Sandvik AB (publ)

Björn Rosengren - Chief Executive Officer Tomas Eliasson - Chief Financial Officer Ann-Sofie Nordh - Head of Investor Relations

Peder Frölén - Handelsbanken Olof Larshammar - DnB Markus Almerud - Kepler Cheuvreux Max Yates - Credit Suisse Alexander Virgo - Bank of America Merrill Lynch Klas Bergelind - Citi Lars Brorson - Barclays Sebastien Gruter - Redburn

Greetings to you all and welcome to the presentation of Sandvik's results for the Second Quarter of 2018. We will run through the presentation after which we'll open up for questions.

The presentations will be of course carried through by our CEO, Björn Rosengren; and CFO, Tomas Eliasson. And without further ado, I’ll just let you rip.

Thank you, Ann-Sofie. Also I would like to welcome you all to a sunny summer Stockholm, beautiful day here.

I am going to present our half year results for 2018. And I’m very pleased to see that Sandvik is moving in the direction that we want.

We are seeing strong demand in all markets as well as in all the segments that we operate in. Also each of our business area is developing in a good way.

And during this quarter, we have seen record orders, record sales and record profit as well as profit margin. So it's Sandvik that is in good condition at the moment.

We also been working with the portfolio management and we are if -- we have been, as you’re all aware of, been able to close a number of deals during the last quarter or just after the quarter. Hyperion is now closed as well as Welding wire as well as the Fagersta divestment, also the Stainless wire coming to an end.

And then we augment moving into the direction that we want to move to grow Sandvik and to expand our core businesses. And we are happy to present during this quarter two acquisitions, Meteorologic as well as Inrock.

Meteorologic, you are well aware of; we have had press conferences regarding that. And Inrock is consumable company within directional drilling, which is adding aftermarket business to SMRT.

So that’s great. But we have also taken the decision to evaluate strategic options for the Varel business.

This is nothing new for you guys. I've been mentioning that before.

We have in our strategy to be number one or number two in the businesses that we operate in. Varel was bought earlier in the direction when Sandvik was moving into the -- more into the oil and gas industry, which we have said that that’s not the direction we’d like to move the company at the moment.

The company has developed fantastically well during the last year. And we actually up at levels when it comes to profitability where we were when we acquired the business.

It's still a little bit smaller but it’s moving in a nice direction. There are still some parts within that business that we consider core.

That is the mining rock tools, i.e. what we call Tricone Bit, where we together with the Sandvik range, our market leader when it comes to this product.

But we will come back to that later. As I mentioned the market continues to be strong.

We see strength in all segments as well as in all regions. We see that we -- in Europe, up 16%; North America looks 8%.

It looks little weak. Actually that is the area, which is developing best also substantially.

We see as high as 19% if we take away one-time orders during last year and this year. So good development there.

U.S. is around 10%.

When it comes to Asia, it’s up 17% and China there is around 7%. So good development within all these regions.

I mentioned before it is record order and record revenues. They are up 12% in profit volume.

We have a book-to-bill ratio of 1.04. That means that our orders are larger than our revenues.

And that is of course good news for the future. That means that these products will be delivered during the next half year.

So that looks positive. The profit is growing but also the margin.

We are at the record profit of SEK 5.067 billion. This is equivalent to 19.4% margin.

There is some currency in this part. It varies a little bit between our businesses.

If we look at SMT as well as SMS, there is a positive currency effect, but when we look at the mining business that’s quite a significant negative currency effect. But if we look at the total here and we include the positive metal effects as well as the FX and some structural from the divestments that we have done, we are actually 28% up compared to last year.

So that’s great to see. So if we dive into each of the businesses and see what’s happening there, when it comes to SMS Machining Solutions, also here we have record revenues as well as order intake, good numbers.

We seek continuous good growth here, 8% on orders and 10% on the revenues. Very, very good overall.

If you put in the positive FX, as I mentioned there was little bit positive FX there, you take it by approximately 1%. So it's moving well.

The demand is there. And we’ve done somewhat increase in inventory on that part, which is very much in line with our expectation and that is for the deliveries, which is normally during the Q3.

The FX on SMS there on that part is about 1%. Mining and Rock Technology, strong growth, 15% on orders and 16% on revenues, coming up to good levels.

We’re also seeing here improvement in the profit, during the quarter, reaching 17.1%. I think it's important to understand here we have a very much negative currency effect.

As you all know that the major building market is actually Finland where we have a euro. And the most of the markets that we deliver is the U.S.

dollar where you have a negative influence. So if you actually compensate for that negative currency effect there you actually come up to as high as 18.2%.

