Sandvik AB (publ)

Hi, everyone, and welcome to the presentation of the Second Quarter Results of Sandvik. We will go through the presentation, followed by a Q&A session.

And my name is Emily Alm, and I have just joined the Investor Relations team here at Sandvik. And with me today, I have our President and CEO, Stefan Widing; together with our CFO, Tomas Eliasson.

So over to you now, Stefan, to start

Thank you, Emily. I would also like to welcome you to this Second Quarter report for Sandvik in 2020.

I think it's fair to say, it's been a long quarter. I think we have experienced more things in this quarter than we usually experience over the course of years.

And it's been a challenging quarter. We of course, started to see a sharp decline in our short cycle business over the end of March, a decline that accelerated into April.

We also saw mines closing down in several parts of the world. And then continuing into May, we had the volatility in the oil price, which started to impact our oil and gas segment.

Overall, our orders dropped by 23% in the quarter and revenue by 20%. We are still proud that, we were able to deliver a resilient earnings performance in this environment.

The adjusted operating margin came in at 14%, 14.4%, if we exclude the metal prices. We could do this, thanks to a strong delivery on the savings side.

We delivered about SEK1.5 billion savings in the quarter, and Tomas will in his presentation detail that a little bit more for you. On a rolling 12 month basis, our adjusted EBITDA margin is now at 17%.

We also continue to have a strong balance sheet. We delivered SEK2.5 billion in cash flow in the quarter.

We reduced our inventories and our net gearing is now at the low 0.11. Also in the quarter and in July, we announced or closed three new acquisitions, and we also concluded on important divestiture.

I want to take this opportunity to do a call out to the supply chain and operations part of the Company. As throughout this whole period, we have managed to continue to deliver products and services to our customers, not because it has not been challenging, it's been huge challenges to do this, but the team has stepped up and ensured we could continue to deliver throughout this whole period.

Then, if we start around second half of May, we started to see things opening up. We saw Europe opening up a little bit.

We started to see mines across the world, in at least most of the world starting to open up. And we started to see some signs of a recovery towards the end of June.

But I want to emphasize that, in our business, we didn't really see as a recovery starting until the very end of June. If we look now in the first week of July, we continue to see this trend and the SMS short cycle business is currently operating at around minus 20% to minus 25%, compared to last year.

I also want to emphasize that, this is dynamic situation as I wouldn't read too much into specific weekly numbers. We do however, if we look at our main or key customer segments, not just automotive, aerospace and oil and gas, we expect to see a fairly slow recovery going forward.

If we look a little bit at the market development, we can see that our main regions Europe and North America are both down at 30% or more in the quarter. Asia looks better at minus 12.

This is a little bit hiding the fact that China is fairly strong. China is actually a positive 5% for us in the quarter.

But on the other end and other parts of Asia, especially driven by India is weak as they have been severely hit by lockdown. The other regions we have, is primarily driven by mining.

And then since most of the arrows here when it comes to year-over-year is pointing downwards, we have added some additional information to this slide. In the gray box here, you can see the sequential development throughout the quarter.

So, if you see an arrow pointing upwards, it means that the second half of the quarter was stronger than the first half of the quarter. And if we take the geographies first, we can see that in Europe we definitely see things starting to opening-up towards the end of the quarter.

In North America, we are not really seeing that as of yet, it's more moving sideways. Asia also showed sideways, it's a little bit hiding the fact that China was very dynamic also towards early April, when they were in the recovery phase from their lockdown.

Then they went down, but have now started to begin stronger again in June, primarily driven by domestic demand, while the rest of Asia is not really showing signs of progress yet. And then Africa, Middle East and Australia, mining markets where we definitely see an improved sentiment on the mining side.

South America, however, because of the pandemic situation, if anything, is looking a little bit worse. From a segment perspective, mining, we saw closures impacting us in primarily April and May.

We saw significant impact especially on the aftermarket business, but we saw a pretty significant recovery in June, and in June overall, the aftermarket business was more or less flat. The overall sentiment has been quite good in the mining with commodity prices holding up and we also booked some good orders at the end of June here.

General engineering is the segment that has held up the best for us in general. But on the other hand, it also means that we haven't really seen a strong recovery as of yet in that segment.

Automotive hit very hard earlier in the quarter, here we do see some signs of recovery, and we also saw some encouraging new data on new car registrations coming in June. But of course, there is also a lag for us in our supply chain here.

