler Cheuvreux James Moore - Redburn Peder Frölén - Handelsbanken Capital Markets Alexander Virgo - Bank of America Merrill Lynch Graham Phillips - Jefferies Max Yates - Crédit Suisse Timm Schulze Melander - JPMorgan

Greetings, everyone, and I'd like to welcome you to the presentation of Sandvik's Second Quarter Result in 2017. As per normal, we will run through the presentation managed by our CEO, Björn Rosengren; and our CFO, Tomas Eliasson.

After which, we will open up for a Q&A in orderly fashion. With that said, I will leave the presentation to Björn and Tomas.

Thank you, Ann Sofie, and once again, welcome to the Sandvik Second Quarter Report. I'm both happy and proud to present this quarter report, which was strong in many ways.

Starting up with the orders. We were up 17% and actually good contribution from all our three business areas and also this time from all three of our geographical markets.

So strong, stronger development there. Earnings.

We made 15.8% EBIT margin, and I would say it's a strong 18 -- sorry, 15.8%. I'm a little bit in front now.

15.8%. Well, it is a strong number because if you actually eliminate the currency effects as well as the metal price effects, it is 16.0%, so it's good numbers.

We've seen good performance there both from SMRT, as well as from SMS while somewhat weaker from SMT. We have taken important steps in the direction of moving the company towards focusing on the core business.

And I'm sure you, this morning, also read that the second part of Mining Systems was today in the press release that we have found a buyer for that business. That actually concludes that we now have signed an agreement with for the whole Mining Systems and finally taking that into the next step.

We have also, during this quarter, presented the sales of Process Systems to the investment company, FAM. And we have also announced that we are selling the stainless steel wire business from SMT.

And we will start the last part, the sales of Hyperion starting from 1st of September, so that process ongoing. So we're coming closer to the target where we are focusing on the core business.

And this effect has helped us to strengthen the balance sheet compared -- together with the strong cash flow we have and gives us more room to start focusing on growth going forward. So let's take a first look at the market, what has happened.

We see, as I mentioned, strong orders from all our regions. I think maybe from our perspective, the most positive during this quarter is that we start seeing Europe grow.

We have 5% up. If we're looking at SMS, which is a good indicator of the market, the underlying there is actually 8%.

So very positive due to the working days that was 3% less in Europe than the rest. North America which show a very strong number as 40%.

But if we exclude some of the large orders we have, it's around 16%. Asia, plus 4%.

And underlying there, we have China, which is 9%, so also good. If we look at the different segments, we can see that more or less all of them have developed very positively compared to last year.

And if we compare it to the previous quarter, I would say it continues to flatten out on a very high level, though. We see some improvement in some of them, but more or less on the same level.

So looking into the order intake. I mentioned that we had 17%, which is pretty much in line with what we saw previous quarter.

But also, the revenues are now starting to move upwards, and we had 9% positive during the quarter. But still a very positive book-to-bill ratio, which is building order book for the future.

EBIT margin, I said 38% up. And underlying there, it's actually 30% up if you take out the FX charges.

If you look at the different businesses we have, I think we're sticking out -- let's take that on the next one, the Machining Solution. Strong quarter for the business area.

We mentioned up on the orders as well as on the revenues and a strong EBIT margin of 23.3%. Actually, there is an underlying leverage of 73% for the this which we are really happy with.

Machining Solution have also managed to keep their inventories or their working capital under control and are at a level which is below 23%. This together had actually generated a very, very strong cash flow for the business area.

Another business area has done an excellent job during this quarter is Mining and Rock Technology. The growth continue on a strong level.

It's 23% up compared to last year. Here, we see that the revenues are now starting coming.

There is a certain delay between orders and revenues. So those are at 17% and the EBIT margin, 16%.

And if we actually lift out the Varel business out of this, it -- we would actually end up at 17.1%. So I think we're now really coming to good levels for the business.

Also, Mining and Rock Technology managed to get the working capital down to 23%, which the one who have been following this business during long time, that this is exceptional, well done. Then we come to Material Technology.

We saw strong orders, very positively, 40% up. But within that, we have a number of large orders consisting of approximately 1 billion.

So if you take out that, we have a small, slightly underlying growth there. But I would just like to mention that project business is actually part of the Material Technology, so we see that as an important part of the normal orders.

Revenues were also on a good level for the quarter, up 7%. Where we have a little bit more challenges is on the profitability side.