And if you also take out the Varel business, you are as high as 18.9%. So we are getting closer to where we are.

I still think that there are more to reach for. But I think we are moving definitely in the right direction.

And it's also good to see that you know all the product areas and business units there are starting to perform quite well. And that’s of course very positive.

SMT, the problem, the child that we presented one year ago that we will go into restructuring program and we said that during the next two years we are going to reach 10% EBITDA growth. We have also new management since the second half of the year where I think it's moving according to plan.

I think we also see that in the quarter reaching an underlying profit of 9%. It is of course the quarter where we have best resource normally.

And there is a little bit of building up also inventory for being delivered during the rest of the year. But still we see good growth.

We say it's 17% here. But if you actually remove the two big orders, we had a large order last year in this quarter and a big order but little bit smaller this year.

So if you remove both of those, the underlying growth is 37%. So you start realizing that that business is now in a good market for the moment.

So we are very happy about that. The work will continue and we are optimistic that we will reach the targets for next year.

So Thomas, Can you help us a little bit with the balance sheet?

I'll do my very best. Okay.

Let’s dig into the numbers. And take a look at the summary for the second quarter and year-to-date but having focus on the second quarter.

So if you start at the top hand right side, you can see all the top-line numbers both orders and revenues, as you heard 12% organically, currency, plus 1 both for orders and revenues, and structure, minus 2. And the structure here is Process Systems and Welding Wire, which is deconsolidated now or divested, I should say.

If you look at the profit, SEK 5.1 billion almost, that’s 36% up, 28% taking off currency and metal price effect, 19.4% in EBIT margin. We should mention, of course, that we -- as we go into the second quarter, as we always do, we produce a bit more for the summer closing.

So in Q3 we have a bit of under absorption, in Q2 we had a bit of over absorption. This is like as I mentioned like one percentage unit on SMS, one percentage unit of SMT meaning that it’s like 0.5 percentage units on the full group but it is as we normally run the business.

Nothing strange about that. The finance net, SEK 266 million compared to SEK 225 million a year ago, might look a bit strange but important thing here is to understand the interest net.

The interest net was minus SEK 173 million in the quarter, SEK 278 million a year ago. So the interest net is down 38%, driven by debt reduction and by recapitalization of many of the subsidiaries.

The reason why the finance net as such is picking up or going down is that that there are always temporary revaluations of hedges and other derivatives in the finance net, temporary changes. It was a big plus a year ago, it’s a little bit of the minus this year.

But the interest net is down 38%. Tax rate 26.3% according to the guidance that we gave after Q4 -- after the U.S.

Tax Reform. We said that the tax rate would go down in the range.

We’re not changing the range. The range is 26% to 28%.

But it would go down and it does. So it’s 26.3%, which is kind of the run rate that we have and that we expect for the full year.

Cash flow, SEK 2.2 billion compared to SEK 2.6 billion a year ago, driven by inventory build-up in the second quarter. Returns, despite this it’s going up 24%.

We have a higher capital turnover and we have higher profits, and earnings per share up 40% to SEK 2.82. We then move pages to the bridge.

We start with the organic development, SEK 2.7 billion on the top-line that’s 12%. Price/volume 1.051 in increased EBITDA, so leverage of 39%, pretty normal.

I mean we have basically 50% for SMS. We have 40% for SMT and a little bit above the 30% -- 32% for SMRT, so 2.4% -- a margin accretion of 2.4 percentage units.

Currency, plus 145, that’s another 30 basis points accretion on the margin. The big driver is -- net-net the big driver this time is euros.

Even though euro is negative for SMRT it’s very positive for SMS and for SMT. And of the 145 about half is transaction, half is translation.

And then structure one-offs with the metal prices and the structural changes as well 0.9, so all in all 19.4%. If you take 15.8 at 2.4 you come to 18.2%, excluding structure, currency and metal prices.

Okay. So let’s leave that one and move over to the balance sheet.

Working capital is picking up as we have mentioned. And you can see on the right hand side, it's going up a bit ahead of the deliveries during the second half of the year.

If we look at the cash flow on the right hand side, they can see that we have a very positive impact on the cash flow from earnings or earnings growth, which as you know is really the only long-term cash flow driver. Working capital eating up quite a bit now in this second quarter and CapEx is flat.

So that’s SEK 2.2 billion for the quarter. Its SEK 4 billion -- a little bit more than SEK 4 billion for the first six months.

