Sandvik AB (publ)

Ann-Sofie Nordh - Head, IR Mats Backman - Acting President and CEO and CFO

Anders Roslund - Swedbank Guillermo Peigneux - UBS Sebastien Gruter - Exane Andreas Koski - Deutsche Bank Daniel Schmidt - SEB Andre Kukhnin - Credit Suisse Markus Almerud - Kepler Cheuvreux James Moore - Redburn Alexander Virgo - Nomura Lars Brorson - Barclays Ben Uglow - Morgan Stanley Andreas Willi - JPMorgan Peter Testa - One Investments

Greetings to you all, and welcome to the presentation of Sandvik's Third Quarter Results. My name is the same, Ann-Sofie Nordh, Head of Investor Relations.

The voice is however a little different today. I apologize about the huskiness.

I've got a bit of a cold. Today, we're going to run through the presentation as per norm.

It's going to be our CFO and acting CEO, Mats Backman, who does that. And I would just like to point out that all the numbers and comments we make in this presentation relates to the ongoing or continuing operations.

And with that said, Mats, please go ahead.

Thank you, Ann-Sofie. Good morning, and welcome, everyone, to this third quarter presentation of the Sandvik results.

And now starting with a short summary, with some highlights from the third quarter, and we continued to have a very strong cash flow, operational cash flow for the quarter of SEK4 billion, and if I'm looking on the year-to-date numbers for the nine months, we have actually the best cash flow ever in the Company's history of SEK9.4 billion, so very positive on the cash flow side. This is supported by a continued focus on net working capital.

We released some SEK1.7 billion in terms of volume and net working capital in the quarter, so on the positive side, the cash flow. Looking on the demand side, we saw a weak demand in the quarter with an order intake of some SEK19.7 billion, and with a negative price volume of the 8%.

And I will elaborate a little bit more on the development in the different markets and customer segments later on in the presentation. We reported an EBIT of SEK2.3 billion in the quarter, with an EBIT margin of 11.2%.

We saw a positive currency effect of some SEK370 million, and we saw savings of approximately SEK200 million in the quarter. However, the positive currency effect, together with savings, couldn't fully compensate for the negative effect we had from volumes in the quarter, so we had a decline of operating profit year-on-year of 7%.

We continue our portfolio review and our internal efficiency measures. We announced our intention to divest mining systems during the quarter.

We are continuing with the supply chain optimization program, and savings year-to-date or according to plan. And we're also looking on additional efficiency measures in order to mitigate the volume development we have seen.

Last but not least, we are everyone looking forward to our new CEO, Bjoern Rosengren, to join Sandvik November the 1st. Moving over to the order intake by markets, what you can see on this slide is the share of the order intake in the different regions.

And the red arrows shows the order intake compared with preceding quarter, so the sequential development in the different regions. In North America, we saw a slight decline in the quarter.

The same goes for Europe. However, you need to remember that we have a seasonal effect in the third quarter, so adjusting for seasonality in Europe, the trend was rather flattish instead of declining.

Asia slightly declining, and looking on Asia, it's all about China. We had a negative development sequentially in China, but looking on the other important markets in Asia, like India, Japan, Indonesia for mining, for instance, we actually had a positive development in the quarter.

South America, slightly up, but please remember it's from a very, very low level when you're looking on South America. Africa, Middle-East and Australia, slightly down during the quarter.

Looking on the different customer segments, all-in-all, we had an organic development of minus 6% in terms of invoicing, and if we're looking on the different customer segments, we had two segments that was performing over and above plus 5%, indicated by the blue color in this shot. And that was mining, but again, mining is growing but growing from a very low level.

And we also had a positive development within aerospace, and aerospace is a little bit the opposite. That's from a very high level that we are continuing to growing on aerospace.

We had three customer segments in red in this picture, meaning that we had a price-volume development less than minus 5%. Energy, driven naturally by the development within oil and gas, construction and also general engineering.