We reached an underlying margin of 6.4% and reporting 5.0%. And as you know we have decentralized Sandvik.

And in Material Technology we have four product areas. Three of them are doing very good and one, have a little bit more challenging, and that's the tube business.

And to be a little bit more specific it's actually the so called core and standard which are still suffering from the effects of the falling oil price two years ago. And here, we had a challenging situation.

And that actually comes from that there is overcapacity in the market which was built up during the good old days. And many of our competitors are focusing on these more simple products could be hydraulic tubing; it can be heat exchanges tubing.

And here, the price pressure is pretty tough. This is a pretty big part of SMT.

It represent approximately 25% of the business area, and that's why it has effects. And I think the product area, the management team there has to look into that we have to put our -- the business in good shape so we can deliver good numbers also in the future.

On the net working capital, it ended up just over 28%, so a little bit tough on the cash flow for SMT. Tomas, maybe you talk a little bit about the financials.

Yes, thank you, Björn. Let's get into the numbers, and let's start with the financial overview.

As you heard, 17% orders, 9% revenues. If you look at the upper right hand corner, you can see that plus 6% in currency effects took the total reported numbers to 23% for order intake and 16% for revenues.

Earnings, up 38%, or 30% if you exclude FX and metal prices; and margin, 15.8%, quite an accretion compared to the same quarter a year ago. And we'll look at the bridge in a second.

Working capital, 23.3%, continues to improve. Cash flow, up 26%.

Even though, of course, with this top line, we eat up some working capital, but the relative number is still improving. Return on capital employed adjusted, 19.3% in the quarter, and a healthy increase of earnings per share with 30%.

So let's jump to the bridge. And here, we see the organic growth, the currency effects and the metal price effects.

And if we spend some time here on the organic column or product -- sorry, price, volume and productivity here, we can see that the leverage this quarter was 47%. This is one of the strongest operational leverages we've had for quite some time.

Behind that number of 47%, we have SMS, 73%; SMRT, 50%; and then SMT, negative. So that meant an accretion of 2.7 percentage units.

So if you take the 13.3%, add the 2.7%, you end up at 16% organically, so a very strong quarter. Currency added 20 points, and metal price effects took off 40 points, so 15.8% in margin overall.

On the next slide, we have working capital. And as I mentioned, working capital in relative terms continued to improve.

It's down on 23% now. On the right hand side, you see the business areas, but you should really look at the blue line and the red line.

That's SMS and SMRT, which is 80% of the business, both of them are down on 23% now, so very healthy development. The cash flow, look at the table on the right hand side, you can see that we continue to have very good contributions from improved earnings, 1.4 billion.

Working capital is -- of course, goes up a bit because of the top line growth, but the relative number is going down as mentioned. CapEx, basically unchanged.

So all in all, the free cash flow is up 26% or 500 million -- in excess of 500 million. Net debt continues to go down.

In the first quarter -- sorry, second quarter, we of course have the dividends, so we do have a little bit of a pickup there. But the gearing after the second quarter was 0.71.

It was 0.73 when we started the year, so it is down compared to the beginning of the year. So we have the target of 0.8 still in sight, sort of.

Now if we look at the outcome and the guidance that we have given, so let's start with the currency effects here. We guided 400 million a quarter ago in transactional and translational currency effects, and we ended up on plus 409 million, so we're basically spot on when it comes to the guidance.

What then happens, of course, is that you get revaluation of payables and receivables in the balance sheet, depending on what the exchange rate at the last day of the quarter. We can't guide on that.

We never guide on that. It was quite negative this time, so it took down the positive currency effect to 264 million, but the underlying guidance is spot on; and this is year over year numbers.

Then the metal price effects were a bit lower than we had guided, and this is an in quarter effect. For the third quarter 2017, we see that with the current exchange rates, we will have like zero in currency effects on translation and transaction.

The other parts, we can't guide about. The metal price effects, as we see it now, is minus 100 million.

The full year guidance, we stick to the CapEx guidance of 3.9 billion. We did 1.5 billion for the first six months.

The finance net was a little bit low in the second quarter because we had some positive revaluation effects, which took down the second quarter finance net. But the underlying finance net is still the same, it's around 350 million per quarter.

So we stick to the guidance of 1.4 billion to 1.5 billion. Of course, if this positive revaluation stays, it will be lower than 1.4 billion.