Energy because of the oil price disruptions in May, we have seen that one worsening throughout the quarter. Of course now the oil price has improved a little bit, we see a small improvement in the short cycle business towards the very end of the quarter, but the longer cycle business even at this oil price, because of the general uncertainty, we don't see any comeback in the CapEx on that side.

Construction has been hit a little bit harder than mining, and there we have not seen on the general trend upwards as of yet. Aerospace hit very hard in the beginning of the quarter, but if anything, that sentiment has continued to be weak maybe even slightly worse throughout the quarter, after announcements from major suppliers and producers in this space, that they expect the amount to be muted for quite some time going forward.

So, if I summarize again, order intake minus 23, revenues minus 20, dropping one-fifth of the top line is of course severe, and that's why we are also very proud to be able to deliver a margin of 2.8 -- or an EBIT of 2.8 billion in the quarter, a margin of 14%, 14.4% if exclude the metal price impact, which means that we have a group leverage of minus 37%. And this is something we are happy with considering a minus 20% reduction in the top line.

We also in this number have managed some 80 basis points reduction in the margin due to lower production rates, as we have continued to reduce our inventories. So a resilient performance driven by good savings of SEK1.5 billion and rolling 12 months number staying at 17%.

Going little bit more into the business areas, if we start with SMRT, an order intake of minus 10, revenues of minus 12, and a very strong margin of 19.3%. They improve their margins despite a 12% drop on the top line, which is very strong.

If you look at the orders, the equipment side is down in the single digit minus 6%, partly driven by some good orders that I noted at the very end of June. On the aftermarket side, we noted significant declines in the first two months, flattish market in June, in total it came into the low teens of minus 13%.

There strong margins were attributed to good savings in the quarter of over SEK400 million and we should also note that they announced an acquisition of a U.S. distributor on the breaker side in July.

Moving into SMS, they were definitely the one that was the most challenged from a revenue perspective as expected. Order intake was down 35%, revenues down 32%.

That includes a 1% dilution from the Wolfram business, so the underlying capping tool demand was minus 31% in the quarter. Europe down 33%, North America downs 14% and Asia down 18%.

China was down 4% in the quarter, so definitely stronger than the rest of Asia, and primarily driven by strong domestic demand while the Chinese export or key accounts were also suffering. In addition to this of course, our aerospace and automotive were the hardest hit segments and here we talk a material impact of minus 50% or even slightly worse in the quarter.

We did see however, especially then automotive starting to come back down at the end of the quarter. SMS still delivered an EBIT margin of 12.8%.

This is an operating leverage of 47%, which were 32% to drop in the top line for SMS is a really strong performance. You can compare this to the performance in the global financial crisis.

This is of course driven by strong savings. They deliver SEK950 million of savings in the quarter, meaning close to a SEK1 billion in a single quarter in savings, which is a very strong performance.

They were also impacted 140 basis points by lower production rates as they continue to bring down their inventory. Here, we also announced one acquisition that closed and one new acquisition was announced in the round tool space in this period.

And yesterday, we also announced a reorganization of SMS into two segments to continue to drive growth of this business going forward. Moving down into SMT, of course, very challenged on the order side driven by CapEx in oil and gas and aerospace.

They saw both an impact from the short cycle driven by the general COVID scenario, and then the disruption in the oil price. Water intake of minus 33, this would have been minus 28, excluding major orders, revenues of 13%, significantly better as they have delivered from their backlog in both oil and gas and in aerospace.

And in underlying profit of 9.3%, which is leverage of minus 31%, which is also strong for SMT with a double digit decline on the top line. Here the main concern has been the drop in the oil price and the impact it has on the order backlog and order intake on the oil and gas side.

And we have seen a cancellation and several delayed or pushed out orders, on the oil and gas side for SMT. We have a backlog for about another quarter, but we expect after that it will be a tough period for them until this market has stabilized.

Other than that, also they were impacted 130 basis points by lower production rates. The rates are also, they brought down their inventory and the margin was supported by over 100 million of savings in the period.

And with that, I'll hand over to Tomas to take us through the numbers a little bit more in detail.

Thank you very much, Stefan, and let's jump straight into the financial summary, lots of interesting numbers to go through today. So if we start in the upper right hand corner, the top line, orders minus 23 and revenues minus 20 organically, as you've heard.