And general engineering, to some extent, also affected by the development within the oil and gas segment, where we can see an indirect exposure into general engineering being negative. And for the other segments, we saw a flat development in the quarter.

If you are looking on the red arrows, it shows the demand trend compared with preceding quarter. And we have three segments that shows a more of a negative trend in the quarter.

Starting with energy, again, it's all about the oil and gas side. General engineering, also affected by the indirect exposure to oil and gas, but also on mining.

But, when we're talking about the demand trend, it's more a kind of an uncertainty in mining, rather than a negative trend. Just to conclude, order intake, minus 8% in terms of volume in the quarter.

We had a negative book to bill of 0.95 in the quarter, and we saw negative organic growth across all regions. Two segments that we want to highlight that had a relatively better performance than that ones, and that's the aerospace but also automotive, to some extent.

Looking on the invoicing, SEK20.7 billion in the quarter and about minus 6% in terms of the price-volume development. And we had the negative organic growth of four out of five business areas, with only mining showing a price volume growth in the quarter, and very much supported by the strong order intake on equipment during the first six months of the year.

Looking on the EBIT numbers, as I said, we had a year-on-year adjusted earnings decline comparing to last year, minus 7%, and that is despite the positive currency effect and what we can see coming from savings. In terms of cash flow, as I said, a record high cash flow in the quarter.

I would like to highlight one item when it comes to the cash flow, and that was that we had a lower CapEx in the quarter than we normally had, and we are actually adjusting the full-year guidance when it comes to CapEx to about 4 billion from previously 4.5 billion, so that is also contributing to the total cash flow for the Company. Net working capital, in absolute value, we decreased net working capital with some 1.8 billion in the quarter, and it's all about volume.

We had a volume decrease of SEK1.7 billion. Looking on the relative net working capital, I've chosen to show two lines in this one in order to illustrate the structural effects from bringing out mining systems from the rest of the operations.

We have a structural effect from mining systems of about 2% unit on relative net working capital, and I think that is important to remember. Looking on the relative number for the quarter, 29.6%, that is actually the second-best third quarter if you are looking from 2007 and forward.

And the only quarter that is better than this quarter in terms of third quarter is the third quarter 2010, and that was actually the quarter ahead of the only quarter where we have been hitting the 25% relative net working capital target. So it looks very good in the big picture for net working capital.

We have also chosen to show a bridge analysis, explaining the margin development comparing to the third quarter 2014.So if we start with the third quarter 2014, we are reporting 12% in EBIT margin, to be compared with 11% that we present this year. And third year's operating profit of SEK2.3 billion, and then we have done an adjustment in terms of structure and one-offs in order to get comparability between the years.

And in the minus 250 million, that contains of the metal price effect adjustments. We had a negative metal price effect this year of 130 million, and a positive last year of 170 million, giving a delta of about 300 million year over year.

We also had a slight adjustment of 30 million negative in order to adjust for structure, and that relates to divestments that we did within materials technology last year, and finally, a positive adjustment that are getting to the total 250 million, and that's 80 million adjustment for purchase price allocation related to Varel. So we had a higher purchase price allocation last year than we have this year, so we have chosen to adjust for that one.

And then we had a currency effect of 370 million, ending up with a residual of 290 million in terms of delta comparing to 2014, which gives an operating leverage of 29% negative. However, it is important to remember that we had a higher destocking this year comparing to last year, and we had a result effect from under-absorption of destocking of about 100 million for the Group, as well.

So if we're adjusting for that one, we have an underlying leverage of about minus 20%, which I think is decent, given the market development and the volume development. Looking on the savings, we have communicated a saving target of SEK1.7 billion.

We now have a run rate end of September of some 845 million when it comes to savings, so we can say that we are halfway through the savings program, looking on the outcome, as well, right now. And the first step of the supply chain optimization program, that is running according to plan, and we can see the savings coming through, as previously communicated.