But you never know, I mean, it can all reverse in the next quarter, and who knows what's happen -- what will happen. So 1.4 billion to 1.5 billion, we'll stick to that.

And the tax rate, 26% to 28%, 27.5% for the first six months. So we have an extra slide this time on Mining Systems, just to shed some light on what has happened or what we're doing really with Mining Systems.

Mining Systems is a business very much mining related, of course. It goes up and down with the business cycle.

It's -- sort of the turnover is normally between 3 billion and 6 billion. It was 2.9 billion last year.

And on this slide, slide here, you see the split of the business. We have around 80% of the business within the project business and about 20% of it in the product business, the conveyor component business.

So what we have done is that for the project business, we have signed an agreement with FLSmidth, Danish FLSmidth, to sell that. FLSmidth is, of course, focused on the Mining business as such, even though they're buying the whole operation.

The order backlog that we have will be transferred over to FLSmidth when it comes to the Mining projects. But we will keep the other nonmining-related projects within the books of Sandvik and some mining projects as well, which are sort of close to finalization.

And we will deliver them through the Sandvik books but we will buy resources and manhours from FLSmidth to do that delivery. On the conveyor component side, we signed, as you saw this morning, an agreement with the Australian company, NEPEAN Conveyors, to sell that business; and that goes over to them completely.

And we think that these 2 companies will be a perfect home for our businesses for the future. And for us, as Björn mentioned here, it's a way to focus on our core business.

The provision we made in the third quarter 2016 of 847 million remains unchanged. We believe, as we see today, that we will be able to fit both these transactions within that provision, so there's no extra provisions as per today on that.

And with that, I would like to hand over to you again, Björn.

Thank you, Tomas. Just to summarize, I think the quarter -- I think by the end for Sandvik is moving in the direction that we're taking the company.

We have a good quarter behind us. I think two business areas are delivering excellent result, and one business area need to do a little bit of homework with some of its business to strengthen up.

But that has been well compensated actually by the other two business areas for the quarter. By that, I think I'd like to end this presentation session, and maybe we should move over to the question-and-answers.

Thank you very much.

Yes. Let's do so.

And I think we'll go -- we'll head straight for the conference call. And operator, can you put through the first question, please?

It's Klas from Citi. A couple of questions, please.

Firstly, on mining equipment. If I adjust for pricing and currency, given that the Swedish krona has helped you since the last peak, I get mining equipment volumes now run rating at 90% of the previous peak.

We understand that you have taken market share in the upturn, but it really feels like we should start to fade here in terms of growth momentum. So in short, my first question is, do you think there is really more replacement demand?

Or have we hit the peak here in Mining?

Speculating in the future is not something I'd like to do when it comes to Mining. This can go up and down, and we have seen a lot of things during the years.

What I mentioned is, earlier, that we've had a number of years where the -- most of the mines has been underinvested. And we are in so-called the sweet spot for Mining, meaning that our equipment is wear equipment.

That means you need to replace them all the time or you actually lose productivity in the mines. So I mean, four years of less investments have, of course, build up a demand for equipment.

How long this will last? I think it's difficult to say.

But I think the money from the Mining company is available as long as the mineral prices are at a good level. We've seen the mineral prices be quite flat for quite a time but on reasonable levels.

We have seen the best, let's say, development is within gold, silver and zinc for us. Copper is an area where we have strong belief in the future, not least because the world is digitalizing in this direction.

The prices of copper has gone over $5,900. And we know that when it reaches around $6,000, we do believe that the investments will also come within this area.

And that's one of the areas where we haven't seen so much movement yet. But to speculate in the future, I think this is very difficult.

We have to make sure that we are agile and that each of our so called product area can follow their development when it comes to orders and deliveries. And we are, of course, in a great spot there that if you place an order today, you will not get the products during this year.

So normally, when we see orders going down, we have quite some good time to act and make sure that we adopt the companies. During this upturn, we've been very-very strict in keeping costs under control and does not mean that we don't want to grow.

We had to grow, of course, a lot of blue-collar because of -- the production has gone up with -- in many of the businesses, over 100%, so it's quite a lot. How that will look in the future, I don't know.

The good thing with the business we have is that such a big part of the business is aftermarket, and this business has been growing more than the market by itself. It shows that we are expanding our aftermarket business.

And that is, of course, a high profit part of the business and gives stability in the downturn. So from my experience from this business is that this is a business that you can keep on good margin levels also in tougher times if you do running the business in a good way.