Currency impacted 2% negative on both orders and revenues and structure, which in this case, is mainly the divestment of Varel Oil & Gas, impacted minus 3 and minus 2, so all in all, minus 27 for orders and minus 24 for revenues. If we then walk down the income statement, earnings came in at 2.8 billion, that's 43% down or 40% down.

If you take out metal prices, the margin was 14% compared to 18.8, and we'll go through the bridge in just a minute and talk more about that. The finance net was plus 20, compared to minus 387 a year ago.

Here, the interesting part is the interest net, which is coming down nicely steady. We'll talk about that as well in a minute, the details.

The underline tax rate came in at 24.3, working capital will flattish. Of course, the relative number came up on the back of reduced revenues.

Cash flow was strong plus 14%, returns, 12%, and the earnings per share decreased with 38%. So let's then go into some of these details and let's start with the bridge.

And of course, the organic decline minus 20% on the top line is 5.2 billion. The EBIT impact was minus 1.9 billion.

So that's 37% down, meant a dilution of the margin of 4.3%, of course 20% down on the top line and a minus 1.9 billion or minus 43% and the earnings is a big number, of course, nothing to be happy about, but we're satisfied with the performance. We'll talk more about that on the next slide.

Currency was a little bit accretive. Metal prices diluted the margin and the structure was flattish.

But let's return to the leverage here and the organic development minus 37. What is behind this number?

Of course, a big volume growth, but then of course savings, the savings that Stefan talked about. If we look at the Slide here and we're going to go through these in some detail.

These are the savings programs that impacted income statement in the second quarter, and it's a little bit different here. The first one is the savings program, permanent savings, that was launched mid-2019, which is now not executed SEK1.7 billion annualized and SEK425 million hit to the income statement in the second quarter.

There will be bridge effect of course, mainly in Q3 and Q4 this year, and then a little bit in Q1, 2021. But when we look at this program here, we mustn't forget that, we were actually in the business cycle downturn already from mid-2019.

So, this is just a continuation of those mitigating activities that sort of hits the income statement now. The second and the third line are the temporary savings that we have initiated in March and April this year, as we went into the COVID crisis.

The first one are the short-term working weeks, work time reduction. You can see the impact by business area and you see the total number SEK600 million.

We communicated SEK1.5 billion for the year. So, this is being executed if even a little bit more, a little bit better than we said.

And so, it's moving along according to plan. On the next line, we have discretionary spend, everything which is not personnel expenses.

And of course, when people are locked down or work-from-home, don't travel anywhere, you get reduced our air travel. We don't have conferences.

You don't meet customers, et cetera, et cetera. This is much more than we had maybe expected a SEK500 million for the quarter.

So overall, SEK1.1 billion in temporary savings, plus the SEK400 million from the previous program, that's the SEK1.5 billion in total, which impacted the income statement. Now let me just remind you, don't get too excited about these numbers because I'm talking about the temporary savings now, because these are temporary savings.

And as the economy and business cycle recovers, as the demand increases, as the output increases, et cetera, et cetera, work time reduction will go down, discretionary savings will go down as well. So, this will eventually fade out sometime in the future.

So, don't extrapolate these savings out to the stars or into the sky because we will not have SEK1.1 billion every quarter. The big question for us here is, how will we enter 2021, really, at what level?

And some of these short-term savings has to be replaced with permanent savings. And at the very bottom you can see, right now, the expected savings from the new program of permanent savings that we have talked about in Q2, both in March and in June.

The savings number is SEK1.3 billion. We made a big provision in Q2 for parts of this program.

We will make more provisions for that during the second half of the year. We haven't given you a split by business area, but that's because we're not done yet.

So as soon as we're done, as soon as we have our arms around, all these moving parts in this program, we will communicate to you how this is split by our business area. And SEK1.3 billion is maybe not enough it could be even more depending on how the business cycle develops in the future.

Now, if we stay for a few more seconds on this Slide here, you see this number SEK1.5 billion in the quarter in savings, if we go back one slide here to the bridge, take the 1.9 billion drop in EBIT here in the organic column here and just assume that we didn't have the savings, then we would have a negative leverage of somewhere between minus 65% or minus 70%, or something like that. And that is exactly the negative leverage that we had in the finance crisis in 2009.