But we should say again here that we are confident that we would deliver a free operating cash flow for 2018, which is in line with what we had in 2017, which is somewhere between SEK 14 billion and SEK 15 billion. And Q3 and Q4 are the big delivery month for this group.

Moving over then to the net debt. We had dividend payout in Q2.

SEK 4.5 billion dividend went up as you might remember. So the net debt kicks up but it's staying at SEK 18 billion.

And then after this it will continue to go down. Of course, we had the Metrologic acquisition, Inrock acquisition, but we also have the Hyperion divestments in July.

So this will washes out same kind of money in and out, gearing 0.34 compared to 0.71 year ago. So it cut in more than half.

Last line, few words on the guidance or the actuals on the guidance. Underlying currency effect was SEK 140 million.

We guided zero. And of course is the euro, which is driving the metal prices in the quarter.

And of that 201, we guided 100. This is in quarter.

So it's not year-over-year, this is in quarter. For Q3, this is a big number on the currency effect.

It's plus SEK 650 million. And this is mainly U.S.

dollars with the currency rates to be used by June 30. We will have about half of this money is translation, half of it is transaction.

So euro will turn to become a little bit positive but the big -- the really big one is U.S dollar for Q3 with these currency rates. So it’s a big number.

And it will of course have a big impact on the top line as well. Metal prices in the quarter for the third quarter SEK 100 million.

So then look at the full year guidance. CapEx for year-to-date is SEK 167 billion.

We stick to the guidance of SEK 4 billion. Finance items SEK 1 billion, year-to-date to SEK 520 billion.

The important thing here is the interest net which will now be around SEK 800 million out of that SEK 1 billion that's more than 50% reduction in 2 years. And the tax rate, as I mentioned, will stay on the 26.3 to 26.4 going forward here.

So we keep the guidance but in the lower part of it. That’s it.

Björn, over to you.

Thank you. To round off this session I’d like to say that besides that Sandvik is developing in a good way and that we have very strong markets where we are operating in.

I’m also very pleased to see that the Sandvik’s new structure has landed well and is in place. The decentralization process has been a tough journey for the company during the last 2 years.

But I think with the present set up and structure Sandvik actually consists of 34 business units and product areas where the business actually is driven from. That’s where the management is and that’s where the important business and the right decisions are being taken.

This is extremely important for the way Sandvik is going to work in the future. And besides this we have built up business governance system.

The scorecard system, which is a fantastic tool for the businesses to very quickly analyze where we are in the development and make the units take the right decisions. But is also an excellent tool for the business area heads who are driving their product areas but also for us in the group management to actually follow the development of these 34 units and make sure that the right decisions have taken.

And it makes the maxi really agile. While some businesses are developing extremely well focusing on growth and growing the businesses other businesses in the group have strong focus on getting the cost structure right adopting the sales and the resources in line with the demand in the market.

And I think that really helps the group to be agile but also to develop in the right direction going forward. By that, I think we can end this session and we can move in the direction of question-and-answers.

Thank you. And I think we’ll start with opening up with few questions here on the floor.

And yes we do. Pedro, please go ahead.

Thank you. Peder Frölén, Handelsbanken.

Normally in SMS orders, this is typically a bit higher than revenues in the second quarter given some of the deliveries and so forth. Given the pattern we saw right now, orders growing organically by 8% and revenues by 10%.

And given what we see in the book so far in this quarter, how would see demand is trending if you try to sort of take out the seasonality here? That’s my first question.

First when you talk about SMS today and maybe the SMS that you are referring to back in time, that was without PBT. And PBT is actually our all time business, which is bought in mine but also the recycling of all the inserts and is also making boat from for a lot of businesses.

Only 50% of that business is coming to our business and 50% are being sold externally. And that business have had, when you look between the quarters, quite significantly different.

And if you look at this quarter, that was less than it was during previous quarter we had in the beginning of the year enormous. And that is how the orders are coming in.

You book up orders in the beginning of the year and then you deliver out there. I think the difference between 8% and 10%, you should not see that because when the orders comes in it’s a delivery out immediately.

So you should see that the orders and their revenues is between 8% and 10% and that’s that. I don’t think you should make any conclusions that one is less than the other one that part.

But I can mention on the part is that this is probably the best indicator of the industry that you can use because this represents the activity in the production facilities around the world. And you can see this is how it is.

And how the future will be? We don’t know.

And the difference here a little bit from SMRT for instance where you have long order books, we don’t have any order books. I mean they are very short except for the Wolfram, which has been extremely high in the beginning of the year.

