Sandvik AB (publ)

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

Klas Bergelind - Citi James Moore - Redburn Peder Frölén - Handelsbanken Markus Almerud - Kepler Cheuvreux Max Yates - Credit Suisse Alexander Virgo - Bank of America Merrill Lynch Lars Brorson - Barclays Jonas Hoersch - Deutsche Bank Guillermo Peigneux - UBS

Greetings to you all and welcome to the Presentation of Sandvik’s Third Quarter Results. We will have our CEO, Björn Rosengren; and our CFO, Tomas Eliasson, running through the presentation.

After which, we will, as per normal, open up for a Q&A session. And without further ado, I will just hand over the word to Björn and Tomas.

Please go ahead.

Thank you, Ann-Sofie. Good afternoon.

Also, I would like to welcome you to this quarter 3 result presentation. Start a little short summary of -- story of the quarter.

We can say that it’s strong orders in all three of our business areas as well as in all the regions around the world, especially, of course, in Europe and U.S. as well as in Asia.

We’ve seen good margin development during the quarter. We reached, 15.4%, which is up 28%.

We continue to consolidate the group and focus on our core businesses, and the progress is going according to plan. So as we look at the market, to start up, we see good development, as I said, in all our regions.

Maybe sticking out here if we’re looking at Asia, China is actually 23%. And if we look at North America, U.S.

is 20% to very strong. If we also look at sequentially, Europe is up and at 9% at the moment.

If we look at the different segments where we operate, we see continuous strong development in all the segments, it’s either flat or improvement in them, both when it comes to year-over-year as well as sequentially. So looking at the orders intake, 13% up for the group.

And I’m sure that you have, today, also followed up that we received a large order for umbilicals in the SMT of a value of approximately 700 million. This order should have been actually booked during previous quarter.

So if you add that on, we are, for the group, up at 17%, which I think is an excellent level. Revenues up 12%.

So it’s now catching up on the strong order intake that we have had during the last quarters. EBIT development, up 28%.

I said, we reached 15.4%. In these numbers, we have currency effect of minus 250 million, and there is also metal price effects there.

So if you exclude those, we are at 16.8%, which is actually the highest number we’ve seen in the group in a very, very long time. So that’s a really good development.

So a little bit closer look at the business areas, starting up with Machining Solutions, where we have a flawless quarter. I think it’s strong orders, up 11%.

And also here, these are numbers that we haven’t seen since before the financial crisis in improvement in the third quarter, so very, very strong development there. Also, the EBIT margin improvement is very strong, 23% for the quarter, which is a leverage of 52%.

Continues to show strong cash flow, helping the group as very, very strong level. So things are moving.

At the same time, including in these numbers, actually, we are also doing large investments in additive manufacturing as well as in software in relation to the cutting to market. So I think it’s an excellent performance.

Also, Sandvik Mining and Rock Technology is developing well. We see an order increase of 18%, which is good.

We also see that the revenues are now coming up to similar level of 17% improvement. But of course, the best improvement we’re seeing is on the profit level, which is up 80% compared and reaching, I think, a good level, 16.4%.

And, yes, I’m sure you wonder, if we would exclude the Varel business that we put into the business a year ago, it’s actually as good as 17.5%. So really a strong development there.

We see good development, if we look at the driving in the market is metal, it is gold, silver and zinc, which are the main drivers, but we are also now seeing effects of the high copper price that we’ve seen actually go over $6,000 per ton, it was -- I think its highest is $6,800. So it’s good levels.

And these are levels that has been expected and now we’ve start seeing much more activity within the copper market, which you also saw when we look at the region, South America is also growing well at that part. We have a leverage here of 40 -- 56%.

Then we come to Sandvik Material Technology. And starting up, we say that the third quarter is always the weakest quarter during the year.

Last quarter, we informed you that the result of the development of SMT is not moving in the right direction. And we, at that time, also announced a number of activities to improve the profitability.

These activities are being implemented during this half year, and we will see effects of that during the first part of next year. The positive thing in this report here is definitely the order of SEK700 million for umbilicals.

It’s actually 250 kilometers of umbilicals. It’s one of the largest orders in that part.

And as you know, this is the oil and gas industry and that’s, of course, the part of the market that has been struggling for, for some time. So we are very happy to secure deliveries here for a good time going forward.

The activities are going. We are going to improve the profitability and the performance of this business area in the coming quarters.

Tomas, what do we have in the books?

Yes, what do we have in the books? Let’s jump into the numbers, and start with the overview.

And here we have both the third quarter and the nine months. So starting with the quarter as such, as you’ve heard, 13% up in orders.

Organically, 12% on revenues. We had minus 2% in currency on both orders and revenue, so reported 11% and 10% up.

Operating profit or EBIT was up 28%. If you add back currency, negative currency, negative metal prices was actually 42% up.

EBIT margin, 15.4%. Take away currency and metal prices, 16.8%.