So, this is all the difference, stay ahead of the curve, take decisive action, have a decentralized organization, with decision makers close to the customers so we can be ahead three to six months and instead of being behind three to six months and chase our own tail. Okay so on that happy note, let's move to the finance net.

The finance net came in at plus 20. But the important thing here is interest net on the first line plus -- oh sorry, minus 19 million in the quarter compared to minus 144 a year ago.

We have lower debt compared to the same quarter a year ago, and the market has kind of just a normalized, so the swap rates et cetera are more better now. If we look at the tax rates, we reported 28.1%, but that's heavily impacted by one-offs restructuring charges in income statements, which are not tax deductible, some of it.

If you take that away, we're on 24.3 and that's where within the range of 23% to 25%. Working capital, if you look at the left hand graph here, you can see that normally we have a pickup of working capital in Q2 compared to Q1, and that's to build-up before the summer season or the vacation season when you close down factories for maintenance, et cetera.

This did not happen this year. It's kind of more flattish.

The reduction you see here in the graph is currency-driven, so it's kind of flattish. We're very happy with inventory management, especially in SMS and SMT.

Of course, that means that the relative numbers goes up and then you can see that on the right hand side. Cash flow.

Look at the right hand side here, earnings goes down more than 2 billion. On the other hand, we don't have the build-up of networking capital.

So, that meant that we came in with 2.5 billion in cash flow compared to 2.2 billion a year ago plus 14%. The net debt continues down, 0.11.

The financial net cash position is plus is 3.5 billion. The total net debt position is 7 billion.

And just as we said off to Q1, we have more than 30 billion in accessible cash, cash ongoing credit lines and committed credit loans, so no change in that. If we look a little bit on the guidance here, we guided the underlying currency effects of plus 100 million, came in at minus 86, the big difference is the strengthening of the Swedish krona mainly against the dollar total.

Total currency effect was plus 28 times currency effect -- or sorry, net new price effect was minus 76 compared to the guidance of minus 150. CapEx was at 0.8, interest rate was 90 million and tax rate 24.3.

If we then take a look at the guidance for the third quarter, on the items that we guide for and the full year guidance, we have one change, and that's the first one CapEx. We have said for 4 billion for quite some time now.

We now have changed that to 3.5 billion or less as we pull the brakes, and are being much more cast from all over, not only with expenses, but also with CapEx. Currency effect for the third quarter is estimated to minus 215.

Metal prices are minus 15. The interest net we keep the guidance minus 500 million of course, if you look at the minus 90 that would indicate that it would be somewhere less than minus 500, but we'll stick to the minus 500 for the time being.

And the normalized tax rate, we keep that 23 to 25, if going anywhere, it's going down more towards 23 than 25, but we will not change the guidance, now we'll see 20’, 21’ where we will guide you then. And with that, I hand back to Stefan for conclusions and summary.

Thank you, Tomas. Yes, so again, it's been a challenging quarter, but we are very happy that we have been able to deliver a resilient earnings performance in the quarter, strong support from good savings, so SEK1.5 billion.

And we are now shifting focus to ensuring that some of that is converted into the appropriate level of more permanent savings to make sure that’ll be going into 2021 with the right cost structure. We continue to have a strong balance sheet, we deliver good cash flow in the quarter and we strengthen our net cash position.

We do see a signs of recovery towards the very end of the quarter, and it continues into July. Then of course, since we expect that it will be a fairly slow recovery is important that we also work on creating our own growth.

We have taken initiatives in SMS. We are doing a reorganization to increase the future growth prospects in that business.

And in addition to that, we will leverage our strong balance sheet to do strategic acquisitions when it is possible. Overall, I would say we still remain positive.

We have shown in this quarter that we will adjust to whatever market developments that will come ahead here. Thank you very much.

I'll hand over back to Emily.

Thank you. We will now start the Q&A session.

And we will start with questions from the conference call. And may I please remind you to limit yourselves to two questions, and if you have any further questions, please line up again.

So, operator, please.

Hi, Stefan, Thomas, this is Magnus with UBS. Couple once for me and thanks a lot for the commentary on the early July trading SMS, that's obviously very helpful.

But could you give us some extra details on those numbers as it comes to the different end markets in you manufacturing, auto and aerospace that would be very useful?