I mean it’s booming up in that part. So it's a little bit like that.

But I normally give a little bit of feeling of how has next month started. We have come half of that.

And I think what we have seen so far has no change in the pattern that we saw during the previous quarter.

Thank you very much. That’s my short follow-up, sorry.

You mentioned that the inventory build in SMS was sort of normal due to seasonality but at the same time it was mentioned that it helped the margin by one percentage point year-on-year. So it’s more than at least last year.

Could you please repeat what you did last year? How much is normal this year?

And how much is abnormal last year?

If you can answer that?

Yes. I’ll take.

If you can please turn myself. Am I on?

Okay. Good.

Yes, sure. I mean last year, we were in a situation where demand was picking up enormously quickly.

It was a high demand drive in SMS. So we tried to build up but didn’t manage.

We just didn't manage to build up stocks. And this year it’s quite normal.

That’s why we have year-over-year bridge effect, which is maybe a little bit higher than normal.

Besides that also it's true that the inventory was SEK 200 million higher than the expectations both from us and from themselves. And that was related to step buy.

They buy these inserts in the market then they bought for SEK 200 million more into that part. So we would buy less during that part.

And that’s part of the recycling of inserts when we make part. So that has no influence whatsoever on the profitability -- improving our profitability.

Yes, that’s in the supply units.

I think we have an additional question here. Olof, please.

Yes. Olof Larshammar from DnB.

One question on SMR, because you mentioned in the presentation that there is a potential for further structurally improve the business. Could you please elaborate on which areas potential during the coming years?

Absolutely. I mean you have been following the SMRT development during the last three years has been of course an astonishing development during this period.

That comes to the aftermarket, which has improved significantly both grown dramatically as well as improved profitability as well as the equipment part of the business. When we improve our businesses we work with continuous improvement.

So each of these businesses -- they have their action plans become a little bit better. It's everything from launching the right products and making sure that their production is becoming lead times that are shorter and more efficient.

At the moment the business is hampered by enormous pressure from orders specially the part, which is the underground business that is load and whole as well as an underground drilling part where we see huge growth numbers. So they are struggling with suppliers with components not being able to compete all the equipment before they deliver out.

So there are still inefficiency in these units, which is related to very high growth numbers in the business. Then comes what I think is probably the most exciting business for Sandvik and for the mining industry that is actually the automation part of the business.

I would say today that every serious mine in the world today is looking to autonomous mining. And we have a numerous of projects that drives our automation solution but that also drives demand for equipment because you cannot use old equipment for that you need the latest.

So that’s probably the most exciting. The other part is that we see in the aftermarket now quarter after quarter after quarter where we grow over 10%.

And that is important. That is important for that profitability totally but it's also for the stability in the downturn.

So from my perspective today Sandvik SMRT is a very stable and strong business but we can do better. It is an exciting business but we can do it a little bit better.

And operator can we move to the conference call please, to see if we have any questions there. And just like the previous two gentlemen very kindly did, I ask you to limit yourself to two questions because I know there is quite a few people wanting to ask questions.

Operator, can we please have the first question but two please.

Yes. Thank you.

Markus Almerud from Kepler Cheuvreux. So starting with SMS, can you just talk a little bit about the trends again coming back to Peder's questions asking may be about talking a little bit about daily sales rates both throughout the quarter and also sequentially compared to Q1 both by region and then also end markets since particularly in the automotive?

That’s my first question.

Okay. Little bit short in SMS.

We seem the growth leveled. It is up around 8% to 10%, which is good.

We see growth in all segments. We've seen growth in all regions.

Where we see the best sequentially development during this period is actually in North America and that is positive. That also includes the automotive, which you probably remember that during the last quarter, we were to saw a little bit of flattened out.

Year-over-year we put it still on flat but it has had a good development in that market. You know when you look at growth levels it’s easy to get a little bit spoiled with big numbers when you come to SMS but normally for SMS the good growth numbers is 3%.

That is the part. We’re talking about 10% .When you're looking at the whole market, what is actually happening in the market that is production unit.

All over is that as a part that are ramping up their activities. So it’s a good part.

I mean it’s a good demand out there. When it comes to the daily rate, we are maybe not seeing a growth in the daily rate but we seeing them on a very high level and still growth numbers.

And just a follow up on that, it -- I mean that is also concerns on what is out there especially about the PMI stockholding and then decelerating growth. And you talked about production units across the border ramping up.

Do you see any, I mean, are there any warrants out there among the customers about this but the economy is about the slowdown? Or is the previous steady rate?

