Sandvik AB (publ)

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

Guillermo Peigneux - UBS Klas Bergelind - Citigroup Ben Maslen - Morgan Stanley Markus Amala - Kepler Cheuvreux Peder Frolen - Handelsbanken Capital Markets Lars Brorson - Barclays Capital James Moore - Redburn Partners Daniel Schmidt - SEB Graham Phillips - Jefferies

Thank you, Ann Sofie. Welcome to the quarter two report.

With me today I have Tomas who will help me to do some number crunching, as well as answer some of your questions. I think the first quarter was pretty much in line with our expectations and targets to make Sandvik a more profitable company.

The markets continue to be challenging. And also this quarter we saw the currency going against us.

And despite that I think we managed to deliver 13.4% which we are very pleased with. The organic growth was minus 4% both for orders, as well as invoicing.

We start comparing our self with little bit easier quarter going forward. I think the first half year 2015 was the most challenging period.

Also during this quarter we had the capital market day where we presented the strategy going forward and some of the changes that we are doing. And to summarize that, we are consolidating the five business areas into three business areas.

We have identified what we call non-strategic operations. We are going towards more decentralized structure and decision making and we also launched the new group targets, we'll come back to all of these as a bit forward.

We have also earlier today announced that we have signed an agreement with a company called CoBe Capital, private equity company, who would be -- where we'd be divesting the mining system. We'll come back to that a little bit later.

I mentioned that we are moving into a so-called decentralized operations that means actually moving the decision making down in operation closer to our customers to make sure that we can respond to our customer's demands much quicker. This is nothing new in Sandvik, I think previously if you go back in time, Sandvik is coming from a decentralized operation and this has been well received in all our units out there.

The difference from previous is that we are actually moving the responsibility even further down from the businesses to what we call product areas, PAs. And under there we also have a number of business units.

So today we have 17 products areas with full balance sheet and profit-loss responsibility. We also set up the financial targets and we are going actually from a business cycle into a three-year target, and the reason for this is that we feel a little bit unsure how good the markets will be during the coming years.

And for us it's important to focus on profit improvement in operations, even though the markets are not too generous. So our objective is during the next three years deliver 7% improved EBIT margin per year, and we are moving towards our objective to make Sandvik a 15% EBIT Margin Company.

At the same time we of course also want to improve our return-on-capital employed, and during this three-year period the objective is to improve it with 3%. You all know that we have had or we have strained balance sheet and our ambition is to get our gearing down, we will continue to do that.

And that we have dividend policy which is generous and we are planning to continue with that. So if we look at the different markets I have to press many times but maybe to come here.

We can see that there is not so much change in the different markets; Europe continue to be flat on a good level, steady level, and I would say probably that east Europe is a little bit stronger and the western part, also Germany shows strength. North America -- I think Asia, it's an improvement here, you saw we had a negative during previous quarter and now it's about 5% on Asia.

To be mentioned here is that China is still negative 4%. North America is probably the area where we are -- feel that the market there is the toughest at the moment, and we don't see any recovery at the moment.

So it's down 10%. There are of course segments in the U.S.

or in North America where we see good development and that is in the aviation and where still the automotive industry is very strong. So we're looking at the different segments but we are pleased to see is that the mining industry is stabilizing, that's very good.

We see also strong as I mentioned automotive and in aviation; construction is also pretty steady, while we see the biggest challenges in the oil and gas industry which is not just strange. Our oil price has stabilized just below SEK50 but so far we don't see any big movements in the investment climate.

On the general engineering side, it is challenging, especially in North America and as we talked about before they use a very strong relation about general engineering and the oil and gas industry. I think we also mentioned before you said, we are not seeing that the number of drill rigs in North America is declining, rather coming back a little bit.

So far it doesn't really be seen in our numbers but still a little bit in the right direction. If we're looking at both our orders and our revenues, we say that -- we can see that the organic of the minus 4% for both of them and the currency effective about 5%.

But what you can see on the order received here on the chart is that the last four quarters are pretty flat, so we are not going down it's actually flattening out here on that side. Moving over to the EBIT development and I mentioned 13.3% and in that it's actually down 9% compared to last year, but if you look at the currency effect it's about 1.1%.

So if you add that on we would end up at 14.4%. So I think by that we feel that this is very strong numbers.

This is very much driven by many of the projects we have both incomes the backend and the supply chain optimization program where the project is moving according to plan but there is also lot of initiatives when it comes to sales and administration, and of course in all our operating entities and that will continue going forward. So we were looking to the -- our five different businesses, starting up with Machining Solution, I think this is the strongest result of the business unit, I think they presented a good report, we can see organically they are flat at the moment but -- and also a currency that it was against them with 0.7%, despite that 21.8% EBIT margin which I think is very good.