In general, relatively speaking, automotive is recovering more. General engineering, as I said, it never really went down as much as the others.

So, it's also more stable now from that perspective, slight upturn there well. Aerospace, I would say no more specific recovery driven by more long cycle order books and so on.

And I think that will continue to be challenging going forward. From the geographical perspective, it is Europe and China that has been driving the recovery more so than North America.

North America is still going sort of sideways. In general, I guess you could say, it follows pretty well the news cycle in terms of the development of the virus and the lockdowns are opening up of countries and businesses.

And the minus 50, minus 55 that was through the quarter for both those end markets aero and auto?

Yes, overall for the full quarter, both of them were down in the minus 50 range.

And secondly on savings, could you give some flavor on how much temporary cost saving we should expect through the course of the remainder of the year? And secondly to that as well, I think Tomas, you commented that short term costs actions will ultimately have to be replaced by something more permanent cost savings, and I guess that's what you're doing, but then did comment also suggest that you would have more permanent cost savings to come since there is a quite big difference between the level of temp savings and long term savings you've announced so far?

Yes. I can start.

The temporary savings, we have previously talked about, an in-year effect of 1.5 billion, and that number is still valid. So, we did 600 million now in the second quarter.

So there's -- yes, well maybe a 900 million to 1 billion for the remainder of the year. So, that guidance is still where it is, but then on then permanent savings?

Yes, we have the programs we have launched. We had 900 million or actually 1 billion, including the January announcement and March announcements in Q1.

We upgraded that in June to the 1.3 and we would continue to evaluate that situation. It all depends on where we believe we will start in 2021.

For 2020, we can do with these, programs, some temporary savings. So, it's all about now to adjust to the right level in 2021.

And depending on what we see, we will adjust that figure. Obviously, the later we take the decision, the better, the more information we have, on the other hand, there are lead times in implementing the savings.

So, that's the trade off, but we will continue to evaluate that on the number can change, but it all depends on how the economy and the business evolve.

So a couple of questions from me, I want to come back to first the July comment and obviously we are bottoming, but expectations out there might be, might have been for a quick pace into July. You say that you see this in auto, in China and in Europe, less so in Americas.

But could you, Stefan, help us with the detail within the 2025 by geography, are we talking Europe down 10 to 15, Asia down 5, and then similar declines that we saw in Americas down 40. Just so we get a sense by geography within that July number.

That would be very helpful.

First of all, let me say, I think you should be very careful to over read a few weeks here because we are in a very dynamic, fluid situation, if you will. And just like what we said minus 25, last week of March, I mean, if we would have taken that one week forward or backwards, the numbers changed by 10,000 basis points.

And now when we have started to see the recovery here end of June, I mean, I have also of course seen some of your expectations and I think many of you seem to have expected things to have started to recover quicker in June. I think it's also a matter of a couple of weeks here.

And when we are now in what is hopefully, some form of recovery phase, the weekly numbers change, much more than we've ever seen before. So do be careful when you interpret these numbers for just a few weeks.

If we have had this call 4 weeks later, we could probably have given a more robust number in terms of how you could use this for predictions going forward. So therefore, I don't think, we should go into too much of these details as well because I simply don't think it's too much information in them.

But as a general guidance, yes, North America more sideways, it's not minus 40. It's better than that.

Europe and Asia down recovered slightly more. So you can read into that Europe is a little bit better than that.

And Asia based on that they were at minus 12 for the quarter and then have recovered also a little bit, thanks to stronger China. Yes, I think that's the best guidance we can give in that sense.

Thank you, Stefan. I appreciate it.

And then, my second one is on SMT, and you have, Stefan, you previously said that, you have to make up your mind on the potential separation. I just want to confirm that this comment relates to the macro uncertainty, rather than that, you might have a complete different opinion strategically on whether it makes sense to separate SMT.

Because if we strip out the temporary savings and if we adjust for the metal price impact, the margin is very of solid here at 7% given the backdrop. And of course if the backlog is going to sort of see revenues decline, but it looks pretty reassuring.

So, I just would like to get your comment against Stefan on whether this is macro rather than what do you think about this from a strategic point of view?

First of all thanks for the credit to give to the SMT business, they are not used to that. So, I think they appreciate that.

No, I mean, I don't think anything has changed from a strategic point of view compared to about a year ago when the announcement was made in terms of starting the internal separation. That project is progressing.