Just the reason why I ask, it's -- I mean, the previous cycle, we had a big portion being driven by growth CapEx. And I understand that trade cycles are very short for you compared to others.

There's more replacement. But just looking at it, if we are almost at the previous peak, obviously, what you're saying is that it could be replacement of two cycles that are in for basically more growth ahead.

But we have to say that what's really coming at the moment and this business is not different from any other. There's a lot of focus on automatization today in the business.

And normally, the mining companies, when they are making money and they normally do when the metal price comes to levels where we are today, a lot of investments are being focused on the automatization, meaning that you have more mines where you have more trucks and drill rigs without people driving. And this development has accelerated during the last time, and we think this is a trend that will continue.

So there are these areas that -- the thing with the mining companies is, of course, when they don't start making money because of metal prices going down, they have a tendency to cut many of these investment projects. But at the moment, I think that's pretty healthy levels on the money.

How long that will remain, I can't speculate in that. I've been in the market too long to say that when you talk about fantastic future, that's normally when things go sour.

So it is what it is, and we have to adapt to it. I think that's our philosophy.

Okay. My second one and final, I promise, Anne Sofie, is on Machining Solutions.

The margin came in a bit below my forecast, maybe difficult to answer, but what do you think the 3% working day impact did to the margin in the quarter? And then how much of the growth was price?

I think 1.7% last quarter. How much did you increase pricing this quarter in SMS?

I think we have for the group where we are approximately 1% up, and it's a little bit more on SMS than the rest of the group. So that gives you a little bit of an indication.

I think -- you want to answer on the 23.3%? It is a leverage of 20 -- or 73% -- [7%], which from our perspective is a very good level.

And you should know that they have actually taken down or kept the inventory on good levels. So there is actually no positive impact from increasing inventory in these numbers.

So from our perspective, we think it's a fantastic strong number.

Guillermo Peigneux from UBS. I was wondering whether you could actually give us some granularity on Varel's growth during the quarter, both from an organic standpoint and also profitability wise?

For which one? Oh, Varel.

Let me talk a little bit the Varel business. As I mentioned, Varel is part of the Mining and Rock Technology side.

We had, during this last half year, seen positive development and that is, of course, following the number of drill rigs operating in the market. They have also some of their business related to mining, and that's the reason why they are in the mining business.

They make these so called tricone bits for surface mining where they're pretty successful. The profitability has continued to improve.

And if you take away the PPA during the quarter, I think we were at 7.5%, which is, of course, a significant improvement from where we were one year when we really bottomed out at that part. So we are seeing both growth as well as improvement in profitability.

Anything you'd like to add?

No, it's -- well, the growth is double digit, has been quite healthy for the last six months for Varel. And even if you include the PPA, it's kind of breakeven now, so it's developing in a very healthy way.

Okay. And then may I follow up regarding the third quarter?

In the past, you obviously spoke ahead of the summer period, but those have been smoother recently. Could you comment a little bit on whether you were probably producing ahead of the summer season?

Or you're basically not -- you will not face this kind of under absorption, over absorption patterns that you observed in the past?

I mean, third quarter is -- I mean, you know Sandvik, third quarter is always weaker than the other three quarters, and that will be also during this quarter. How much it will be, that's too early to say.

There are fewer factories today that are being closed, not least in mining, because there is a lot of activity. But there is also maintenance jobs that needs to be done during this period, and people are taking some vacations here and there.

So I mean, from quarter part, next quarter will be somewhat softer than we have seen during this quarter.

Yes. I mean, we have closed like 20 factories over the last three years.

Of course, we concentrate the manufacturing to fewer sites, but it will still be less production in the third quarter.

And then last one, I promise. Can you quantify savings into the second half and 2019, what's left?

Yes. Well, I mean, on the same -- you mean the official communicated program, I guess, you're alluding to.

Yes, well, I mean we will reach above SEK 1.8 billion -- or sorry, we have reached SEK 1.8 billion by mid-2017, and we will reach the installed savings, SEK 2.1 billion, at the end of the year. So that means that the year-on-year effects for 2017 will be -- in the P&L will be something like SEK 400 million.

And then you will have a year-over-year effect spilling over into '18 of something like, let's say, SEK 80 million, SEK 75 million to SEK 80 million in 2018. And then we're done with the program.