We’ll have a look at the bridge in a second. Cash flow, SEK 3.7 billion and earnings per share increased with 46%.

If we look at the 9 months here, you can see that the corresponding numbers on the top line was 15% and 9%, and EBIT improved with 37%. Cash flow, 20% up, and of course, we can see the strong cash flow now contributing quite significantly to the debt reduction.

We’ll have a look at that as well in a second. And earnings per share for the 9 months increased with 50%.

And of course, if the earnings goes up 37% and earnings per share goes up 50%, means that you have quite an over-absorption in the finance net as well as a continued reduction on the finance net due to the debt production, and to some other activities that we are doing. If we look at the bridge, you can see here going from Q3 to Q3, 13.3% a year ago.

The 12% top line growth gave us SEK 2.3 billion on the top line and an EBIT contribution with SEK 1,080,000,00. That’s a leverage of 47%.

So very good leverage on SMS, very good leverage on SMRT and SMT did not really have any leverage. But anyway, 47% up.

So that meant 3.5% on the EBIT margin. So here you see, 13.3% plus 3.5%, that gives you 16.8%.

Currency, minus SEK 244 million, that’s a bit worse than we said 3 months ago. But of course, the big change compared to 3 months ago is the U.S.

dollar. The U.S.

dollars is our absolutely biggest transactional currency exposure and it has gone the wrong way from our point of view. So that’s 80 bps down on the EBIT margin and metal prices, 60 bps.

So from 13.3% to 15.4%, but 16.8% organically. Working capital, always jumps up a little bit in the third quarter.

Third quarter is a low activity quarter. You have annual leave and you close down steel mill, et cetera, et cetera, but still around 25%.

If you look at the right-hand side, you can see that the blue line and the red line, that’s SMRT and SMT, continue to develop very well, around 25% or below 25%, in relation to revenues. SMT always jumps up a bit during the third quarter, but of course, the challenges we have in SMRT -- sorry, in SMT, of course, has an effect on working capital as well.

Moving to the next slide, cash flow. A strong quarter.

Of course, we’re comparing to an even better quarter a year ago. But the good thing here is that we have quite an increase, if you look in the table here on the right-hand side, from earnings, SEK 1.1 billion up.

We have strong growth that eats up working capital. Of course, despite we’ve had growth now for four quarters, we’ve managed to keep the net working capital basically flattish in money.

A year ago, we had good releases from SMRT, mainly you contribute that every quarter. CapEx is a little bit down.

So SEK 3.7 billion, all in all, in free operating cash flow. And of course, with good cash flow and good development, the net debt continues to go down.

It’s now down to the lowest level in, well, at least four years, I don’t know it’s more than five years, it’s down to SEK 25 billion, the financial net debt is SEK 19 billion, the rest is pensions. Gearing is now 0.62, which is also the lowest level in many, many years.

And of course, when the company is performing very well, the net debt is decreasing quite rapidly. Final slide.

The outcome. I did mention currency here.

We had a guidance of zero. We ended up on SEK 155 million on currency and -- sorry, on transaction and translation.

The total currency effect was minus SEK 244 million, including revaluations, the balance sheet items and hedging effects. The metal price effect in the quarter, not year-over-year, in the quarter, we guided minus SEK 100 million.

We ended up on minus SEK 64 million. So not that far away.

Q4, using the currency rates as we had at the end of September, minus SEK 450 million. The biggest negative continues to be the U.S.

dollar, of course. Metal prices in quarter, we expect to be zero.

For the full year, CapEx, we’ve taken down the guidance to SEK 3.7 billion now from SEK 3.9 billion. We were at SEK 2.3 billion year-to-date after nine months.

So quite some activities now in the fourth quarter. Net financial items continues to go down SEK 0.8 billion for nine months.

We now guide SEK 1.2 billion to SEK 1.3 billion, and the tax rate will be around 27%. We are on 26.7% now for nine months.

So back to you, Björn.

Thank you, Tomas. And to the last slide and a little bit summary.

As you know, we have, during the last two years, been working hard to consolidate the group and build the stability in our structure as well as improve the profitability. And I think we start reaching numbers where we should be for the group.

We have many so called product areas that are both stable and profitable that now needs to focus on growth. We have a strong balance sheet, and I think we have an excellent positions to both growth organically as well as through acquisitions moving forward.

And that -- by that, I think we end the presentation and move over to the question-and-answers.

Yes. Let’s do so.

And first of all, let’s see if there are any questions here in the room in Stockholm. No, not at this stage.

If so, operator, would you please open up for the conference call, please.

It’s Klas from Citi. The first one is on automotive in SMS, where you see stable growth in Europe and in the U.S., Asia is obviously still growing.

North America car production is down high single digit in the quarter. So in this side, you are outperforming, but Europe car production is up mid-single digit and you’re stable versus improving last quarter.

Is this a market share loss? Or are we seeing the early signs of electrification of cars weighing on the growth there?

I will start there.