It's slightly delayed because of countries locking down and making some administrative processes more difficult. In my view, it's a solid business.

It's leading in its market. It's high performing compared to its peers.

Of course, the question though is, is Sandvik the right long-term owner. And from that perspective, I don't think anything has changed.

Obviously, the final discussion is still to be had in the Board later this year most likely.

Thank you. Just, my first question is on mining and the performance of the equipment business.

You mentioned obviously good large orders. Is there any sense of whether you took some market share in the course on the large orders that were available?

Or do you think this was just a relatively buoyant quarter in terms of market activity?

It's difficult to answer without having seen, let's say where the others are. I know at least some of them were not Sandvik mines before the order was won.

But weather that is, overall can be interpreted more widely. I don't want to speculate on that.

But, I would say, overall, we feel confident that we are happy with the performance of the order intake and the business performance on the mining side including the equipment.

Okay. And just the follow-up question is on the organizational change in SMS.

So, the carve outs of the additional, the additive manufacturing within that sort of separate business unit, are you happy with the current levels of investment organically that are going into that business? I'm sure we'll talk more about M&A in the future, but specifically on the organic investments there, are you happy or would you like to see kind of investments in that part of the business stepping up?

I don't think the level of investment is the problem in either direction so to say. I do believe that we could be more sharp in the -- in more detail what we are investing in, ensuring, we invest in the front line in this growth and maybe a little bit less in, let's call it, staff-type activities.

So, that is something we are changing as part of this, but the overall level of investment, as I see today, I think is okay. Then, as part of this, change is that I will get even closer to this because I think it's important for the future.

And as part of that, we'll see if I come to a different conclusion, but as of now that's how I see it.

Yes, hi, gentlemen, just a bit more comments on SMRT. We see excellent copper price development, gold price on a record high.

It's a big chunk of the SMRT business. So would you guys be surprised if the new equipment orders have a complete turnaround this year and go positive towards the end of the year?

And at the same time, with the strong utilization of the equipment, would you think that service business is also strongly improving? That would be my first question.

And secondly, on SMT, umbilical tubes, I think that's kind of a dying business at the moment because offshore is completely dead. Are you preparing for kind of a restructuring effect?

Or let's say, is SMT one of the businesses where you see more permanent restructuring, more permanent capacity cuts in the coming months?

I'll first start with SMRT. I mean it all will come back to what we believe the metal prices will go.

You're absolutely right, right now, it looks very good. Gold, copper, even iron ore and so on.

I guess the small question mark here is. What is driving this?

Is it underlying demand? Or is it also that they worries around supply because there are still closures and difficult pandemic situation in some important parts of the world?

I would be more confident if those issues go away and we are more confident that it underlying demand that is driving these prices. Until we see that, I still think we are quite cautious and careful in the predictions here.

But if these prices would stay, then what we have seen is mining CapEx, in our view, our numbers say, they should continue at the level of they have been on which should indicate not a booming business, but at least a robust business. And that should also continue to drive decent performance on the aftermarket side.

On the SMP question, I mean, they did the announcement in June on layoffs to adjust for 2021. I think, Goran and his team there are very close to that business.

They manage it in a very stringent way. If they see a need to do more, they will do more.

If they feel going forward here that they have done enough, then that's also the conclusion. So, I don't want to speculate, we will evaluate, or we continue to evaluate these things on a monthly basis.

We have been on a weekly basis, but maybe not more on a monthly basis, what actions we need to take going forward. If I'm not saying no, I'm not saying yes to that it will depend on how the market develops.

Yes. And that would mean that you also consider the divestment even if the high-margin offshore business is completely -- is disappearing for the next years, would still consider the disposal or divestment.

Is that correct?

Yes, the market environment is to factor in the decision more as a general comment. I mean, there are times when you prefer to do this versus not, but, they can perform on deliver ever without business being challenging.

So that there's not a, let's say a hard condition to continue that business needs to be back at the floor level.

Thanks for the call. Just couple of questions, firstly, just following up on mining.

We did hear about the EBIT rates in SMS side, but could you also talk about the EBIT rates in the mining side, especially the differences between aftermarket and equipment trend as well. And secondly, on the margins within SMS, would you say that we’re past the worst trends especially in terms of the leverage you have been seen, do you expect the leverage is specifically to improve into bring forward?