And that, of course, is related to the supply chain optimization program. That is, of course, in all our businesses' continuous improvements in all our product areas that everybody's trying to do.

And this is the way that they're working forward. So just because that these programs are coming to an end doesn't mean that we will continue to drive efficiency in our operations.

That will continue.

So I mean, of course, the big trick is, of course, to not put yourself in a situation where you have to make those kind of huge provisions, instead work with everyday improvements, small steps going forward.

That's our ambition.

A couple of questions, please, starting on the Mining side. Obviously, the margins have improved.

The volumes have improved. Can you just talk a little bit about what you're seeing in terms of the pricing dynamics and whether that's kind of improved?

I think we were hoping that it was going to, obviously, since the volumes came back.

Yes, pricing are improving during the part. Especially, we see it in orders more than we see in the revenues because what we are invoicing today is, of course, taken earlier.

So that has an effect. There is also differences between equipment and consumables.

On equipment, we're seeing larger increases than we are seeing on consumables so far, so there are some variation in part. But overall, it's moving in the right direction.

And second question, just on Materials Technology. You obviously kind of flagged that the level of profitability isn't necessarily where you want it to be, and you're taking action.

Can you give us an idea of kind of when we might see those actions coming through? I mean, I appreciate that Q3 is difficult with the seasonality, but is this a kind of -- is this a six months thing?

Or is this kind of over the next 12 months?

Yes, I mean, we talked actually during the Capital Markets Day that we -- our ambitions regarding SMT, and we expect that this business should be a 10% margin business in the future. We are, of course, not really there because the reporting is 5% and the underlying is 6.5%, so we are somewhat away from there.

There will be activities taken. I will not go into any point because we are a decentralized company.

That means that the tubing management team, especially the management team for core and standard, will be focusing on what kind of action that need to be taken. But sure, we do expect that a business which represent 25% of SMT should be making a reasonable profit.

Starting with SMS and the market if you can talk a little bit about the development throughout the quarter in underlying demand and especially for Europe but also for North America, and also, what kind of underlying growth do you see in Europe for SMS?

First, which I mentioned before, is that it was very positive during this period. And I think that's the really biggest change that we've seen from previous quarter is that we've seen a stronger Europe.

So that's good. Otherwise, we continued to see a strong China and a strong Asia.

But also, North America is on a reasonable good level. So overall good.

They're, of course, very strong if you compare year-over-year. But sequentially, I would say flattening out in the two, North America and Asia, while Europe is improving.

And it's improving throughout the quarter as well, so it's accelerating, is it?

I mean, it's difficult to talk within a quarter. But everybody knows that April was a dreadful month.

That was the month at the last quarter, and that was a very, very short in Europe this time. So when we saw the numbers during the first quarter, everybody was a little bit surprised, a little bit shocked more or less.

But the rest of the quarter has been tremendous, strong. So I can't say more than that.

And then moving on to Mining and the aftermarket business, so you comment that you grew the aftermarket business by double digits. You also grew Varel or Drilling and Completions by double digit.

Did the aftermarket business, excluding Varel, also grow by double digits? And you say that you gained share, and do you gain share from competitors?

Or do you still -- do you keep earning businesses from your customers and take over that? If you can comment a little bit on that please.

I mean, my passion about aftermarket. It's extremely important for us.

And I think they've done a great job within SMRT in focusing, and that they have actually been working quite some time on that. And we start seeing the numbers, as I mentioned, with a double-digit growth.

When we're talking market share in aftermarket, it's against ourself for what the customers are doing. Because from my perspective, there are no limitation in the aftermarket; it's your own creativity that actually describes how big that market is.

It can be in many parts. It's a different kind of service, product that you can offer.

It's not only spare parts and so on. So this is an area that you can continue to develop, and we should.

So I'm very pleased to see this good growth numbers, which is, as I mentioned before, higher than the Mining growth, the underlying. So that's a good sign.

I mean, they continue to work hard on this, and I know Lars has a strong focus on this. He talks a lot about the aftermarket and the focus on that, so we do expect that this will continue.

Could I start with SMRT? Your order growth of 23%, and your margins are up 800 bps, excluding Varel, pretty impressive.

Could you perhaps give us a flavor for how consumables versus service is growing organically in the orders, whether they're both double digit or whether there's a range? And on the margin increase, I know you don't want to break it all down, but can you give us a sense as to how much is the equipment side only coming up or whether consumables or service margins have also been progressing favorably?