And then how they are conducting the business?

I mean we know that market goes up and down. So at the certain stage, that will be going down.

How it will go down and how it will be effective is difficult. So far I knew that this question would come today.

So I went on yesterday and asked our guys within SMS, are you seeing any slowdown? Are you seeing anything that would affect this part and asses that?

Now we are not seeing it at the moment. But this is of course now.

Tomorrow it -- we cannot ask there of course. The important thing is that we are preparing ourselves for able to handle both ups as well as taking care of flattening out or if we will see softening off.

The good thing with the SMS business that is not like any other businesses where you can see for instance equipment within mining where you can see in a downturn when volumes go down very much. When you see in a downturn in SMS you see negative numbers.

There are normally a couple percent if it’s a lot. It could be 5%, 6%.

Maybe you remember from the previous downturn. So it’s a little bit different from some of other businesses in the market.

It's an aftermarket business. Its consumables which are being used all the time.

So important of course is that we and our customers are not building too much inventory.

Okay. And then if I can just quickly talk about crushing and screening why do you see that a very rapid growth which is kind of new beyond it grew that before is that.

What part of crushing of screening is it both the portable and the fixed? And then is that of any special big orders there which is impacting?

I don't know what we have researched specially but we have more significant in the crushing of screening?

Yes, we did see. And in relative terms we see a good support in drilling equipment and also crushing and screening.

And it's generally ingredient crushing and screening.

Crushing and screening is of course both construction as well as the mining. When you look at the mobile crushers, they are more related to the construction industry and some of the stationary crushers are more to mining but you can also find them in a lot of queries.

One development which I would like to talk about here because I was little bit rough on them when I was new here that is the mobile crushers. But the mobile crushers have now reached the margin numbers that was a little bit magic at that time.

Remember I said there might be a question of divestment in the future. Now they have, during two years, improved their performance fantastically are doing good numbers.

On the stationary crushers have been -- is much more stable business moving on both in the mining and big crushing. That has had the good development quite some long time and it continues to be on the good level.

It represents both quarry as well as mining.

Okay. Thank you very much.

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

Thank you. I just want to ask a question on mining and rock.

I think you talked a lot in the past about we should be looking at commodity prices and how they move as the key driver. I just wanted to check given we have seen some declines in the copper prices recently.

Are you seeing that reflected in customer conversations and negotiations in activity? Or is there nothing really to report there in terms of activity levels?

No. I think copper is one of the strong areas at the moment.

They are investing well. The industry, they waited a little bit longer than you saw some of the other industries to get going.

But during this year, the last 12 months we’ve seen good demand in copper. So a lot of orders is actually coming from copper today and there is no signals that that this would slow down.

If you follow the mineral prices, they went up and now they are moving sideways on a high level. At the moment we don’t see any big changes there.

And just sort of brief follow-up, could -- I mean could you give us an idea on your balance sheet? I think sort of given cash generation, you should be sort of nearly have no net debt at the end of 2019.

So could you just remind us how you think about your balance sheet? What the level of debt you feel comfortable carrying on the balance sheet?

And when you look at sort of capital allocation and the pipeline, is there enough out there to sort of fulfill that level of debt from the balance sheet? Or could we start thinking about any shareholder returns?

Well, okay. On balance sheet, the net debt right now, just to give you some background is SEK 18 billion.

And given what we said about the free cash flow generation for the rest of the year, could probably most likely end up below SEK 10 billion before the end of the year, which would mean that if we don’t do anything major would lead to the net debt free situation during 2019. Now that’s not a target as such.

I mean we have a capital allocation strategy, let's say from an operational point of view, which is like one-third for dividends, one-third for M&A and one-third for CapEx really. And the target is not really to live with the total net debt free company.

The target is to release resources in the balance sheet so that we can invest in assets, in new companies, acquisitions so that we can develop our businesses, which are profitable and stable.

It’s correct. And we started our acquisition journey in our core businesses.

And we have, as I mentioned probably these two but there, of course, a lot of things going on. And we would be happy to talk more about that when they’re coming in coming quarters.

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

Just a quick one I guess on SMS. And I was looking at your -- if you look at the report last year, Tomas, a bit, I think you built a little bit less as you said in terms of inventory.

But I think if you look at the incremental margins of SMS over the last three or four quarters clearly those come down as the production system aligns with demand. Given the concerns that we have seen in the market and the fact that you have built a little bit of inventory into the summer shutdowns, can you give us a little bit help around what we should expect in terms of incremental margins over the next couple of quarters?