Good is also to see that the networking capital is very stable, and they produce a very strong cash flow for the group. So that is moving in a good direction.

On the Mining side, margins are here pretty much in-line with our expectation and I think the positive side is here that we see an improvement on the equipment side, I think that's positive and also the after-market is stabling out which is also good. We should know that we are comparing this quarter which is a flat quarter compared to previous year with a very strong one last year, so its good numbers in that rate.

Mining and Construction, as you know are merging at the moment and there is a lot of focus today to getting the new five -- sorry, eight product areas up and running. And the management is in place and I think it's moving very much in a good direction.

Also Materials Technology shows stable profit levels, 8.8%, if you take away the metal surcharges, it's 8.5%. They were a little bit positive by SEK9 million this year.

On the organic growth, it was down minus 8, minus 6, if you actually take out the surcharges out of that it's pretty flat, it is minus 2, minus 1, so also pretty much. We had a great order from China on -- from the nuclear industry which we were very happy with, we have as you know, big expectations from the nuclear industry in China.

We had a small cancelation or active re-privatization from the umbilical side, more focus on some of the bigger orders that we had there. Otherwise, I think is what's pretty much what we expected.

On the Construction side, I think you will probably realize that the numbers were a little bit weaker than the expectations but in the EBIT numbers, we have taken a number of provisions. I think around SEK40 million at the moment which in relation to the merge into the Mining business.

And what we're actually making sure that construction that moving into mining is clean at the moment. So if you would add that on we are just under 4% which is not different from previous quarter.

We can also see that organically we are down 13% but we should know that last year we received a large order from Australia, the tunneling order. So if you exclude that it's about minus 6%.

Network and capital continues to work favorably going forward. And the last one and probably the last time we talked about Venture, that is also pretty much my new expectation, the order takers minus 10% a year-over-year, and here we know that there are two businesses which is pretty much related to the oil and gas industry, and that is the drilling and completion as we call it today, that is now being moved in to the mining operations.

And the other one is Hyperion, the diamond part of that business which is little bit under pressure, at the same time I think they did a good quarter. Also Processing Systems, which is one of the companies that will be at divested had very good orders at the quarter.

And then another business, the BOL [ph] business would be merged into the SMS business had also very solid numbers during the quarter. With that I'll let Eli [ph] talk a little bit about the numbers.

Thanks, Björn and good afternoon, everybody. So let's immediately go to the financial summary.

Top line as you heard, minus 4% organically, both on orders and revenues; currency effect, minus 5%, both on orders and revenues. And then we do have a couple of very small acquisitions but they are so small, so they are not significant, doesn't really affect the numbers; so all-in-all minus 9% on orders and minus 8% on revenues.

The margin, 13.3%, SEK2.7 billion in earnings, down a bit from previous year but not too bad considering the currency headwind and the volume drop that we do have with 4%. Working capital, 28% compared to 29% on the revenues last year.

So an improvement although sequentially, it is a bit up which of course impact cash flow which we see on the next line, cash flow is lower than last year. We'll come back to that in a minute.

The return on capital employed, 11%. Now let me say that that for those of you who attended the Capital Markets Day, you heard us talk about the financial targets going from 14% to 17% in return on capital deployed.

So what is these 11%? Well, the 11% is as reported.

The financial target excludes all the one-offs and we're still carrying with us one-off costs from 2015 in these returned number but that will be gone when the year is over and it goes up a couple of percentage units. Let's move to the bridge and the three biggest impacts are as usual; organic growth, savings programs and currency.

We have the more numbers on the next page but on this page here we can talk a little bit about the savings programs; SEK214 million in the quarter. We have now reached SEK1.5 billion in installed savings of the SEK2.1 million and that we will achieve at the end of 2017, so there is SEK600 million to go.

There would be a substantial chunk of that in the second half of 2016 and then a couple of hundred million in 2017 and then there would be less radical spill over to 2018, although around a hundred million. So let's look at the numbers in the bridge including top line as well.

And in the first column here you see price, volume or organic development including the savings. So 4% on the top line means SEK637 million down and the EBIT effect is flat but it's actually a little bit positive including the savings.

So this means that we have 50 basis points accretion to the EBIT margin from the organic part of the business. Currency, of course 5%, SEK1.065 billion on the top line and the currency effect is SEK391 million.

So that's a dilution of 1.1 percentage units we all said here just a moment ago, so quite substantial. And then statutory one-offs, alloy surcharges, metal prices add, etcetera, etcetera.