I don't want to dig too deep into it, but I can give you a little bit of a flavor there. I think when it comes to equipment side, I mean we are probably, in some of the most underground equipment, if you're looking to where we are, I mean, orders are over 100% and the factories are loaded in the part.

On the consumables side, it's more or less following the market development, and that is a couple of percent. That is the mining market doing.

And the spare parts we talked about, it's on a low double digit level. So I probably said too much.

You look very -- still relaxed. But I think this just gives a little bit where we are.

But the equipment side is definitely what has exploded in the market, really good growth numbers, and that's positive.

And in terms of the margin increase, the 800 basis points excluding Varel, is that really all coming from the equipment growth? Or is there also.

I don't really want to go that deep into the part. But you can imagine, of course, in fact is when you have under absorptions and you get good volumes going through, I mean, we are getting the volumes up finally in the factories.

But until this quarter, we were quite limited in the growth numbers. Now we'll start seeing this falling through, which, of course, helps.

But still, without a doubt, the aftermarket is the high margin part of the business.

Yes. I mean, if you go back to Q2 2016, that was not a happy quarter from an SMRT point of view.

I mean, volumes were still going down, and you came from load levels of 30% to 50% or something like that in the factories. Now it's a completely different story.

And if you probably remember, there are also that -- that was the quarter just before we merged Mining and Construction part. So -- and I'm sure there was a lot of cleaning in those very low 9% EBIT level.

That was actually probably lower than where we -- underlying were. So there was a lot of cleaning during last year, which we, of course, this year didn't have to go through.

So it doesn't mean that just with these volumes that you should get this kind of leverage continuing up, maybe that's a little bit too optimistic. I mean, we are coming up to numbers now for the Mining, excluding Varel, with 17.1%, which I think is a rather good number.

And on currency, if I could. At the current rates, not a lot next quarter, but I'm thinking the quarter after that and the year after that, you could end up with some quite big negatives given the strength of European currencies.

Would you be able to put any early numbers on that? Or is it too early?

I want to be very clear on this because we've gone through -- I've gone through a number of downturns in my years running Mining business. And I think the important thing is, you must have a mindset that this is temporary.

This is nothing that is going to last. If you have that, that means also that your investments in relation to these huge increases are done in a different way.

We are actually outsourcing much more today. We are not building any more factories.

We're rather closing continuous factories, and we are using external suppliers also when it comes to final assembly of equipment. That means we are not really building capacity.

We will probably continue to be tough on this. I'm looking at Lars back there, and if he's nodding on his head, yes, he agrees with me that we are not going to build any new factories.

It's going to be focusing on making sure that we have a tight production unit that can survive both upturns and downturns because we all know that underabsorption kills any company.

Okay. And just finally, are you tempted to make SMT noncore, given the challenges that continue for 10, 20 years?

That was a different way of putting that question.

I have never heard that question before.

No, at this moment, we have no plans to do that. That has been quite clear.

But we are challenging every business that we have. And I mentioned there also during previous speeches that as long as SMT contributes to the positive development of the Sandvik Group, it will be -- remain part of the group.

So that talks for itself, I think.

And we'll have the next question, please, on the conference call.

Well, I would like to continue to talk about the sort of leverage or rather the capacity. We have seen impressive leverage numbers of assembly business like Mining, where you see much higher leverage in the SMS business than you might have wanted to comment upon at least a couple of quarters ago.

So I think you mentioned a bit on Mining that you're not willing to build capacity. But on SMS, when will the leverage come back to more normal levels?

And are you sort of lagging in fixed cost in that sense? How should we look upon the leverage in SMS, please?

Well, I can start with a quick comment. Of course, now I think, again, looking at the second quarter, second quarter was a quarter where margins were still flattish or actually going down.

The SMS margin did not start to pick up until start of the third quarter, really, and same thing really for SMRT. So the comparison is quite easy.

And then as Björn mentioned, we have, what did you call it, Ann-Sofie, we had a lack of crap in the earnings for SMRT this quarter in Q2. So that, of course, helps.

And in the year-over-year bridge, that boosts the numbers. But apart from that, I mean, our previous, let's say, not guidance, but our previous statement on leverage going forward is still valid.

We talked about 30% to 40% for the SMS business.

So you're actually -- so fixed costs are catching up or -- I mean, the leverage will not go down if you're going to increase the cost basically right because you will have still a decent volume situation? You talked about Europe still improving and the others are leveling out on a high level?