If you’ve been following us, this goes a little bit up and down during the quarters, but I don’t think that we would say that there is only -- either a win or a loss. I think the market shares, as we see it, has been pretty stable during the quarter.

But, yes, we see that in certain markets, we see good sales and good development of the automotives, even though we have as much as 90 million cars being produced every year in the world. So it still keeps on being very strong.

Yes -- No. And the reason why I’m asking, Björn, is because you were growing last quarter in Europe when car production was down.

So in that light, it looks a little bit odd to be flat when car production is up. It’s quite a big sequential delta, but there is no change in terms of market shares or...

No. We have gone through with all our businesses and they are reporting very stable and good development in each of the markets.

So we absolutely don’t see any market share loss in the automotive industry.

Okay. Then on M&A, and maybe a question for you, Tomas.

During the quarter, we understand that you have talked quite a lot about M&A and the potential to moving to higher growth segments such as metrology, CAD/CAM, to boost growth there in SMS. And multiples out there are pretty punching.

But I think that you have also said that you can live with high gearing for quite some time. So I think net debt to EBITDA of two times over several years is possible.

Is that how you look at SMS and M&A today? Because on our numbers, it seems like you have to gear up the balance sheet quite a lot without a real step change in growth given the punching multiples.

So if you could comment a bit on M&A, Tomas, in that light, that would be very helpful.

Yes, maybe I can talk about the multiples, but maybe I should leave the growth question to Björn.

Yes. I guess, I think we talked a lot about this, of course.

And I think an important part, as you know, was to strengthen the balance sheet to be able to move into these areas. Now with the divestments that we are doing at the moment and the cash flow level that we are running, we see the group coming towards 0 debt in a couple of years.

So it’s really moving quick in direction, which gives us a pretty good striking power. Of course, if you want to buy the largest company within metrology, it is very expensive.

We also realized that and probably without our reach. But of course, we are looking into both the software market, the additive manufacturing business, where we are both building organically as well as looking for add-on acquisitions.

So I can tell you, we have long lists, but you are right, the multiples are high and that’s probably what you have to accept when you go into these kind of markets. But it’s, of course, most important that it strategically really makes sense to fuel further development of the SMS business area.

Yes. And we should also say that, of course, we’re very careful with our credit rating, and we don’t have an official target by ourselves for -- let’s say, for net debt over EBITDA.

We haven’t said really that we can be on hilarious levels for years and years and years. I mean, you can have it one year or something like that.

When you exceed it, if you sort of get back within two to three years. But we are cautious of our rating.

And of course, there are some targets, of course, which could be too expensive, et cetera, et cetera. But firepower is increasing, and we have a long list of short- and long-term targets.

My final one is on SMRT and the margin. When I do the numbers, am I right to assume that core mining and rock or drilling and hauling is now delivering close to a 19%, 20% margin and perhaps crushing and screening high single-digit.

And Varel there, if I get it right, 3% to 5%. And if that’s the case, I can see SMRT, as a whole, starting to deliver margins near Atlas levels once the recovery in the late cycle business, crushing and screening, kicks in.

So if you can talk a little bit, Björn, about the margin potential ahead for SMRT. I think expectations look pretty low there for next year.

Yes. So first, I’ll say, we don’t try to disclose any part of it, but it’s pretty clear that the parts, which is the underground and surface mining part is, of course, developing in a very, very positive way.

Also, on the order side, of course, higher than the numbers that you have seen in our books and so on. So those are getting too good.

But from our perspective, and I’m sure Lars agrees with me that we still have a lot of potential within SMRT going forward. So sure, there are certain parts of the business which is more profitable, that is correct.

Yes. I’ve got three questions too.

On mining, it looks like we’ve seen a very strong replacement order cycle for a year or so. I just wonder, conceptually, how much of the replacement of the good times of 2009 to 2012 you think is done?

And how much needs to be done? Because if it’s done, then we need to move into Greenfield and Brownfield to continue the growth.

And I’m just trying to assess what you think has already been done on that front. Maybe we could start there.

Yes. First, to give you a little bit of an update where we are regarding replacement and extension of the mines.

We see approximately 60% of the equipment that we are selling is going to replacement, about 40% is to the extension of mines, which has now started. You probably remember that I started to talk about the mining, it was only replacement, and we are now moving into the crusher.

You also know approximately how many units we have operating in the market. We are over 8,000 units operating in all different parts.

And we know that the lifetime of these equipments are between 5 and 10 years depending on how you run this equipment. So there is a lot of equipment out there that needs to be serviced, overhauled, but also replaced going forward.

So I don’t think that is going to be something holding back. I think it’s more going to be related to how much money are the mining companies making and that is more related to the mineral prices going forward.

I think that’s probably a better indicator to see what we will see going forward.

Very helpful. And then on SMS, your -- very strong rates of growth year-on-year, and particularly China feels like about 20%, the U.S.

about 10%, within that. I’m just thinking, because those are similar numbers to what we’ve seen before.