Are you going to look to reverse that industry builds in Q3, perhaps a little bit harder than you did last year? And then, just perhaps in terms of follow up, I wonder if you could talk a little bit about the development of China over the last couple of quarters in SMS?

I think you said you pulled 7% to China, but I think that was for the group overall. Thank you.

Tomas, do you start?

Yes. Sure.

I can start. I mean when it comes to inventory and inventory buildup, we must not forget that we come from the situation where we were under stocked and we have talked about this over the last like two, three quarters because the demand has been so strong for SMS.

So we started to get challenges for some of the brands, some of the core brands within SMS. Now we have built back to the levels where we should be so that we can deliver according to our promises to our customers.

So, of course, they don’t want to leave that situation. So with a sort of back in balance now class a little bit of over stalking for the Q3 shut down.

Incremental margin, I mean, we are not changing anything. I mean 35% to 40% or something like that’s what we see going forward.

When it comes to China, yes, it's great. China is the high growth for SMS than it is for the group.

That's correct. But we do normally don't talk about those numbers.

But it's a little bit higher. China is very strong.

It's strong in all the segments there in the market and its developing well. When you see in the group being high between 20% and 30% on the high side, SMS has never been on that level.

They have been lower on that part. So it's more when it comes to equipment sales within the mining part, which is more effective on that part.

I think I saw numbers today in the papers; China is growing 6.7% BMP. That is the part we know that when we're looking at our market, it is BMP plus that we should be in a different market.

So China feels very strong. It's a lot of exciting projects that go in there.

Automotive is only one there but it is the general industry, it is the aviation industry, it is the tech industry, it’s a lot of things happening in the parser. So we feel very comfortable about the development in China.

No indication for a slow down there.

So if I could just follow on that beyond the fact that you saw SMS Asia grow 10% in Q2 versus 14% in Q1. I guess the tougher comp.

Is that comp driven North China slowing down.

I think Asia what we have is 17%. I mean that is too much.

But one of the markets where we’re growing is faster than anyone else is today Japan. We have a super team there and it’s doing amazing at the moment.

So that's a little bit part. But that varies a little bit between the different regions.

But I think we were in Asia 17 and China 7 during this quarter. But I don't think there is any reason for any worry from that at least.

I don’t see that way. I think we are experiencing well.

We are close to the customers, we are close to the market and it looks at least quite good. And it is of course very high numbers.

And we know the automotive industry is making close to 30 million cars every year. It’s a big market.

Okay, thanks very much.

Thank you, Alex. Then we move on to the next question please operator?

Thank you for taking my questions. From UBS here, I’m asking a kind of relative question to the one that we heard from - but it's more detail in a way.

I think, Thomas, you mentioned that you’re expecting the the free cash flow from operations to be aligned with last year is necessarily well or that certainly well. You recorded one about SEK 15 million cash flow, which you have additional anything between SEK 11 billion to SEK 12 billion cash flow.

Is that dual effect of the cycle we are aiming, which is still growing, right? You’re still taking away the seasonally adjustment that you need to do in Q3.

Would it be possible for you to meet demand from the cash you mention in Q4 without inventory build up or actually being able to meet that cash flow number? It's real or would you need basically to be a lot more constrained on receivables as well as inventories?

I think on the cash flow we saw very strong growth during last year. And during that year we managed to deliver, actually, cash conversion that was over 100% more than just the profit.

And SMS is enormous and it is -- I mean it’s amazing. They are running on a really high cash conversion numbers.

And we do expect that to be down during the year. They will be all the way up there even though that they are growing.

So they are doing a fantastic job there. SMRT is correct that during the -- traditionally in this industry, of course, that business drives more because you will buy from sub suppliers, you have more products being built and then you have deliveries.

If you have for instance delivering a mining truck to Australia, it's actually three months before at least the factory until they're being invoiced to the customer. So, yes, it takes more inventories.

But at the same time they are all working with a lot of activities to improve their performance. And we do expect, I mean, the volumes have now -- the deliveries have gone up.

From the beginning we saw high orders and we saw low deliveries. Now the deliveries are actually coming up on quite good levels but we should continue to see an improvement in delivers, which will also generate cash going forward.

So I think we feel comfortable to say that to reach the numbers that we get before. Those are our pre-action; those are coming from the businesses and those that we support.

So yes we see pretend even this year and that will be the third year in the row where we have the cash flow on this level. And I can assure you that businesses are being incentivized on this as well as rest of the performance of the businesses.

But that’s pretty quite lot of efforts to make sure that we have reached these targets.