If you take that out, you have another 50 basis points. So from 7.4 to 7.3 and here we have the components.

Let's talk a bit about working capital. Working capital on the left hand side here, 28% compared to 29% a year ago although sequentially it is up a bit.

And if you look at the right hand side you can see how the businesses are developing, when Mining is improving Construction is improving, Machining Solutions is flattish, and Materials Technology is up a bit. And it's very important to say here that we don't have an inventory issue, inventories are down all over the place, accounts receivables are down, payables goes a little bit in the wrong direction but the biggest impact here is actually advances from customers, we don't have as much advances this year within Materials Technology, as we have last year and then of course it has an impact.

But the summary -- all that I'm saying is that inventories are going down for all businesses and for the whole company. Cash flow, SEK2 billion compared to SEK2.7 million a year ago; this is cash flow before the financial items taxes and acquisitions.

And as you can see on the table on the right hand side, of course we make less money. We have a decline organically.

We basically keep the margin, but as we have the volume decline, of course in absolute terms we have less cash. Working capital is up a bit and CapEx investments are down or improving.

So all-in-all SEK2 billion compared to SEK2.7 billion; 24% down. The net debt continues to go down year-over-year.

There is always a pickup in Q2 as you can see in the chart here and that's because we have the dividend in the second quarter. Gearing is around 1.0 and the target of -- I guess is 2.8% in gearing is perfect [ph].

The guidance, if we look at the second quarter we guided SEK500 million in negative currency impact, transaction and translation. We end up on 391.

Metal prices we said minus 50 but it stopped at plus 9. For the third quarter, we guide -- with the currency rates we have today; Ann Sofie, maybe yesterday?

End of June.

End of June. We say minus SEK100 million, and the metal price effect is expected to be plus SEK13 million.

The full year we haven't done any changes on the outlook at all, so we say CapEx for less than SEK4.1 billion. The financial items or the finance net somewhere between 1.7 and 1.9 but if we would say something here, it's maybe more closer to 1.7 and 1.9, so it's moving in the right direction and the tax rate somewhere between 26% and 28%.

Now just a few words on Brexit; we got a lot of questions on this one, of course, and I'm sure we will get more questions on it. So I'd be bit preemptive here and give you the basic facts.

There is really two issues here; do we have an impact on the currency flows on the British Pound, the depreciation? And how big is the United Kingdom in our business?

Let's start with the size of the business. 2015 we had sales of SEK3.8 billion, and of course, it's the fourth largest market that we have.

So if we have a downturn in the UK economy, of course it impacts us but SEK3.8 billion, around 5% of the total company. The net assets invested in the companies that we have is SEK3.7 million.

We have 11 production sites, 8 sales units and around 1,400 employees. The currency flows match actually, so the short-term loan positions on the British Pounds are more or less exactly the same.

So this means that we don't have an impact short-term or an immediate impact on the currency flows regardless of where the pound goes. So the conclusion is that, as I mentioned, no immediate currency impact but the UK is still an important market for us.

As you see the numbers here, we don't disclose margins by country but you can do your own assumptions here. And with that I'll hand over to Björn again the floor.

Thank you, Tomas. And I will end up with talking a little bit about the structure.

As I mentioned, Sandvik is in from my perspective about 28 operating entities, 17 product areas and business units, each of them with full responsibility for their P&L and their balance sheet. These all different operations, their performance varies from being extremely successful, stable and profitable to being less and need more improvements.

The -- of these business units or product areas, they need to have the strategic agenda and we follow the curve, stability, profitability before growth. That means some of the units they need to stabilize the business, make sure that there will be no surprises, and the next step is to improve the profitability to the right level and brand [ph] unit is profitable and stable than it's time to focus from before growth.

So this means that all of our 27 operating entities needs to focus on continuous improvement. So if all our operating units continue to improve Sandvik will become a more profitable company and we'll be able to reach our target to reach the 15% EBIT In the next three years.

I think we end there and then we are open for questions-and-answers.

Yes, let's go straight to the questions. And are there any questions in the hall here in Stockholm?

No, no questions here. Then operator, could you please sit through the first question on the conference call please.

Thanks everyone and good afternoon. I wanted to ask two questions; first, obviously about Machining Solutions and whether you could actually quantify the stalking effect and the additional base effect on the margins if at all?

And then maybe a second question on SMT and Materials Technology, the invoicing continues to be very strong and well taken away Q1 last quarter I guess, or in the trails below and invoices, so I wonder whether we should see actually an erosion in terms of revenues going into the second half of 2016? Thank you.

Thank you. Let's talk about the stalking effective in SMS, there is a small increase in inventory that which actually is neglectable so it has a very, very limited effect on the EBIT margin on SMS.