Looking on the guidance going forward, we are guiding a negative currency effect -- excuse me, positive currency effect of 100 million in the fourth quarter, and that is based on the closing rates end September. We are guiding for a negative metal price effect of 100 million, also based on the closing rates end September.

And looking on the full-year guidances, we are changing the guidance for capital expenditures to about SEK4 billion. I think it's important also to highlight that this is an underlying difference when it comes to the capital expenditures, because the carve out of mining systems doesn't really affect the capital expenditures, as it is a very low capital expenditure business, the mining systems, so that is on the underlying business now.

And we are keeping the guidance when it comes to net financial items, as well as the tax rate. Summary of the quarter, and I think I will not repeat myself.

I think we went through all the times already, so I would like to move straight into the Q&A, Ann-Sofie.

Yes. We'll open up for questions, and I will just kindly remind you and ask you to stick to one question at a time, with one follow up.

And while we do that, shall we start to see if we have any questions here in the room? Yes, please, Anders.

Yes, Anders Roslund, Swedbank. I would like to hear the usual comments about machining solutions' demand situation in the actual month, and also a little bit about production levels in machining solutions, how much below and cost for under-absorption and what you look forward to into the fourth quarter.

If we start with the demand, the third quarter is a little bit of a tricky quarter in terms of seasonal effects, but what we saw the normal seasonal effects in July, August, and looking on the September number, and September is pretty much the whole quarter for machining solutions. And what we have seen so far when it comes to the order intake is the same level as we saw in September, so no change on the demand side in that area.

When it comes to under-absorption from destocking, I would say, looking on the total destocking for Sandvik, we had two business areas with then under absorption effects in terms of profitability. And I would estimate for machining solutions in the third quarter that we had about 1% unit in effect from under absorption.

Going forward, for machining solutions, we are planning to produce according to the demand in the fourth quarter, so I can't foresee any big under absorption effects in the fourth quarter from machining solutions.

So no major changes in your production levels for the fourth quarter?

The tricky thing with the fourth quarter is, if we see a kind of the shift in demand, historically, looking on the fourth quarter, then we will get the whole impact towards the end of December, really, when the customers are kind of prolonging their holiday shutdowns, then. And that you never know, but apart from that, no.

And no specific trends regarding the big geographies, Europe, US, in machining solutions?

In terms of sequential development, we can't see anything dramatic. Because what you see in the year-on-year is we had very strong comparables looking on US and Asia, mainly China.

So in terms of the sequential development, flattish, maybe slightly negative, but nothing dramatic, sequentially.

Okay, thank you.

Thank you. Operator, can we take one call from the telephone conference, please.

Good morning, everyone. It's Guillermo Peigneux from UBS.

I think in 10 years, this is the first time the operator pronounced my name correctly, so I'm very, very happy, very pleased with that. But I wanted to ask actually one question and one follow up.

First, on mining, invoice and versus orders, do you think it's fair to assume that at the moment, the mining division looks a little bit over-invoice and relative to the order intake, and therefore we should see that, if orders do not recover from these levels, we should see revenues going down to order levels and some kind of impact on margins, as well?

In terms of the equipment, I think what you need to remember, that we had actually a pretty strong first half of 2015 when it comes to the order intake on equipment. What we have seen on the third quarter, it's I would say more uncertain in the market, because if we're looking on the year-to-date numbers, in terms of order intake on the equipment side, it looks pretty good, actually.

On the aftermarket side, what we have seen there is increased competition, and I would say some price pressure when it comes to rock tools. But to it's difficult to say in the current environment, and especially looking on the production reduction we see with miners as well, though.

Thank you. And a follow up regarding actually pricing trends in cutting tools, can you comment on those?

Looking on the overall price effect for the quarter, I would say from a Group perspective, we are flat in prices. If we are starting from the positive end, its machining solutions, positive pricing, and we can see that continue and also supported by introduction of new products.