I would have thought they might have slowed a bit more than that, given the comparatives. But when you look at a sequential picture, I guess that’s daily rates of revenues, have you noticed a step change upwards in China or in the U.S.

in the last three, four reported months? And if so, what do you think is driving that?

And how do you think we move from here?

No, I think it’s -- so if you look between the second quarter and going into third quarter, it’s not a step change going upwards, it’s more if we relate it to the year before. And it is true that when we’re moving into Q4, it’s going to be more challenging numbers going forward, even though demand is at a good level at the moment.

And at the near future, we don’t see any change in that demand.

And just lastly, on the portfolio. You’ve obviously made lots of mid-sized, small-sized disposal announcements.

Bigger picture, SMT, have you come closer to taking a view on the longer-term ownership?

I mean, first looking at the report where we have these, I think we have a major job to be done to -- before we even start thinking about that to make sure that SMT is performing where it should be. And we have made that pretty clear.

It should be at least a 10% business and that’s our mission to put it at that level. And before then, I don’t think we are prepared even to think about any divestments there.

Thank you, James. Do we have any questions here in the room in Stockholm.

No? We’ll go back to the conference call then.

Please, operator, could you please put the next question through.

My first question would be on prices. Obviously, a harsh raw material environment and strong leverage in the SMS and mining business.

So maybe you could share with us the pricing element of the price volume component in those two areas and maybe also both orders and revenues, please.

Pricing has continued to -- for the group has continued to be about 1%. So that is moving according to part.

Of course, it varies a little bit between, as I talked about before, SMT has the much more challenging side on the pricing side which -- especially in the core and standard products. While we see improving the -- in the SMRT business, it’s very strong also in the SMS.

Okay. And so, I mean, given that, what you do in pricing and what you see on your cost base and also at least up till now you managed to deliver on demand without expanding fixed costs too much, how should we think about leverage going forward?

Tomas, you talked about the 30% leverage in SMS for quite some time, but so far we have enjoyed significantly higher numbers. So how should we think about that if we look at the midterm situation, maybe next year as full year?

Well, I mean, we’ve talked about 30% to 40%, and there’s no reason to change that now. I think we’re still comparing to not so strong quarters.

30% to 40%.

Yes. And in that, maybe you could share with us how you manage.

I mean, you talk about in the report about building some inventory in SMS not, I mean, quite logical in this part of the cycle. But if you could share what you do in terms of personnel here?

Are we talking about temp or could you reach a higher leverage ratio with current staffing? Could you share some nitty-gritty numbers with us, please?

Sure. I think, first to say, that Tomas is doing an excellent job as to handle these big volumes without extending their personnel.

So it’s very much relating to automation, being able to run. As you know that, we continue to cut down number of productive -- production facilities and focus on fewer and make them more efficient.

So I think, it’s a lot efficiency improvement. And they have good programs, I think, within all our four business product areas within the business area are doing a good job to be able to lever out these big volumes without actually extending any personnel.

So it is a very good job going forward. And they are working in efficiency improvements in all different parts of the business, and I think that will continue.

We will continue to work down the number of production facilities, as we said, making sure that they are bigger and more efficient going forward. And that’s what’s been driving the leverage during the last year.

You mentioned, Björn, that on sort of extensive investments into additive and also software in your opening remarks. Maybe you could describe those more in detail, what you have done on additive and on software?

Absolutely. I mean, you should also know that in the numbers from SMS, you have also these big investments that we are doing, both in additive manufacturing as well as in the software part.

So we are actually beefing that up with quite a lot of people and quite a lot of resources, and that’s actually being swallowed into the numbers that you are seeing in SMS today. And coming to the additive manufacturing part, you will get a little bit more insight on that on the Capital Market Day, which is approaching now with a high speed.

And I’m sure, Peter, that you will be also be there. But we have -- they have presented their strategy.

We have presented it also for their group, board and they are fully in action with the number of activities where we are going to drive that. Also, of course, in the software side, we have created like a software group that are working centrally and will be supporting each of the four product areas going forward.

And that is, of course, today, more costs than we see revenues and this is what is going to be the revenue growth opportunities going forward. So we’ll do a little more in-depth detail, and you will hear from Klas and his team more in what kind of activities we are doing there.

It’s quite exciting. I’ve spent quite a lot of time up in Sandvik and together with the guys from additive, and it is an exciting area.

And I really believe this is -- we are the right player to be able to be successful within -- in additive manufacturing. We have what’s necessary.

The material knowledge, the cutting knowledge, which we are working with, and of course, all the customers in our pool. So I’m pretty optimistic still on that.

Yes. Markus Almerud, Kepler Cheuvreux.

A couple of questions, please. If I start with going back to M&A, so you say that you have a long list of targets.

And could you just talk a little bit about in which areas that is? I mean, we’ve been mentioning CAD/CAM and metrology, but is the majority of the targets you’re looking at in those areas?