The little bit working out inventories much related to deliveries that will be -- which is seasonal and would be down during the summer period. But today there is more less no effect maybe 0.1% or something like that, but not more.

On the SMT part, there we saw that pretty good invoicing, that is correct. We are little bit optimistic that we should be able to continue to see a reasonable development during the second half, we'll be seeing that.

There are lot of exciting area within SMT, it is related to Iran as one part, the nuclear is very exciting, and we also see some small improvement in some parts in the primary business. So we are carefully optimistic that we should see reasonable second half of the year when it comes to orders in SMT.

At the same time they are taking the activities that we talked about during the Capital Market Day to make sure that the costs are related to the revenues. And this business is longer distance between orders and deliveries which gives us also reasonable time to take action, if needed.

But so far I think it's moving reasonably good.

Thank you. Can I just check that the numbers of extra days that's not going to impact on margins, I think that should be the case right?

I think we had that to two days in the quarter.

Yes, and that will not impact margins, it's just basically their revenues and orders, that's all?

Correct.

Thank you so much.

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

Hi Björn, hi Tomas, it is Klas from Citi. A couple of questions please, firstly starting on Mining, demand is up slightly quarter-on-quarter versus flat last quarter.

Does this also mean that pricing has improved? I'm thinking about consumables where price pressure has been a key feature of the last 12 months.

ATLAS is talking about better consumables this quarter, I just want to understand the change in pricing as well.

No, I would say that the challenges hasn't really changed anything from previous quarter, there is correctly on the consumables some pressure on the pricing side, that is correct. While we see, of course, a little bit more stable in the rest of this, the after-market business, the service and the spare parts, as well as on the equipment.

Okay. Then my second question is on SMS and General Engineering; last quarter you were down slightly quarter-on-quarter, now it looks more stable.

It seems like Europe and Asia are the main drivers, North America still weak. And can you give us some color on China within Asia there you still say that Asia is down year-over-year, but how did China develop sequentially and by end marketplace?

Yes. If you look at China, the positive in China is automotive that is developing positively as well as the aviation side otherwise it's down about 4% in China.

SMS is also down in China I think with 4% during the quarter while we see an uptake in the mining side which was otherwise, I would say that no big changes if you're looking sequentially.

Okay. My final question, promise to be brief is margin in SMS.

It's 22.4% key no occurrence in production, this is the highest margin since the peak in 2012. So I am trying to understand is, is this the extra cost for the product launches that they are now leveling off or is it -- but the price mix in Q2 more smarter tooling, the sensors, what is the key driver?

No, I think it's the -- the project is around related to the supply chain optimization program but also a lot of efforts that has been taking on the S&A cost and they continue to drive this going forward. So it's not an ending, we will continue to make sure that the operations are in-line with the demand in the market.

I think they are doing this very successfully and we will continue by.

Thank you, Björn.

Thank you, Klas. Again, do we have questions here in Stockholm?

No, it's very quiet. We will continue with the conference calls please.

Operator?

Yes, thank you. Hi Björn, Tomas, Ann Sofie.

Björn, a question on mining please, and the improvement in demand/orders that we've seen sequentially, is that been driven by any specific product lines or commodities? I know you've given it geographically but how does it come by equipment or the different metal exposures?

Thanks.

I mean it's difficult to say if it's coming, the orders are coming in bigger projects, and you get certain time. If we look at the metal prices they have gone up during the last months or quarters actually, we didn't receive from the beginning any reaction in the market.

Lately, we've seen good orders in the end of the quarter which is very positively and there are some positive signals but it's still difficult to say. We are not really sure how sustainable this is and I think we should probably wait one more quarter to see how the development before we make any quick conclusion on the demand in the market.

We have seen other times when we've been maybe little optimistic about that and then becomes a weak quarter after that. But it is encouraging because we need of course orders for the factories, not to avoid under absorptions in them, and from my perspective it's encouraging to see that the after-market is stabilizing because that is an indication of how the operations are -- the mining operations are working.

As more they are working and harder, we have put in a lot of efforts to improve the after-market during the last that two years and that should be paying-off.

Thank you. And then a second one please on the Materials Technology, where I think you normally get a 2 basis points to 300 basis points margin drop sequentially in the summer in Q3.

Would you expect the same pattern this year or would it be lower given that -- I think here the comments we suggest that you were already de-stocking a little bit the second quarter. Thank you.

I mean, this is Sandvik, it becomes weaker during the third quarter and I don't think we should expect any other changes -- that pattern is not and that of course is related to the number of working days and many of our operations, not be the SMS business as the SMT, it's very much related to that.

Got it.