Yes. I’m a bit concerned because I think that it's almost a doubling, it's not a doubling but it's just basically that’s your second half you did SEK 7 billion cash flow, sorry was a bit higher than that in fact actually.

SEK 9 billion.

SEK 9 billion. Yes.

So we’re talking now about SEK 11 billion, SEK 12 billion. So finally it is which I guess you need to continue to focus for return.

I can show you there is no inventory build up in the mining business, which are not products, which are placed an order, billed to customers and then you have a little bit of lead time and then it goes to the customer. So there is -- the inventory that you are building up is actually no risk.

It’s out there. We even let the customer prepay a little bit before the part so they cannot cancel the orders in the part.

That’s a big difference from before ‘07 when we had a big crush. So I think the market is much healthier in this part.

And if in the future the volumes would go down, then the cash flow comes like a count on. And then you have a number of years where you are just getting a huge cash flow out of those businesses.

And that’s how the business works.

Alright.

I think for us the financial situation is good. We have a good cash flow position and I don’t think this is the big worry.

I think people are making a little bit too big thing out of this. We will reach the cash flow in the end and we would be reaching those financial targets based on that.

May be I could -- yes, maybe I could just add, I mean, yes, we know it's SEK 11 billion but I mean it was SEK 9 billion second half of last year. It was SEK 8 billion in the second half of 2016.

So I mean, and the company is growing.

And the profitability is much higher today.

Yes, exactly. So I mean, yes, it’s lot of money.

But this is -- yes, that’s it, quite confident.

May be I have -- out of curiosity a question on Machining Solutions. How much of the recycling business is recycled in China?

Recycling in China?

Yes. How much of your recycling operation or like the dependents let’s say from the business per se from a cost perspective to China in one way or another especially on the recycling part?

The recycling business works that in the factories where we sell a lot of inserts around tools. Afterwards we collect them and we buy back them when they are used.

And we deliver them to Austria where we have our big recycling plant. And then they actually grind them down and they actually take out the wolfram out of that and that are being used.

So in a new insert, approximately 50% of the wolfram, which is the main content that is actually coming from recycling their part. So we are buying and of course these prices also varies between how much is available in the market but that’s a business.

Now PBT is a product area. We follow them as we do with Coromant or Seco or Mining part.

They run their business in a way and they sell 50% of the business goes to Sandvik and 50% of the business goes externally. They even have a mine there where they take out their own wolfram.

So it’s a business where they run it. And from my perspective, they are doing high level job.

They are performing fantastic. It’s not easy when you have your brothers and sisters that are stars.

And you would have to get up to over 20% to even being looked at. This is the environment where they are working.

And I think they’re doing a great job.

Thank you. Operator, we will have the next question please.

Hello? There seem to be a little bit of a technical issue here.

Thank you. It's Klas of Citi.

I have two questions. First on the moving parts within SMRT.

It seems like after market is growing at the similar strong pace as in the last quarter at around 10% in parts and service and consumables running at high single digit. Can I just ask -- was there an increased price cost pressure on the consumables side?

I wonder this has changed versus the last quarter and if you could help us with the margin ex-PBA and including PBA for Varel in the quarter.

First I think services and spare parts is over 10%. And then not just a little bit over is good 10%.

I’m not allowed to say more. But that’s developing fantastic way.

So when we to and talk about after markets, it's correct that the consumables is a part but actually the service and spare parts grows a little bit faster than the consumable business. So that is doing well.

Yes, price is -- it’s a good market. We're seeing good prices and apart we’re seeing prices around 2%.

Some of the business even a little bit higher than that. We’re not going to go into detail, but we are on -- pricing wise stronger performance now than we did in the previous quarters.

So we’re following that and that's an important part of course prime profitability in good terms.

I meant on the consumable side. Some of your peers have highlighted price cost pressure at least last quarter.

And I was wondering on the consumable side whether that has changed anything quarter on quarter?

For us we see positive price development in consumables. So from our part that is developing well.

So I hope our competitors are not lowering their prices too much.

My second one is on, coming back to SMS, you said that China was very strong in the quarter. But I thought orders in SMS were growing only 5% in China in the quarter, which is obviously a strong slow down from the 15% to 30% we've had over the last two years.

If China -- Asia is 8% and Japan is much stronger than China must be flowed in 8 that would have both.

Now we are -- China is higher than -- it’s higher than 8.

For SMS?

For SMS.

In orders?

Yes.