Or are you looking at other areas as well? So if you could talk a little bit about that, please.

Yes. So as you know, I talked a lot about the strategy as we go forward.

And we say, first we look at each -- our product area and you know that we have 18 product areas within Sandvik and each of these -- and it need to be stable and profitable before you go to growth. So we have them within all three business areas.

When you are stable and profitable, you can focus on growth. So each of these product area, they are -- have their team identifying potential targets that will strengthen their strategic position in the market.

I mean, it’s no secret that the SMS business is the most profitable and the most stable of our businesses in the area, where we would like to see a lot of growth and there we have set up a growth strategy, which consists of not only growing the new areas, but also strengthen the core that we have. There are still pockets, where we can -- both when it comes to technology and markets where we can do better by acquiring companies within that business.

Then we have, of course, identified these three areas, where it is the software, it is the additive manufacturing and it is the metrology. So when we’re look at that lists, that is from each business area, from each PA, and we put them together, it becomes a quite an extensive list with opportunities on the M&A side.

But I cannot go in details on that part. I promise you as soon as we have one on the table, I will be presenting them for all of you.

And you can imagine that this is, of course, how we’re going to create value in Sandvik going forward.

Coming back to the multiples, of course, I mean not all of this leads and targets have, let’s say, challenging multiples. Let’s be honest, and there are pockets of the core world where we need to penetrate just markets, just bolt-on acquisitions, et cetera, et cetera.

So, we have the whole register, all kinds of variances.

Okay, okay. Moving onto SMRT, if you look at the mid-teens growth of all the aftermarket volumes, is it continuous market shares, which is driving that acceleration?

Or is it, I mean, higher production rates? Or what is driving that?

I mean, during the last quarter, we had very strong growth in the aftermarket, actually close to 20%. So it is on a good level.

This is, of course, faster than the market is growing, we all know that. And we know that the activities that we are doing in the aftermarket are start paying off.

And of course, yes, it is market share improvement. When we’re talking in market share in the aftermarket, we actually talk about how many of our units in the market that we are actually servicing and overhauling in the market, and that’s where the focus is.

And there is, of course, an enormous potential. There is no limit, actually, what you can do on your own equipment.

And then if we’re moving into the digitalization part and the automation part, which is highly exciting in the mining market there, with all the data and the knowledge that you have on the equipment, of course, gives a lot of opportunities in supporting the equipment to be more efficient in the market, knowing exactly when you need to overhaul the equipment. And now we are working hard to make the customer to understand it is worthwhile paying for.

So the potential there is exciting and the guys are doing a really good job. And the digitalization part of the mining market, that’s where I really think the growth is going to come, to be honest, more than acquisitions from our side.

It is automation and it is digitalization and it is aftermarket where you will see the growth going forward.

Okay. And then finally, if I can just ask on quarter standard, in SMT, is it possible you think to -- I mean with the increase in competition, is it possible to get that profitable on its own terms?

Or will it always be so that you need to have the other areas supporting it?

Of course, we will get that profitable. I can assure you that we will and the activities are being taken.

First, I would just say that if you look at the orders on hand, we can, of course, see the pricing level of the product that we have sold and that has improved compared to previous quarters. So the orders on hand have a better margin.

Then there are a number of activities that we also have shared with you, both this time and the previous time, that will put the cost structure in line with the demand. So, there are activities that are going to be taken.

And I can assure you that, that business can be profitable. It’s actually coming from 10% EBIT level, if you go back a couple of years, and it has deteriorated down to zero.

So the big work is now, of course, to get that business up and running again. But I can assure you, it can improve a lot.

Thank you, Markus. And operator, we’ll continue with the question from the conference call, please.

Just my first question is for Tomas around working capital. Obviously, we’ve seen that come down a long way from sort of 30% levels where it was.

When you look at sort of working capital today, do you think as a percentage of sales, you can continue to make reductions? Or do you expect it to stay sort of broadly flat as a percentage of sales and potentially rise as absolute sales increase?

Yes. Well, I mean, we -- the long-term target has always been 25% and SMT -- sorry, SMRT and SMS are performing.

It can always be a little bit better, but maybe, no major changes. The big change we need to see now is within SMT.

You saw in the chart, it’s kind of developing in the wrong direction. And of course, SMT is 15% of the top line of the company.

And of course, relatively even higher when it comes to working capital. So the big improvement would be in that area.

Okay. And just second question for Björn around mining and rock.

Just if you look at your sort of portfolio where it is today with sort of drilling, crushing and Varel, could you help us understand sort of between these businesses, what you think the synergies are? And given that the environments for all of those businesses is improving, is there likely to be the opportunity over the next kind of 18 months, if perhaps there aren’t immediate synergies between crushing and drilling to think about exiting some of those businesses at a favorable point in the cycle?

First, I would say, when you’re working with the mining industry, there are no me too product. For instance, it’s not one stop shop.