It will be a little bit softer during the quarter, that's pretty clear.

Okay, many thanks.

Thank you. Operator, can we have the next question from the conference call please.

Hi, Markus Amala here. Can I ask -- continue with the geographical questions based on SMS in particular.

So we're seeing improvement in growth trend in North America in particular but also in Europe. Can you talk a little bit about if that is just working capital or working days or if those an improvement in SMS in particular?

So that's my first question.

Maybe I -- can I answer that. We haven't seen any improvement in North America, rather their office, I think it's pretty weak there.

If you look at the automotive industry, I think that is more or less flattened out. Yet we don't see any growth in that part but we do believe that it's related to a little bit of the destocking but we see an improvement if the automotive in China and Europe but that's an -- but China was still minus and North America is minus, so it's Europe which is the strong part of the SMS business.

And is North America -- is it accelerating or decelerating or is it sequentially into the quarter pretty steady? And do you have any feeling at all so where the stock levels are with your customers?

We would probably say it's a slight down in North America. We do believe that it is related to the destocking in the automotive but it's difficult to say exactly what level that is but now North America is probably the market where we see the biggest challenges, it's not really Sandvik issue, I think this is really North American issue.

Okay, thank you. And then if I can just continue on mining, so there has been a couple of project approvals, some big ones like the -- total expansion but also some of this.

So can you talk a little bit about do you fill in the talks with the customers at tendering activity as such. And also we've heard from some of your competitors that there is an improving situation in gold which has become quite important for you and do you agree with that picture or you're seeing something else?

Thank you.

No, we agree with that. I think gold is important for us.

The most important is copper. And copper as you probably see it is down, actually quarter-over-quarter.

Gold is up but we see an increased part on the tender [ph], it's difficult to see how they will materialize. So I think as I mentioned, we need another quarter to see how that really is but there is slight optimism in the market.

Okay, thank you.

Thank you, Markus. Can we have the next question please operator.

Thank you. This is Peder Frolen.

Hi Ann, Björn and Tomas. My first question is on absentee on umbilical business.

You mentioned as a whole that you expect and hope for a sort of stable order situation. Could you just update us how the deliveries will look like for the umbilicals?

And could you also clarify bit about that specific umbilical business that you -- I think it was a cancellation or a postponement. That's my first question.

Thank you.

First, when it comes to umbilicals, for the year as we have mentioned it looks good. I think you are pretty full during the period.

What we are working hard is to improve for 2017 and 2018. There are lot of exciting projects that have to materialize, that's before but whether slight small optimist that is have a good chance to do that.

Related to the cancellation there, that was actually related to one of the big contracts that we took last quarter and there the customer had to prioritize on the large project instead of the small one. So it was not really taking out that part that is just put back in time a little bit.

Okay. And the magnitude here?

On the cancellations?

Yes.

Yes, I think it was totaled about SEK90 million.

Okay. And my next question, you mentioned the process and construction and I mean, now the transformation although structure of the group is sort of ongoing, will we see more of this type of provisions when we sort of exit my system business, when we get these two divisions together and obviously also when you resolve the venture business.

I don't -- I hope not because it's difficult to say that it would never happen that if things can always happen but I think we are -- we feel pretty comfortable at the moment, at least with a merge between construction and mining at these period but I -- difficult to say but I think we feel pretty clean moving into that. On the venture side, the different businesses moved in, both into SMS, I don't see anything should happen there and moving into the mining, there should not be anything that feels pretty clean at the moment.

When it comes to mining systems that we -- you all know that we announced today, the signing of the contract with the CoBe, there -- there is a capital loss in that part which is around SEK800 million but that is going to be booked as non-continuous operations. It will not affect our operating margins.

This is of course not closed yet, so we expect to close this by the end of November and we have a lot of work to be done during this period and that can be cost in relation to the sales. Do you want to add on that a little bit Tomas?

Yes, we can elaborate a little bit on that. I mean the capital loss is estimated to be SEK800 million if you do not know for sure then the closing is like in November hopefully but around SEK800 million in capital loss.

And then of course there are transaction cost etcetera but the transaction cost and some other cost, they are already provided for last year so that will not impact the P&L going forward but you don't know that there might be some other costs depending on how it goes which rolls on -- related in the future, not significant but that might be something but all of that will be accounted for as Björn said in the discontinued operations so it will not impact our key numbers or ratios.

So in curiosity [ph], were the -- sort of industrial players that were interested in the systems business and if so why are you sort of wanted to divest to product equity? Is there a pure price or loss type of function or…

I think it's -- what we feel important is that there is future for money systems. We need to make sure that they can continue to operate because they operate with many of our customers where also you see in the mining business and we need to have good relation.