So if I understand you correctly, the first question was more around the later phases of the quarter in mining and the trends there. On the aftermarket side, we definitely saw an improvement.

As we said, the June was essentially flat on the aftermarket side. And then, you know, if you were minus 13 for the quarter, you can understand that it was a fairly significant improvement in the final month.

Equipment, I usually say, I mean, we don't want to -- it's difficult to do when the trends in terms of a short couple of weeks, because it's a bigger project that come in lumps so to say. So I don't think we can draw on general trend conclusions there.

What we can say is that the underlying sentiment has been quite okay in the industry despite this not driven by still good commodity prices. And we were encouraged by some of the orders we will not the end of June, which the orders we booked is for the next 12 months of equipment but overall it's bigger project.

So we were confident and encouraged that those deals are still progressing. So I think the underlying sentiment this is quite okay on the equipment side.

When it comes to the margins in SMS, as we said, we are happy with what SMS delivered in this quarter considering their production rates and the drop in the top line. And assuming that, we don't have new major lockdowns, so we go backwards in the general trend, yes, but I think we should have -- we should see them improve as their top line improves.

Obviously, the leverage upwards will not be as strong as before simply because the leverage downwards wasn't as strong, so they will have to also as Tomas said start to open up some of the discretionary spend and so on as the market improves. But, yes, I guess that's, that's it.

On the mining side, is there any major markets which are still under lockdown and causing few concerns especially around the aftermarket side?

Yes, there are regions in South America, there are mines being closed for pandemic reasons. There are some locations in Africa either because of the virus or for political reasons.

But it's more, I would say, you know, spot based if you will, rather than them than big close downs in, major talks to the continent. So it's more manageable and about, we're still not full out of the woods.

That's what I said, that this is what we, would like to see when this goes away, what this will do to the commodity prices as well, because there is at least a theory that these, worries around the supply is also maybe holding up some of the prices a little bit.

Just a couple from me. On the -- I guess, it's a group-wide question, but I guess particularly interested in SMS.

What sort of indications are you getting from your customers with regards to the usual summer shutdowns? I'm just trying to think, obviously, very unique profile as we've kind of gone through the Q2 and this year more generally.

And I'm just trying to think about how they might be adapting their plans and how that's impacting how you think about the business this year?

Yes, it's a good question. We have heard of some customers that will shorten sort of vacation stops and so on, to produce either to catch up with order backlog, or to sort of address sort of a pent up demand, but that's a little bit what we saw in China in March.

They were completely locked down in, in February. They were booming in, in March and then they came down again early Q2 as they sort of came back to the underlying demand.

We don't know if we will see that in other parts of the world. And there are some indications to what you say, but there's not that we haven't gotten, let's say significant feedback that they open up or they open more or significantly more.

I think many companies are aware of this as well. I mean, if you're sitting at an order backlog you will also look at the incoming orders before you decide to work the holiday.

Yes. And then just second question is probably for Tomas.

Just thinking about inventories, Tomas, and clearly, there's a lot of moving parts given, there's a sort of structural, I guess, desire to reduce inventory levels across the group or at least improve working capital but you've obviously got falling sales. So some of these ratios move around quite quickly at the moment.

Just trying to think about how you're thinking about inventories in Q3? And any help you could give us in terms of, I guess, under production potentially in the Q3 bridge and just how to think about that a bit more generally?

I think I will hand that over to Stefan to talk about the production rates.

Yes. We went into Q2 now with saying, with the approach that we were going to produce roughly in line with demand, in particular in SMS.

And that statement still holds. We might see slightly declining inventory, because of our summer breaks, not material but a little bit.

But the general approach is to produce now in line with the demand. SMS is at, I would say, a good inventory level.

Of course, in percent of sales it might looks a bit high. But we also have to factor in service levels and so, on the total product offering they have and so on.

So, we think they are at the quite good level, but it could be reduced a little bit further. If we reduce it too much, we will have an issue once the thing starts to pull again, and catch up without demand.

So, we don't want to go too low.

I would like to come back to the cost savings. You had temporary cost savings -- because I didn't really get you, Tomas, when you talked about the temporary cost savings going forward.

Because if I read your press release from July, you are saying that you expect temporary short-term actions to generate savings of about SEK1.5 billion. And I think that the temporary savings gave you SEK1.1 billion in savings in this quarter.