The customers don’t buy the equipment just because you are buying a drill machine, and then you are buying a crusher in that way. You have to be best in everything you do, in every product area.

Without that, it does -- you will not be delivering. So that is also a little bit why we have set up the structure with product area.

So these are eight companies that are working hard to be more efficient, make sure that they have the right product and to support the customers. And we have said that each of these parts, you should be number one or number two, then you have a good position among the customers.

So from my perspective is that you will not sell the drill steel just because you’re selling a rock drill. There are so many machines that are using other competitors’ rock drills at the same time or other consumables to the equipment.

So you have to be best in everything you do. So if we want to be in these different areas, we also have to be the best and we have to have the best equipment.

We have to be number one and number two. And that’s how each of these product area are working.

If -- and I repeat what I’ve said so many times, if they are not going to be number one or number two within people and not living up to the expectations we are doing there, yes, then we have to question, are they the right players. If we’re looking at Varel, which is, of course, one of the areas that you are looking at, 30% of Varel is so-called tricone bits.

These are the big bits that are working in with the surface mining part. So those products together with the Sandvik range, then we have 40% market share on these tools.

When it comes to the oil and gas industry, yes, it’s a little bit of an odd bird in our portfolio. That’s pretty clear.

And you know that we have been working to improve that business before we make any decision how we go forward and they are doing a good job today. They are profitable.

And if you, actually, take away the PPA, they’re making a decent margin. Even with the PPA, during certain months, we are actually on a neutral level.

So things are developing in the right way. And as better we are getting with that business as more -- or different opportunities we will have with that business.

So at a certain stage when we feel that we have the right, we’ll make the final decision there.

Okay. That’s very helpful.

I mean, maybe just briefly on within the crushing business, I think you talked about when you took over, that was one of the underperforming businesses, and I think that’s helpful context on Varel and the different parts. Could you talk a little bit about mobile crushing and also the different parts of crushing?

How those are performing relative to when you took over?

Yes. I think they have -- all the -- the whole so-called product area, crushing and screening, that consists of 3 business units: one is the stationary crushers; one is the mobile crushers; one is the hydraulic breakers.

I can assure you this quarter and this month, I have called two out of those three and congratulated them for such a great improvement in their business. So the whole crushing and screening business is going from, as we say in Swedish, [Foreign Language] from that mean -- felt great to go at it.

That means -- just understand, it is going in the right direction and they’re doing a fantastic job in running their business. We made some changes there also.

For instance, in the crushing business, we actually took out the spare part business, which was earlier part of the spare part division, because it’s such a different business from the loading and haul and the drilling business. So they are actually taking care of their whole business that has taken a bigger ownership of the customers.

So they don’t just meet the customers when they sell the equipment, they also do all the overhaul. And as you can understand, on a crusher who has a much longer lifetime than a drill rig, the business you do is that supplying the wear equipment, the spare parts, the service, that is doing the business.

And the result of that has really made a great impact in the market. And I think they’re performing well today.

So it’s going absolutely in the right direction.

Okay. Maybe just a very quick yes-or-no question.

Just on the crushing aftermarket, is that growing in line with the overall divisional aftermarket in SRMT, i.e., mid-teens? Or is the drilling aftermarket outgrowing crushing materially?

Or are they at similar levels?

I don’t think it’s growing as quick as it is doing on the drilling and loading and hauling and the surface part of them. But I’m spending the whole first day together with the team down there.

So after that, when we meet you at the Capital Market Day, I will be much more informed of this, more greater details of that business.

Thank you. And we’ll continue with the call -- with the questions from the conference call, please.

A couple of quick ones just, I guess, on SMT. The -- you quoted a SEK 30 million headwind related to project deliveries affecting Q3.

Do we just mechanically put that in, in Q4? Or does that indicate that -- or maybe you could just discuss what that was related to?

And whether or not it is as simple as one of timing and that we should expect it to come back in Q4?

I think it was one umbilical order that was delayed that should have been delivered out and invoiced during the quarter, and they didn’t manage to get it done. That was slipped into Q4.

And then, I guess, more broadly on SMT, you called out the continued development with respect to Chinese product and the competitive environment in the most standardized end of the market. Just wondering, if you could maybe characterize some of the, I guess, sequential headwinds.

Are they getting stronger? Or is it just a case of it continues to be a tough environment out there?

And as you look forward over the next six to 12 months, can you talk a little bit about how you see that capacity dynamic changing?

First, I think it’s important to look at SMT. I mean, we have gone in the orders development, that has actually gone down during long period and then we have bottomed out and we have seen improvement.

So if you look for this quarter, we had 9% growth. But to be honest, the umbilical order is -- from our perspective, it should have been booked in the third quarter.

And then you are 33% up. That means that we have during the last quarter, the last month, we’ve seen an improvement in the whole market and we see an improved demand from different parts.

I also mentioned earlier that in the orders on hand we have, we have been ensured that we have a higher margin of those products. It’s still a challenging business.