So most important is that the business continues to have a stable future and we need to find a player who is serious and dedicated enough to make sure that this becomes good business. I think that's important.

And we are the reason why this capital cost is so high because we needed to capitalize the company in a way that it can stand on its own legs in the new structure, that is important otherwise it would be impossible for them to label [ph]. So this is behind that, there the some restructuring work and there is some capitalization there which is needed to be done and that's what we put again, we need to make sure.

But we do believe that the buyer is the best buyer that we have found so far.

Great, thanks a lot.

I believe we'll have one question here from the conference room [ph].

Yes, I'm [indiscernible]. Just a follow-up on the mining systems.

There is a SEK600 million cash outlay, is that the capitalization you talked about?

You can take it.

Yes, the big part of that is the capitalization. But it's also a bit of restructuring and some purchase price adjustments etcetera.

Well, to put it like this, what is not in cash flow impact is the book -- is the net value of the assets.

And we also have one question having been put through, through the web. And it regards our view on the M&A and whether we see any potential for any near-term deals?

I'm exciting with the new structure that we have. We have this 27 entities and they all are in different phases in the development and as I mentioned during the Capital Market Day that the operations that are both stable and profitable, they should be focusing on growth and we have quite a lot of these entities in Sandvik as you probably understand.

And they need to focus on growing the business and you can do it organically as well as through margin acquisitions and we encourage them to go this direction. So, but you need to stable and profitable before you go for acquisitions, that's important.

But it will definitely be one important part of the growth Sandvik in the future.

And coming back to the financial targets that we talked about here, just half an hour ago, we repeated half an hour ago; this is why it's so important for us to improve the gearing in the company from today's 1.0 to 0.8 because we have to create space in the balance sheet so that we can be a bit more active on M&A for the future because there is not much space today for major acquisitions in the balance sheet.

Right. We go back to the conference call, please.

Operator, can you put through the next question?

Hi, it's Lars from Barclays. Hi, Björn, Tomas, Ann Sofie.

Just a quick one follow-up on mining systems, I couldn't hear what Tomas said. Can I just be clear are you injecting any cash as part of your sale up the systems business, and if so, how much?

And also just to be clear are there any other contingent liabilities, any performance ready conditions to the sale earn outs etcetera?

On the cash side, yes, we do capitalize the company and we haven't disclosed and we're not disclosing the parts of the deal as such but the capitalization is the biggest one.

And you probably know also that the company has been making losses in the last time, and we need to put there -- there are some restriction measure that are being taken to make sure that the company's not losing money.

Thanks. If I can just return to SMS, thanks for the update on Brexit.

So UK is 5% of the group, how much is it for Machining Solutions? And just on your European trading in Machining Solutions, you said earlier I think in the press call and Q3 hadn't really been much worse nor much better than Q2, perhaps you can give us a sense of where the monthly trading trends have been in Europe through the course of Q2 and what you've seen, if anything in UK in a three to four weeks post-Brexit?

It's -- I mean during this quarter it is actually only 14 days since quarter started. So I think it's a little bit early but we haven't seen any changes in the development that we had seen at the previous quarter.

And how big is UK in SMS?

For SMS -- yes, for SMS it's SEK1.4 billion.

Thanks.

So pretty similar to the group; in percentage, yes.

Thank you very much. We continue with the next question from the conference call please.

Thanks. Hi everyone, Björn, Tomas, Ann Sofie.

I'd like to touch on three topics if I could; just on SMS and Europe, you've gone up from 0% to 4% organic order growth, that's quite a big plus. I just wondered if you could perhaps help us a little bit more understand the great trends; north, south -- I know you have quite a big eastern European and Russian business and it collapsed a year and a bit ago with the ruble, so I'm imagining maybe Russia is helping that but could maybe give me/us some color on the changing growth there?

I don't have those numbers at the moment, do you have those numbers?

Yes. I think in general for Europe you can say that at the eastern parts of Europe has certainly contributed to be a big extent to the total for Europe and Russia not least or be it they are clearly like you allude to coming from very low levels.

But yes, the eastern parts have certainly been outgrowing the western parts through the quarter.

But western is still positive?

Closer to flat than positive, yes.

So is it really all the eastern block?

Yes, they've done well through the quarter.

And just within SMS, you talked a bit of a couple markets about round tools outgrowing inserts, maybe that's difficult on a quarterly basis but is that structural trends continuing at the moment in the quarter? Can you see the difference, size the difference?

If that's for the quarter or a abroad question?

I'm waiting for the quarter whether that trend continues? The round tools are still outgrowing inserts?