So there should only be SEK400 million left according to that. But it sounds like you are excluding the other temporary savings when you were talking about the SEK600 million and the remaining SEK900 million.

So could you please explain that? And what we should expect in terms of total temporary savings in total for the year?

Yes, of course. The SEK1.5 billion that we talked about in the press releases is both in June and in late-March that was basically referring to short-term working weeks, that's the SEK600 million that we had in this quarter and that statement stays.

What we say in a positive way underestimated was that, the temporary spend savings, the discretionary spend savings, which is travel and meetings and conferences and so all that. We had -- we anticipated that we would have it, of course, but maybe not of this magnitude.

But one mustn't forget that, we went into kind of a complete stop in April, and we went very far in cutting everything. I mean, even sort of going into life supporting spend, if I put it like that.

That of course has to come back as the economy opens up and countries opens up. We don't have a specific guiding for that part of it.

We only have guidance for the short-term work in weeks and that stays on SEK1.5 billion. Of course, there will be discretionary spend savings, but we have chosen not to give any specific number on the other part.

Yes. That's very clear.

And then could I just follow-up on the separation of Sandvik Materials Technology. Can you explain what the process will look like from here?

Yes. So, we have always at first we were in complete and total separation.

And now as I said, because of some delays that and about Q3 three is the current plans, we should have all the legal entity set up in the countries that are still behind on that. And then the Board will discuss potential next step and the recent affirm date for that, but we have said that we will do it when the internal separation has been done.

So, I would say I used to say late summer now I say in the fall, because we were a little bit too late. And so we want to complete that process and then we'll have a discussion on how we move forward.

Okay. And when you joined as the new CEO of Sandvik, you said that you were going to form your own opinion on what you think about Sandvik Materials Technology and if it belongs within Sandvik.

Are you done with that? Or -- and are you going to communicate that?

Or is that -- are we -- do we have to wait for the Board decision or?

Yes, I think, I mean, I'm more or less formed my opinions on this. And again, I want to repeat the first part here, which is that I can also confirm that, I think SMT is a good business, leading innovation, high performing compared to its peers.

Whether it should stay in Sandvik or not, that's the dialogue, I'm initiating with the Board, and we will have that discussion in terms of reaching a conclusion after the internal separation has been completed.

And then my last question is also on SMT because you said that you have had some cancellations and delays in your oil and gas business. And to me, that is a bit concerning because I guess that the oil and gas business is the most profitable part of SMT.

Would you say that if you would exclude the oil and gas business, is SMT still profitable? Or are the other parts making a loss?

No, no, no, they are still profitable, absolutely.

Can you give us some more details about the new Sandvik manufacturing solutions you need? What's focused on software and additive manufacturing?

I'd like to get your thoughts about what's the addressable market size, the profit pool, the growth potential? And also, how do you -- how appreciate the current situation in terms of the group's ability to make acquisitions in those areas, in terms of the current price or the potential acquisitions in terms of the potential return on these acquisitions as well?

Yes, sure. So, it will -- this segment will contain what was previously two divisions, AMT and additive.

We are working on the restructuring of that as well. So, that's not necessarily how it will look like going forward in terms of the divisional split.

I don't want to comment here and now on the addressable market because I think one of the work we have in front of us now is to define the sub-segments in the areas they address more because if you just take the addressable market and you have additive metrology design and planning software, it becomes huge, but that's not really the addressable market that we will have. So I would like to come back on that when we have done a little bit more work in that area, both on our own strategy and defining also exactly what segments we will address going forward.

And when it comes to ability to acquisitions and so on, I'm quite positive. It's an area where there are definitely targets and ability to do acquisitions.

It comes back to my first comment that, we ourselves have some homework to do for the remainder of this year to be more specific on what parts here we're going to address. So we don't go too wide or go in every direction just to find acquisition targets.

But now, overall, I'm positive. That's why we do this because I see the risk potential.

I want to increase the speed and focus of the execution here. So, we’re going to have a dedicated team that's I will be closely involved in myself initially to do this.

Okay. So we can expect more about this up to CMD.

Yes.

So, thank you, Thomas; and thank you, Stefan. We will now close the call for this time.

May I just remind you that our Capital Markets Day will be held as a virtual event on 3rd November, this year. So thank you all for joining and see you soon.