We still have to adopt our cost. We still have to make the changes that is necessary to get this business in place.

But I think the market conditions have probably bottomed out, and we should see an improvement coming from that. So as you probably see in the last quarter, it’s not that we are lacking orders.

It is correct that we have a mix change. There’s been more core and standard orders taken in than some of the other parts, which have also affected negatively for the business.

But the market is not that weak, and we are seeing small improvements. But there is still a lot of work to done before we can say that we have done our job there.

So it will be some tough time for SMT going forward.

And the last question, I wondered if you can just sort of size the powder business that you have for us? So are we going to hear more about that on the Capital Markets Day?

Yes. There are -- there -- SMT has four product areas and powder is one of them.

It’s not a big, if you compare them. If you compare them to the tubing, it’s a very, very big difference.

The good thing with the powder is that in the business there, we are world leader in powder for additive manufacturing. So that’s a good part.

We are growing with 25% and the profitability is very, very high. But it’s still very small business, but we see a lot of potential in that going forward, and we do not believe that, that business is going to grow slower than we have there.

But it is, of course, a minor part of the total business. So it doesn’t really help the whole business area at this time, but in the future, it will.

Two slightly high level questions on mining for me. First, I was struck by your mechanical cutting order.

I think that’s quite interesting, because we’ve seen a number of your competitors also announce some order wins on mechanical cutting products this year. It looks to me as though we’re finally starting to see broader commercialization of, if you say, continuous mining in hard rock.

It’s been a long time coming. I think it’s fair to say, it’s been at the R&D stage for a couple of decades for the industry.

Do you share that view that commercialization of mechanical cutting and hard rock is now finally happening? And maybe related to that, how do you see the impact on your core drill and blast business?

Or at least over the medium term from that?

Mechanical cut still is majority coal, that is pretty clear. We have a number of innovative projects or R&D project, when it comes to cutting in hard rock.

And we know that every miner’s wet dream is to be able to cut the rock instead of blast it. So that is the truth.

It is not extremely easy. We still not have been able to commercialize the product yet that is competitive in this.

We are working hard on it. I know that from my time in Atlas, they have also tried in many times, but never been successful in doing that.

So I wouldn’t say that the success is there yet. It could be an opportunity if we manage this development in the right way.

But from my perspective, it’s still some time to go. And it’s no secret that our mechanical cutting business is the least profitable part of our business.

And one of the reasons why we really hang on to it, part is that, exactly what you are saying. We would love to break the code, where you could be sufficiently cutting the rock instead of blasting.

Indeed. That’s helpful color.

Just secondly and a follow-up to, I think, it was James’ earlier question on the mining equipment business. It was interesting that, that split, as you see today, 60-40 between replacement and growth investment.

I think you called it, extension of mines. I presume exclusively brownfield or almost exclusive brownfield.

What do you think that split looks like in 2018? And maybe to ask that slightly differently, do you see the replacement demand slowing down at a similar pace next year as it did this year?

And do you think there’s enough coming through in terms of growth investment to see mining overall continuing to grow even if it’s not going to be quite at the current levels?

Speculate on mining demand has never been -- anyway been that successfully in what I know, so to talk about 2018 is very difficult. But from my perspective is that it’s all about mineral prices going forward.

If the mining companies are making money on the minerals, they will be investing. There’s no doubt about that.

If you would see a severe cut in metal prices that are going down, you would also see a breakage in investments. It goes hand-in-hand in that part.

Just to give you a little bit an indication, what I feel is a little bit different from this upturn from the previous one is that the interest for automation is much bigger now than it has ever been, and that is probably related to that. Today, we have products within automation, off-the-shelf product.

That means that we can actually help the customer to automatize a mine underground with the product that we have available today. So it’s a huge interest in automation.

And when you start investing in automation, you also tie yourself up much tighter with the supplier, which mean you have to start a long-term relation. And you cannot stop investing when you have started out that, as you have to take that to the next stage.

So that is important. So if we get a little bit longer upturn in this market, a little bit longer further, we will be able to start so many automation project that will actually help us also in tougher times.

Yes. It’s Jonas from Deutsche Bank.

Maybe just one on the slightly changed guidance, especially on CapEx, so would you cut by round about 200 million, but as you said, still in Q4, we should probably still see quite a lot of activity there. And maybe just for the cut was there -- would any specific investment projects that you had in mind, and then some abandoned or pushed out?

And if so, could you maybe share what the nature of them were?

No, we’re just being careful, really. And I mean, we have an ambition to be careful with CapEx.

So it’s just a reflection of that. It’s no major investment that has been pushed or taken out, etcetera.

So we want to stay on below 4 billion for the foreseeable future. So nothing special to comment on that.

Okay, great. And if I may sneak in a follow-up also on SMT, where you said the orders on hand that you’ve seen recently had maybe slightly better margin, and you also highlighted, of course, the 750 million umbilical order.