Yes, I mean aerospace is one of the segments that is doing the strongest. So and that's a big and important segment for round tools, I think it's fair to say that the past in a fairly similar skill.

Great. And just turning to SMT if I could, you talked about deferrals back at the Capital Markets Day and orders moving to the right; I just want to be clear has that trend continued or you've actually seen some umbilical business come in that surprised you?

There are some interesting possible orders but I would say it's always too early to say anything before it goes there but there are some -- as I mentioned there are some little bit optimistic that could be.

Okay. And just finely, I'd just like to understand if I could on Mining Systems; it looks like you're effectively paying the buyer to off-load the business, SEK0.5 billion plus [ph], and given some are optimistic about being at the bottom of the cycle mean less.

I just wonder why is it that people don't see better option value than that if you're going to capitalize it and restructure it?

Right, we don't go into all the details but the buyer is of course putting in capital also in this business. But we need to put that stage where it can stand on its own legs and that it has the possibility to survive.

So we need to do this and during a period you have seen it's been a struggling business for us and we need to put it in shape and that's why we need to inject the capital.

And without going into any details James, we have of course looked at various options and even from a financial point of view or also from a financial point of view this is the best option.

Absolutely. Thank you very much.

Thank you, James. Operator, can we have the next question please?

Hi, good afternoon. Maybe just two questions on mining system.

I mean, so you have the capitalization, then you don't mention the exit price. I understand the facility did require exceed the capitalization or not?

That is the first question.

Yes, as we said we don't go into all the details as where the capitalization has been or what is the purchase price or so, we would not disclose that. But we disclosed that the cash flow affected it 600 and the capital loss is about 800 in the sales.

Okay. Just also on the bit on the under-performing business units of the performance over the last 3/6 months profitability wise, are there a lot of drag on in profit than there were in 2015?

Are you talking about Mining Systems?

No, the overall under-performing business that you highlighted during the capital market then?

I didn't get the question.

He is talking about the bubble chart.

That was on the left hand side below this, okay. The bubble in the -- one of the big bubbles in the left hand corner was the mining system, that is correct which is being taking out.

That is -- we have of course other bubbles in that which is under-performing where we are putting in lot of efforts now when they are owning their own costs and their own balance sheet is to make sure that they are moving upto the profit area but we say and I come back to that, we do not expect any quantumly changes, it's all these continuous improvement which is important. And we focus on the businesses where we -- where there is market attractiveness and where we believe Sandvik to contribute to these businesses that are part of these three businesses that we are focusing on.

Okay. And final question on the elimination line, SEK220 million in the quarter.

It includes quite large effects if we exclude it closer to SEK170 million in the quarter. Have you started to put back some center cost into a divisional areas and are we not SEK150 million to SEK200 million level a quarter, is it a new level?

I think you're referring to the center costs that were lower during the quarter. I think we are putting in a lot of saving efforts on the central part and there have been -- if you remember, what we talked about during the Capital Market Day that we have a certain amount of costs which is a pretty big one where we also first transferred it over to the different businesses.

We have started to moving some of these costs back to the operations, and that will continue during the whole year. So that is taking place but when you look at the lower cost for the center part that is a clear cost savings on the center costs for central functions.

Given that, that mean that the divisional areas -- performance is even better than what you show when you compare with Q2 2015?

But in the savings there that is a saving also that meant that there is little bit less distributor costs also over to the business.

We are more than aware that central costs are allocated to the businesses. So when we are moving them it doesn't mean that the businesses are taking on more costs, I mean so they get the resources and the people and the system and what have you.

And then it's upto them of course to decide what resources that they need and do not need. And that varies of course between the -- where all the different businesses.

Yes, so when you look at the business areas and the product areas, it is apples-for-apples. What we're doing here is that we've given them the power to directly influence the costs.

Okay.

As supposed to distributing a big, big chunk of corporate common costs.

Okay, very good. Thank you.

Thank you very much. I believe we have few more questions from the conference call please.

Can you please get through the next one?

Hello, this is Daniel Schmidt from SEB. Good afternoon, everyone.

I just wanted to ask you on SMS and EBIT margin there again, it really takes a step-off in the second quarter. If you look at this adjusted for sort of seasonality, how linear should we sort of model this EBIT margin progression?

Is this the sort on the floor now going forward or is there any sort of specifics in the Q2 numbers that we need to consider looking into the coming quarters and years?

No, I think number one is that we've not started guiding forward to the different operations. But I would say this is a clean report so there is nothing extra which is being added on to the SMS business.