We will continue -- I mean, to make sure that we have the right capacity for our businesses, we will continue to work with shutting down smaller and less-profitable production facilities, moving in this direction. That will be a continuous work going forward to make sure that we can keep the margins up on a good level.

On the leverage side, in the end, I think we have a fantastic this -- and that is probably not a normal one. So I stick to what Tomas says, it's between 30% and 40% that we should be going forward.

Yes.

On European? Or on SMS?

That's on SMS, yes.

And just a quick one. If you can just confirm whether core and standard are on red numbers or not?

And more interesting maybe, you mentioned initially that your indebtedness now gets you closer to start looking at growth, maybe you can open up a bit there? If not investing in capacity, and organically, I guess it will be to continue to take market share from the aftermarket, to continue to strengthen the product for SMS, but I would be more interested to hear about your M&A plans.

Let's start with the core and standard. I think you all are well aware of the structure that we have today.

We have our so-called product areas, but we also have something called business units. SMT has, in the new structure that we presented for a couple of months ago, four product areas where tubing is one part of them.

But within tube, there are a number of business units also. We have the oil and gas part, which very much is related to the umbilical business, which is developing very favorably.

We have the nuclear part, which has also good margin. And we have special tubing, which are more sophisticated tubes.

And then we have the core and standard. So when we're looking at SMT, there are so many good parts that are developing in the well part.

Unfortunately, we have one of the businesses which is not performing. And that business is coming from the oil and gas.

Let's say, the after part from the oil and gas price has come down because there is overcapacity in the market. If the -- I think we were more or less on negative numbers, yes, on that business during the quarter.

And of course, that's not acceptable. That's pretty clear.

So that is really sticking out there. Then to the maybe more interesting part, the more exciting part, and that is the growth.

We have been streamlining the company now into our core businesses. And we have now also strengthened our balance sheet, and our net debt ratio is on a level which gives a lot of room for striking going forward.

So we still, in our strategy, have a philosophy; first, stability, then profitability, and then growth. So when we're looking at our PAs, which of the PAs are both stable and profitable?

They should be focusing on growth. And it's not a secret that within our SMS business, that's where we have the best profitability and the best stability at the moment, and that's where we would like to see the growth.

And you have also seen our strategy going forward, which we call the growth strategy. That means that we would love to extend our businesses both into the additive manufacturing part, in the software part as well as metrology, which we have identified as three strategic growth area.

But we are also interested to strengthen some of the core business if we find some interesting companies that would actually add more products or market share in certain parts of the region. So we are really open for this.

And I can assure you that our board is also focused that we should start moving into growth phase and both organically as well as through acquisitions.

That sounds promising. Thank you.

Let me just double check, do we have any questions here from the room in Stockholm? No, then we'll continue with the conference call, please.

Could you put through the next call, please, operator?

Björn, I wonder, would you mind just giving us some color around the end market developments in SMS, just if you can call out anything in particular by region? That would be super helpful.

Sure. And we're talking about end markets.

If we start, I mean, one of the areas where we talked a lot about is the automotive industry and that's where we're focused in. We have seen earlier that in North America that it has flattened down and even gone down sequentially.

I think that is pretty flat during this quarter sequentially. And if you're looking at Europe, and that's the positive thing where I've said we've seen some growth.

While in Asia, we've seen a flattening off within that segment. On the aerospace, which is another very important sector, we've seen a growth in North America picking up, while we've seen Europe a little bit flattening out.

And China is pretty flat at the moment. So that's what.

Other areas where we've seen good development is the general engineering side. And the general engineering side, we've seen up in the most of the regions.

Maybe that gives some kind of indication where it's heading.

Sure, that's helpful. Sorry, just to clarify, your comment on automotive was the market's down sequentially, but you were flat?

No. No, I -- yes, I mean, if you look at overall, it's probably pretty flat.

But Europe is up. And we've seen flat, flattish in North America and in Asia.

Two questions, please. Just on cutting tools, Machining Solutions, can you talk a little bit about some of your intentions there?

You touched on them. And just specifically, things like round tools, what proportion of the business is round tools?

How does the pricing and margin compare in that area? And is this something perhaps you need to grow in with M&A?

And the second question was around Mining Systems. Of the 847 million, how much is actually cash out?

And when would the cash out be going to the buyers of that business?

Why don't you take, Tomas, on the Mining Systems?