Now are they -- how close are they getting to the lifted margins that you would like to see for the overall business area? Is that maybe half the level or further down?

Maybe any color that you could share would be great.

I mean, it’s pretty clear. You know where we are year-to-date on SMT.

And then I mentioned from the beginning that our ambition is, of course, to get this business to a 10% business, which I think, it should be, and I think it is possible. And today, we are not close to that.

You are pretty clear with that. It is -- has not changed overnight.

There is a lot of activities that is being taken. It’s going to take -- still take a couple of years to get there.

That’s pretty clear.

Just a quick comment on the order intake. I mean, as we have talked about today, I mean, we do have challenges when it comes to profitability and returns in the SMT business.

But to be fair, the order intake has been good over the last three quarters. And now with this big umbilical order, it’s going to be even better.

So if you just look at the annualized numbers, the long-term trend of order intake and just add the umbilical order on, we’re actually back to mid-2015 numbers. So I mean, we’re through the trough just looking at the numbers with a better margin.

And that is, of course, going to help the business area. Of course, also, if you have the volumes, if you have been making sure that your production facilities are being fully utilized, that, of course, helps your margin also going forward.

Thank you. We’ll have another question from the conference call, please.

I wanted to ask about the tangible synergies or maybe an example of a tangible synergy between metrology and Coromant and Seco, if I may? And then I have a follow-up on SMS as well.

Okay. First, I mean, I can talk a little bit about that.

The process today, cutting process is normally -- you have a part which you design, okay. What do you do?

Yes, you make a drawing out of it. Then you take in one of the Sandvik yellow coat.

They are in more or less every factory around the world. Then they help the customer to decide what kind of cutting data, what kind of tools are you going to use.

When you’ve done that, you go to the -- your machine and you program it for this data and you put in the part. When you have been cutting the part already, you take it out and then you put it in a metrology setup and you measure it.

Then you take it back and you put it into the machine and then you cut again. Then you take it out again and then you measure until you’re happy, and then you take it out to the customer.

That’s how it looks in many factories today in the part. The future is going to look different from our perspective, it is that when you design the product, you’re doing it fully with CAD.

Then you have software that is going to go in, analyzing the part, deciding what kind of cutting data, what kind of tools. So it automatically chooses the right tools.

Then it transfers the data into the machine. No people is involved so far, and the machine is being put in the product.

And it cuts the piece to the right size. Then the metrology is part of the cutting machine.

It’s inside. So they don’t -- you don’t need to take out the part.

It actually verifies the cutting and makes the changes in the settings. And when the product is ready, it comes out.

So what we’re talking about here, and that is everything they are doing in SMS today, is helping our customers to be more productive. That’s the everyday work we are doing.

And we do believe that this process is changing. It’s going to change going forward with the technologies available, and we are in the frontline of this.

And we are working with this. And we are going to be sure that we are the one who is going to help the customer in that whole process.

So it’s software, it is metrology and it is the cutting part. So that’s a little bit how we see the future going.

It is very clear. One follow-up, actually, a little bit more narrow focus into the quarter, and I wonder that there is a lot of things to take into account when you look at SMS growth this quarter.

You see easy comps is one, adjusted number of days is another one. And I was wondering more, if you could give the picture of the seasonal growth, the seasonality or sequential -- sorry, rather than seasonal, but sequential growth in Q3 versus Q2?

And also, if you could say any number of what level of utilization rates you are actually at the moment loading through your factories, SMS factories?

Normally, Q3 is lower than Q2 and then you see an increase in Q4, that is historically. And this quarter, Q3 you saw quite good numbers also, activities also during the summer.

But normally, Q3 is the weakest quarter in SMS business, yes. So when you go into Q4, there’s more activities and that is historically.

How it will be this time, we never know, but that’s how the pattern is normally. I don’t know if that helps you a little bit.

Well, yes. But if I basically require a bit of more detail, can you see some of the adjusted weakness that you normally see in Q3.

And when you look at Q3 seasonally adjusted, do you see a continuous acceleration in the quarter? Or is it just the same level than in Q2?

Or how can we look at it from a seasonally adjusted basis, so to say?

Are you talking from Q2 to Q3?

Q2 to Q3.

Yes. I think, yes, you’ve seen the numbers in Q2, where we were around 6% growth and now we’re on 11% growth.

But of course, that is an acceleration in the part here. We can also say that moving into October in that part, it continues to be on a good level.

If I may add to that question there, if you look at it and if we try to seasonally adjust the numbers, it’s -- I think it’s sort of a high level way to look at it. It is more of a stable development in Asia and North America, while perhaps there’s a little bit of improvement in Europe.

Thank you. And with that, I think our time is out.

So we say, thank you very much. And I -- we would just like to remind you all about our Capital Markets Day on the 21st of November in Germany.

If you haven’t had the time to register as of yet, please do so now. Thank you and we’ll see you in about a quarter’s time.

Thank you.

Thank you.