Just following up on that question, sorry to deliver the point Björn on the trends in SMS, particularly in China, but it does look like got a meaningful slowdown. If you go from 20% in Q1 to what I think is 9% in Q2, that’s obviously a very rapid deceleration through the quarter.

With the risk of trying to bring you down some numbers here in China for the quarter as we exited, could you help us a little bit with the run rate in Q2 on early parts of July, maybe to be specific that China actually grow in June, July for you in SMS?

To go as, I think, we pinpointed that pretty much. If you compare to the previous quarters, it's pretty flat.

I think it is -- I mean, sequentially part. What you saw in orders during Q1.

It's the same level for SMS in Q2 that I know. So it's not the slowing down.

You always comparating with the previous year and it also depends a little bit what happened during that period. But it is not softening, it's flat development quarter-over-quarter.

Understood. Can I turn to your European automotive segment in SMS?

I mean you obviously had a very good Q2, perhaps a little bit beyond a normal seasonality. Do you think you’ve benefitted from some pre-WLTP ramp in Q2 among some of your European automotive OEM customers IED new test procedures that seemed to be impacting both the quarter that we’ve been through if we got potentially negative going forward in the next couple of quarters?

Of course that question we were expecting. And of course our SMS people, the Coromant.

And they are of course putting daily to the market actually to lift them what is going to happen and talking with the customers. But there are no indications from the market that there is going to be a slowdown during the part, which is related to this going forward.

Right or wrong I don't think we will know, I think the future will tell in that part. But of course we are being very careful in listening to will that being an impact.

I read that’s in the numbers here that during Q2 automotive was up in the sales dramatic during end of the second quarter, which of course means that a lot of cars will be produced during the next half year or so. But so far we have no indications that they come to us and say that now we are going to slow down with 10% or 5% or anything like that.

There is no signals whatsoever from the market in that direction.

Understood. And just finally if I can, can you help us with the year-over-year impact on your EBIT bridge for SMS with regards to production levels.

I appreciate now you’re producing in line with demand if you like. Obviously last year you had a 50 basis point tailwind in Q3 last year.

It sounds like we are cruising inline now which means it should be something similar in negatively impacting your EBIT bridge in Q3 ’18 versus last year. Is that fair?

I think it was during this quarter about 1%, which gave an extra. And this could stay and we know what for Q3.

For Q3?

For Q3.

We don’t have any guidance for that.

No. It bounce on of course well.

But I can assure you we are not building anymore inventory during this period. If the level will stay like this we'll go down a little bit, that depends on also.

They have a number of closures of factories during this period and that’s why we’re doing it.

The margin is always seasonally down in Q3.

I think you will also know I mean that you can look back in summary that you see that Q3 is weaker when it comes to profit levels than Q2. So this is the strongest one.

Sure. Thank you very much.

Thank you. We can squeeze in one more question, operator, if it's going to be a quick one please whoever is next?

I would be quick. I mean we haven’t touched on the U.S.

China disputes. Do you export from China into the U.S.

in any of the business units? And may be if you can give us some breakdown of the cost of goods sold in offshore U.S.

subsidiary by region or much of their curves of domestic are derived from China, Mexico and Europe. That would be a good to assess.

It’s very little. We have about, I think we had a number of 35 million or something like that that is being -- and that’s coming from our big factory for mining equipment that some of them.

But that is not a big thing because we are doing the same thing in Tampere, so that is just a little bit of a capacity reason why we’re doing it. So if you see in there is no impact whatsoever when it comes to these customs.

And I think that’s part of it. We have looked over for the businesses and the one which we all know that is the SMT where we’re, of course, always curious to see how that is affecting our performance of the SMT.

But when we talked to Göran, he said that it’s quite interesting here today because we are so local there and we are doing more than our competitors, which means that everyone that is asking for an exceptions to come sufficient. So that comes up a lot of interesting deals where competitors say that there is no production locally while we can say yes we can.

So that is opportunities coming up. The cost increases, they are being -- they are already being compensated above good prices.

So far I would say not have any negative effect on our profit margins so far, probably a little bit positive at the moment.

And sourcing for SMRT, do you have any sourcing from China in for the U.S.?

No. There is no sourcing.

What I -- I mean what we are producing in mining equipment in U.S. is [electric] where we’re making the surface mining equipment.

But they are not buying anything from China. What I know, I think there are probably more local supplies there.

So no affects whatsoever there.

Thank you very much. And on that note, it’s time for us to close this session.

And we wish you all a continued good summer. And we’ll see you again in October.

Have a great summer.

Thank you.

Thank you. Bye, bye.