And where will we end up forward that we will see, they will continue to focus on keeping the costs under control, they still haven't completed the supply chain optimization program, so that will continue. And we have a flat development in the volume, so we haven't much helped from that during the period and we had the headwind in the currency so it's of course important to see if we can get some growth in the future.

That will of course also depend on the developments that are going forward but that's too early to say.

And I think maybe -- I think part of your question was about -- little bit about a straight line and seasonality, and of course there is a strong seasonality in the SMS business because it's immediately dependent on the manufacturing activity worldwide. So when the Western Europe closes in August for example; of course it is not much safe.

So you can take 21.8 as a floor and apply it for Q3 and Q4 seasonality still there.

Absolutely, now I understand that. But -- all right, but would you say that this is anyway -- is this in-line with your expectations that you presented at the CMD to make this sort of journey to come to 16% for the group?

Okay, we're not sort of -- this is still early in that journey but sort of the SMS performance, is that in-line with what you expected?

I think SMS probably over delivered slightly and maybe some of the other businesses under delivered slightly compared to the expectation but I think overall it's pretty much in-line with our expectations.

Thank you, Björn and Tomas.

Thank you, Daniel. Can we have the next question please from the conference call?

Yes, good afternoon. My question is again on SMS margin, can you talk a little bit about the geographic mix because when you look back in the last quarter there has been negative contribution to the organic -- profit bridge are coming through in this division, but of those who had a positive in the second quarter with flat organic growth.

So it is obviously a mixed thing going on and with Europe being stronger, North America down, our margin is substantially higher in Europe than North America?

In fact, I would like to say if you look at gross margin it's pretty steady I would say, maybe it's slight up on that part but I think it's very much related to savings, that this is taking place.

I mean under savings, again, geographically focused? Are they going to continue -- you commented on the seasonality but within the product areas, again we just see this EBIT margin on the bridge for the divisions, but the aerospace in defense and automotive high margin at an EBIT level?

I think if you look at automotive it's always been seen as the segment where you had a lot of challenges when it comes to margins, so not really.

Okay. And I'm just moving forward on the new divisional structure, when do you anticipate that we'll have a pro forma going backwards, and how long will you provide a pro forma going back and what sort of level of detail will we get in terms of organic growth and profitability and so on?

Yes, it's going to take some time, it's going to take a little bit more than two months to redo the numbers, and we have the ambition to go out with the press release in September with the historical data on the new structure going back three years.

And will that be quarterly or…

Yes, it will be quarterly so that you can do all your comparisons and trend charts and whatever.

Okay. Thanks very much.

Thank you. Do we have time for one more question from the conference call, if it's a quick one please?

Hi, thank you. Just a quick one on the construction business, I just wanted to understand a bit more about the margin there and specifically what part of that business had got worse year-over-year to results from that the 2.3% margin in Q2?

Firstly, I think you have to see that the volumes are down. If you see year-over-year, I think that's probably then used to automatically get some under absorptions in the production facility.

But as I mentioned is that if you really want to compare it with previous quarter you should be adding back about SEK40 million in cost, that provision as we have taken during Q2. So if you add that on, you end up between 3.8 and 4.0, that's about where the level is of the construction business at the moment.

Okay. And do -- should we see any reason as we move into the second half; from that level it should deteriorate?

Is there anything across the regions that concerns you?

The new structure is of course significantly different from the -- because now the same production unit, they do not split their cost between mining and construction, so if you are for instance in surface drilling, it doesn't matter if you go into the mining or construction, you have to make sure that these cost is what you need to put in relation to your revenues. So the management teams will be running their operations, you will have eight management teams driving that efficiency for the different products.

So it means if you have under absorptions or you don't have enough capacity in the factories you have to adopt that, so that would be a very strong focus from each of them. I think it's a little bit early to say on the construction side, I mentioned that before that where we -- I think we're organically down 13% which is quite a big number I think.

If you lift out that order it's about 6%. If you look where the focus is at the moment, where the best activities is actually in the Nordic region here, that Norway and Sweden, is really big construction related to infrastructure and to Tenley [ph].

And I think we've been putting in a lot of efforts during the last quarter with both in Finland, in Sweden, and in Norway to make sure that we get good stake out of that exciting business that is coming. We will continue to do that focus.

Sure. And I know you said that I mean mobile crushes the capital markets obviously focus on turning that business around; have you started to see any positive effects from what…

Well, it was a pretty tough time for the mobile crushes when it comes to the volumes, that's pretty clear.

Okay, thank you very much.

I know we've run out of time. I know there are still questions out there both on the conference call and on the web.

So please feel free to contact us at Investor Relations and we'll be more than happy to help you. With that said, thank you very much for joining us here today.

And we'll bid you all a very good summer.

Thank you.

Thank you.