We also have the construction in positive numbers for the quarter, but that's more driven by kind of internal activities, where we're addressing pricing. Mining, more kind of flattish when it comes to pricing, and then we definitely had a negative pricing effect looking on Venture, for an instance, driven by oil and gas, and also slightly negative for materials technology, mainly driven by the impact on core and standard in terms of tubular.

Thank you. My last follow up, corporate line.

It used to be around SEK300 million to SEK200 million. It looks like two quarters in a row of you've got SEK200 million.

I was wondering whether that is the new level, or should we be still thinking about SEK200 million to SEK300 million? Thank you.

The third quarter is a seasonally low quarter for Group common costs, but saying that, we can also see impact from the cut in terms of spend and the savings that we are going through right now. So I think it's fair to say, on an average level, around SEK250 million for the year.

Thank you.

Thank you. Operator, can we now take the next question from the conference call, please?

Hi. First question is on machining solutions, just coming back to your comment on the destocking in the quarter.

If we look on page 15, net working capital, two thirds is still going up in machining solutions. It's been the case for the last three quarters, which is rather strange when demand is weakening, so what do you see in terms of receivables and payables in that division?

Second question will be on mining aftermarket. Could you give us some color on the share of the aftermarket as a percentage of total sales in the third quarter?

And can you help us on SMT? Final question.

What is the impact of lower nickel price on the top line in the third quarter, and what is volume driven?.

So many questions, so it's difficult to remember that.

We'll take them one by one.

When it comes to net working capital for machining solutions, we have -- first of all, you need to remember that we had a kind of a decline when it comes to invoicing of 5%.So if you're looking on relative numbers, that is definitely an issue for the relative net working capital. When it comes to stock, we have a destocking, and I mean like I said, we had an effect of under-absorption from destocking for machining solutions of about 1% units, so I guess you can kind of calculate backwards a little bit.

We are decreasing on payables, and that's coming with a lower investment level, and also, when we are addressing spend, so that's the only item that is going in the wrong direction, so naturally, you have a positive effect from accounts receivables when you see a decline in sales. But again, please remember that we have minus 5% when it comes to the invoicing.

When it comes to mining, the share of aftermarket, if I'm looking on the third quarter numbers, it's 67%, to be precise, in terms of aftermarket. Top-line effect on metal price, to answer that, I need your help.

And I need some help, too. 160.

That's also the bridge.

Okay, you can find it in the bridge analysis with the backup slides. But the EBIT effect is 130 million.

Yes, but I'm looking on the top-line impact, the [bets] who will follow our nickel price, what is volume driven, price driven, and what is nickel price passed through to customers?

Please look on the backup slide when it comes to the bridge for materials technology, but the EBIT effect is 130 million when it comes to change in metal prices, and it's all driven by the nickel price.

And we'll take the next question from the call, please.

I want to know a bit more about your backlog and the duration of the backlog, because you have a book to bill of 0.95 in the quarter, and I want to understand when your revenues will reach the order level, if demand stays where it is.

It's a completely different situation if you are comparing the different business areas, but what I --

We can focus on mining and SMT, maybe, because you had a book to bill of 0.87 in mining and 0.9 in SMT. So if you focus on SMT and mining, that's okay.

Starting with materials technology, what I think is very important to highlight, looking on the order intake, as well as the order stock, is that the part of the materials technology business kind of exposed to a CapEx within oil and gas, that is mainly on the umbilical side, and umbilicals, that's a really important segment looking on the profitability for materials technology. And when it comes to umbilicals, that is a business that is very late in the cycle, and we still have, looking on the order backlog, I would say six months order backlog on umbilicals.

But given the late, the business being late in the cycle, we can still see orders that are out there for the fourth quarter, so that will kind of take some time before you see the full effect. When it comes to mining, we had a decent first half when it comes to the order intake on equipment, and that's what we see in the order book right now.

We saw some uncertainty, but I think it's very, very difficult to see the development then going forward for equipment, so I guess that's the key. When it comes to aftermarket, it's not that much of an order backlog on that side.