Yes, let's start from the back then. Yes, of the 847 million, around 700 million is cash, really.

And a large portion of that will go out during the fourth quarter, but some will spill over into 2018 as well.

When it comes to round tools, yes, it's about 20% of that, and that's -- but the good thing with the round tool business, it's an area where we actually are growing continuously. It's one of the fastest growing part of our business at the moment.

So yes, we have a strong focus on the round tool business, and we would like to extend and grow further within round tools.

And how does the impact of the growth in that affect the incremental margin, so this very strong number you've had for the quarter? And in fact, you've said it's more 30% to 40% on a long-term basis.

Are they lower margin compared to the rest of the business?

Yes. I think, underlying, yes, round tools are lower margin then insert business.

But at the same time, I think we had good growth development within the round tools and also managed to get the margins on good levels for that business. So I don't think there is -- and maybe I should not dig too deep into these differences.

But I don't think you should see a big dilution in the margins even if the round tools will continue to grow.

Thank you very much. And we'll have one more question, I think, from the conference call, please?

Just one question on from me. Just on the Mining business, obviously, your orders are running ahead of where your revenues are.

And is there any risk that sort of as the higher OE revenues feeds through that we start to see any negative mix from that division? Or are the incremental margins on OE enough to keep margins going up with the volumes?

I think we do expect that margins should continue to improve, of course, maybe not maybe as much as we have seen. I don't think the fall-through will be as strong.

I mean, we're coming up to pretty tough numbers at where we are today. Of course, this varies so much between our different businesses.

From the -- the crushing business is less margin than you have in the underground drilling and the loading business; and you're seeing in the mechanical cutting, which is actually even lower than that. So I think it's difficult to say how this is actually going to effect.

But what I've said before, and I stand for that, is that this business should be a high-margin business even in a downturn due to the aftermarket part of the business. So I don't think you have to worry so much about big dilutions.

Okay. And maybe just a quick follow-up.

Within Mining and Rock, how do you think about Varel fitting into that business and the synergies between Varel and the rest of the business? And is there any point obviously in the U.S.

onshore recovery that you maybe think about alternatives given we have seen a very healthy H1 development there?

I think that's something I don't really want to comment if we are looking, that -- we will, what I said before, challenge all our businesses, and Varel is one part of it. And that has not been on the top of the agenda because we see that it's quite a long recovery on this company before it could be -- come up to the shape where we would discuss if we are going to sell it or not.

But as I mentioned before, they have a very nice mining part. And if you're looking at the so-called tricone bits, and looking at the Sandvik tricone bits and the Varel cone bits, we have actually over 40% market share with these bits.

And that's -- this is a consumable market. We like consumable markets for it.

So there are advantages and there are disadvantages. The oil and gas business is maybe not so much synergies as the Mining business, and we have to see how we take that.

But they continue to do a good job in improving. And as the oil and gas market comes back as well as the mining market back, we should also be back in margin for this business.

And when the profitability is at the right level, it gives us bigger flexibility in whatever direction we take.

Thank you. And I do believe if we keep it short and sweet, we can squeeze in one more question from the conference call, if there is one.

Operator, please.

It's Timm Schulze Melander from the U.S. spec sales.

Just very quickly, Björn, when you first arrived, I think you mapped out your fleet of equipment in your Mining business and you noted how underpenetrated the aftermarket was for you. Just if you scale that opportunity, can you give us some sense as to how much of that opportunity you've already addressed and is this reflected in your order intake?

And how much of that is still to come in the coming quarters?

I mean, the mapping of, I think the Mining guys have put in a lot of efforts now during a two year period with a strong focus. And I think they've done an excellent job in finding out where we have our different equipment and how much each of them are consuming and which of the equipment are operating.

It gives us a pretty good viewpoint where are the blind spots and where are the spots where we are strong in. And Lars talks a lot about this.

We have a lot of blind spots still in the market where there is not Sandvik equipment, which gives opportunities. So yes, this gives opportunities for selling more equipment, but it gives also more opportunities for selling spare part.

So this is an ongoing job that the Mining guys have started for quite some years ago, and we'll start seeing fruit from this. And it really helps us also to understand our position in the market, which is important.

Transparency is very important.

Thank you very much. And that completes this presentation.

I know you're all busy and have another call to run in to. So with that, I bid you a good summer, and I'll see you in October.

Thank you very much.

Thank you.