And if I remember correctly, I think you'd said that you have had no order backlog on the equipment side, basically, and the backlog you have had in mining has been related to mining systems, but now it looks like you have some sort of backlog also for the equipment business. But I suppose it's no longer than a quarter, or at maximum, two quarters, right?

No, no, no. I think one quarter is a fair assumption when it comes to the equipment.

And you are right. Historically, looking on the order book for mining, it has been all about mining systems with large orders.

But equipment, one quarter, I think is a fair assumption.

And now more and more savings are coming through, so do you think you will be able to defend your margins when sales comes down through more and more cost savings also in coming quarters?

That's what we're aiming for.

And then maybe this is a bit premature, but can you say something about what you expect for CapEx in 2016? Do you think you will be able to keep the level at 4 billion or lower?

Or if we put it in relation to sales, below 5% of sales?

I think it's difficult. We will provide you with a guidance when we are getting that for 2016, but as it was you can see as an overall target is the 5% in relation to invoicing, and that's what we are aiming for.

Okay, great. Thank you very much.

Thank you. And I believe we have one question here from the room.

Please.

Yes, hello. Daniel Schmidt of SEB.

I just wanted to ask you if you can update us a bit more on the divestment of mining systems, where you are in the process, what should we expect in terms of timeframe and also the sort of the rationale behind the book value of SEK2.3 billion. Is that a reflection of the indications that you've had in the market?

Thank you.

When it comes to the process as such, I will not give an update now, other than we have ongoing discussions with potential buyers. When it comes to the write downs and the impairment we took in the third quarter, that's reflecting what we see in terms of the value for the business, and from an accounting point of view, we need to show that.

But nothing on the timeframe. If you look six months out, do you think this will be sold by then?

That would be guessing. We are getting back with more information when we have it.

Thank you.

Thank you. And, operator, please can we have the next question?

Yes, hi. It's Andre from Credit Suisse?

Can I ask a question on SMS demand, to follow up the previous discussion? Firstly, could you tell us how the demand evolved during the quarter?

I know there's a lot of seasonality there, but I guess, [B], you've got selling dates. You've got the data for an each day of selling, so you could compare that, if you could share how that evolved.

And then secondly, what you indicated for Q4 being broadly stable or maybe small down, is this kind of seasonality adjusted or not?

You have I think the question you are referring to what's the kind of the destocking, under absorption effect, and that is to a large extent season into that one, when we are taking out volumes in inventories in third quarter, so that's more of a seasonal that's more of a seasonal effect. When it comes to the demand in the quarter, I would say like I said, flattish, kind of slightly negative in terms of sequential development for machining solutions, but talking about the development within the quarter, it's really difficult given the holiday season and July, August.

So kind of just stating that what we saw in September is basically what we see now in terms of the order intake. So I wouldn't point out the trend within the quarter, no.

All right, got it. And can I just double check on Venture.

Are you planning any additional specific cost cutting measures in this business, given how the margins have evolved?

Yes, we are. And that is a kind of continuously ongoing efforts, and especially looking because we have done quite a lot when it comes to Varel, because they were really early in the impact from the drop in the oil and gas prices.

What we have seen now in terms of more kind of indirect effects into process systems and into Hyperion, in the case that we need to do more, and we are doing more, also from a structural point of view. Because it's interesting to see, if you are looking on process systems, for an instance, we can see indirect effects on the industrial processing, for an instance, where we can see effects on the sulfur market that also have an effect on process systems.

So yes, we have additional ongoing cost measures within Venture, as well.

Got it. Thanks very much.

Thank you.

Thank you, and operator, we'll continue with the call question from the conference call, please.

Hi. Markus Almerud from Kepler Cheuvreux.

A couple questions. First, on Europe, the European order intake you say is minus 6%, which is a bit weaker than I expected.

Can you just elaborate a little bit on what sticks out and which end market is dragging it down? You're talking about it being sequentially flat, if you take away the seasonality, but if you can talk a little bit more on that.

And then secondly, if you could just update us on the commodity exposure in the remaining mining business in terms of how much is gold, how much is copper, etcetera, etcetera? Thank you.

Taking the last one first, then. We have reduced the exposure to iron ore and coal quite a bit with taking out mining systems from the figures.

And I think you can see the exact share, actually, in the supporting material, but what is important to remember is that it's a decreased exposure on iron ore and coal on that one. On the first one, when it comes to Europe, again, looking on the businesses that are heavily impacted by seasonality, mainly materials technology and machining solutions, it's mostly kind of seasonality and within Europe, we see the same pattern as we have seen previous quarters.

I mean a high volatility and a negative trend more towards the Eastern Europe with Russia, more kind of stability looking on Germany for an instance. So no kind of significant changes from what we have seen before in Europe.

Okay, thank you. And then finally if I can just ask about the aftermarkets, you said that the you gave us the Q3 numbers, but what's the share aftermarket in the first nine months?

And then also did you keep all of the aftermarket and service sales, so did you have parts of it coming with the mining systems as well?

No, I mean aftermarket in terms of all mining systems is almost kind of non-existing. So it is a continuous business.

And taking out mining systems, I think we have a kind of a similar picture in terms of the share of aftermarket of the total invoicing for mining, meaning two-thirds of the business.

Thank you. And we have one question here in the room.

Please Anders.

One question regarding construction. It seems that you had the better order intake for a couple of quarters while sales is significantly lower.

Are you having a better pipeline now or --

No, see if you are looking on the order intake, we have had some major orders that are kind of disorienting a little bit when you are making the comparison between the invoicing and order intake. So I think it's mainly due to major orders.

When it comes to the underlying market development that is not reflected when you see the major orders. So there is no change looking comparing to previous quarters.

Those major orders, will they be shipped in the fourth quarter or next year or --

I mean partly fourth quarter and into next year as well.

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

Hi Mats. Can you help us a bit more understand the impact of oil in both Venture and SMT?

Specifically, can you say roughly how much Varel revenues have dropped and what the book-to-bill looks likes and whether the margin, which I think it's already gone from 16 to low single digits is now in loss. Just trying to understand how that might develop.

And on SMT, I'm more thinking about next year. Is it that oil hasn't dropped so much in SMT and will next year and could you sort of scale how much it's dropped so far and how much you think it drops next year.

I'm thinking about margin mix I guess, oil based margins are way higher than standard in European consumer style margins. So can you help us quantify any mix effect in to next year in SMT?

It's not quantifying exactly I can give you some guidelines on that one. Starting maybe with the Varel side, we are still in positive territory if you are looking on the margin for Varel, because what you can see in the total number is a purchase price allocation effect of some 50 million in the quarter.

So taking out the purchase price allocation, we have a positive margin with Varel. When it comes to the impact on Varel, as we have really a footprint when it comes to the unconventional US oil and gas, we saw a more of a kind of an immediate effect on Varel from that one.

So, I don't think you should kind of assume that we will see a dramatic shift from Varel right now going forward and especially as we have seen a more of a stabilization and looking on the rig count in US. So that goes for Varel.

Looking on materials technology, like I said, we have in terms of umbilicals, we have an order book that last or an order book until end first quarter next year. We are still anticipating to see orders in the fourth quarter when it comes to umbilicals.

So that impact will be kind of a later if we don't see any kind of changes in the underlying environment for oil and gas. What we see in terms of the profit effect and I think that is important to realize when you are looking on materials technology.

We can definitely see an effect on the more kind of core and standard business within tubular, that is indirectly an effect of what we see going on within oil and gas, because we see a much, much tougher competition in that area and more players are getting in to the core and standard side of it. So that is definitely something that is negative in terms of underutilization and in terms of kind of the productivity within materials technology and it's also priced specially in that area.

If I can just follow up on automotive. I was surprised with your slightly stronger comments and I'd have expected given global auto production seems to have slowed to 1 and some talk about adding to minus 1 next quarter.

Is that a market share issue or timing issue?

No, I would say it is probably more a timing issue built in to that one.

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

Just a quick one. I wondered if you could give us a little bit more color around the continuous softness and rock tools in mining I suppose particularly, but also I think you talked call it out in construction as being stable.

So, I just wondered if you can give us a little bit more detail around I guess particularly the pricing dynamics and really what's driving that in terms of any comment you can make with respect to the conversations you're having with the customers

In terms of old price ratio on rock tools, it's the competition. It is much tougher competition and we can see kind of a more price pressure from contracts rather than the kind of over counter sales for rock tools.

Thank you Alex. And operator, we'll have the next question please.

Thanks very much. Good morning Mats, Ann-Sofie.

Just a follow-up on SMS if I could, Mats. I was a little bit surprised to hear your comment earlier but you didn't see anything meaningfully dramatically by region within SMS.

I thought Europe was notably weaker at minus 4% in the quarter. We've talked about that being the bright spot earlier.

Does that reflect underlying market trends here or I would have expected you to be taking share on the back of your product rollout, so I was really surprised to see the 4% decline there. And then on APAC, better or at least declining less than in Q2, again, a bit surprising given what we thought was a sequential deterioration in China.

Can you just talk through those two regions please?

Looking at Europe to start with, from a sequential point of view, it's a lot of seasonality built into the figures. So, it's really kind of hard to do any conclusions looking on mainly July, August in Europe.

But I would say seasonally adjusted more kind of a flattish development in Europe. When it comes to Asia, like I said, a negative effect from China.

So we continue to see a very difficult market situation in China in basically all of the customer segments looking on the development in China. While we saw a more positive development if we're looking on Japan and India for an instance in Asia.

So the issues with China continues.

Thank you. And then just secondly and finally if I could on balance sheet and dividend into 2016.

Obviously strong working capital as you pointed out in the quarter, you're scaling back a bit on CapEx and you should presumably see some proceeds come through from the sale of mining systems, in the not too distant future. I wonder whether though in light of the current demand trends, what your thoughts are on leverage and dividend payout specifically.

You've been quite generous in the past few years. I wonder whether we should start to set expectations here to a payout ratio or policy, payout rather and at closer to the policy level at around 50%.

It will be helpful. Thanks.

I think when it comes to dividend, that's more a discussion for the Board. What I can refer to is, our financial target we have when it comes to dividends, because we're talking about 50% of EPS and I think that is probably kind of good starting point to see the long term targets when it comes to dividends.

And looking at the balance sheet we are improving, because it's extremely important looking on the cash flow development and looking on the net gearing we're now below the 0.8 that we have as the long term target. So that I think is a good progress.

Thanks.

Thank you Lars. Can we have the next question please operator?

That's great. Thank you for taking the question.

I am standing in for Ben Maslen. I wanted to come back on the mining aftermarket again.

I just want to understand the specific price dynamics within that business. I'm not completely familiar with how big rock tools is as a proportion of your overall mining aftermarket sales.

But are you saying that this is something the price pressure is confined to rock tools or is there any risk at all with that spreads to other product categories. So that was number one.

And second related question is, are we talking about mid-single digit declines in that category or is it something more serious. Are you seeing deep price pressure in one area or is this just a fairly gentle downtrend.

And then finally, how do you expect aftermarket pricing to develop over the next one to two quarters?

Again a lot of questions. Let`s see if I can remember them.

If we're looking on the aftermarket, the 67% of the total that contains a rock tools services and their part. Rock tools is definitely less than 50% of the total at the kind of aftermarket exposure.

And looking on the price pressure what we see within rock tools, I would say, as you stated, it's less dramatic using your words, we haven't seen any kind of a huge impact. Then I am looking it's difficult to sum, given the more uncertainty we see in mining and the developments we have seen in the quarter with the mining houses closing capacity and so forth.

That might have a bigger impact going forward. That's still to be seen.

But I would to like looking on our portfolio for aftermarket is that we have done a lot when it comes to developing our services for an instance. So that's more of a kind of a self-help and we are increasing the penetration on our installed base.

We're doing a lot of positive things as well within aftermarket.

Okay, I guess what I'm asking is, is it fair for us to assume that this effect that you're seeing right now in rock tools, could actually be more broad based within your mining aftermarket over the next six months.

I can't kind of the answer that and give a forecast, but what I can conclude is, if we have the mining houses starting to a kind of the take down capacity, we're going to probably have more idle equipment out that. An idle equipment would have an effect as well on the spare part for an instance, but we haven't seen that so far.

Thank you very much.

Can we have the next question please. And we only have a couple of minutes left.

So can I kindly ask you to strictly stick to one question going forward. I want to see if we can squeeze in all the remaining participants.

My one question is a follow-up on Europe, where we earlier had discussed the weak picture on the machine solution side as well. Can you maybe give a little bit more commentary around that, because a lot of debate that we get on European car production, European appliances, it doesn't look like Europe is getting worse, but you see a weaker development here if you could give some color maybe by geography or important end markets.

Why Europe's not improving like maybe some of the overall macro data is telling us.

Again, looking on Europe for machining solutions and adjusting for seasonality. I wouldn't say that we have a negative effect in Europe.

We are talking more of a kind of a flattish development in Europe. Of course again, for machining solutions, the seasonality plays a big role in the third quarter every year and then it makes it a little bit more difficult to judge the trend in the quarter, but what we said adjusted for the seasonality, more a flat development for machining solutions in the quarter.

Thank you. And the next question please operator.

I just wanted to ask a mining systems business that is up for disposal. Book-to-bill is 0.35 in Q3, which seems to be down substantially from H1.

Is Q3 performance indicative of underlying or was there a particular sort of drop off or something else just to gauge how that may look for the full year?

No, I think it's more kind of normal given the market environment we have. Because it's a very high volatility when it comes to mining systems, because we have very big single orders and it always depends on where we get it between the different quarters.

So I think it's no change when it comes to market environment in that timing.

And actually if I may, just one more question?

Yes please, go ahead.

On pricing there's been quite a few comments. If I just dare to summarize and run through it and if you can tell me what I've got wrong, that will be great.

So, what I've got is positive pricing in SMS that was clear and negative pricing in Venture in oil and gas and in mining new equipment and rock tools in aftermarket and a negative pricing in SMT. And then my read is that elsewhere is more or less kind of in line flat.

Does that make sense?

Just to stress, when we talked about mining, we talked about the flat pricing overall for mining.

Overall flat with pressure in rock tools. I'm implying better for an aftermarket and flat in OE, something like that.

Yes.

Thank you. And we have a final question please operator.

I'm sorry to come back on this SMS question Europe again. I mean if you look at the year-on-year local currency order numbers that go from minus 10 to minus 4 and this is a year-over-year number, not a seasonal number.

And so I really would appreciate if you could help us understand how the new product introductions are phasing in, the extent to which these are supporting business or whether there is some other individual year-over-year factors which are plying through in Europe?

When we are looking down year-on-year we have a development before the third quarter. I think that's more due to the comps.

But looking on the sequential development, again I would say more kind of flattish adjusted for seasonality in what we can read in the quarter. And our order intake is really supported by introduction of new products and we can see that there's a kind of a positive in the new sales ratio as well, so we are supported by new products, but in this more kind of difficult market situation, it's always kind of more difficult with introducing new products as well in terms of productivity, when productivity might not be the kind of main issue for customers.

But looking on the underlying, we are definitely supported by the introduction of new products, yes.

Thank you. And thank you all for joining us today.

Before we finish off, I would just like to remind you all that regarding the CMD, we have postponed it. It was originally planned for November 16, we're pushing that into 2016.

I will come back with a new data as soon as we can. Have a good day.

Thank you.