Sandvik AB
STO:SAND
| US |
|
Johnson & Johnson
NYSE:JNJ
|
Pharmaceuticals
|
| US |
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
Financial Services
|
| US |
|
Bank of America Corp
NYSE:BAC
|
Banking
|
| US |
|
Mastercard Inc
NYSE:MA
|
Technology
|
| US |
|
UnitedHealth Group Inc
NYSE:UNH
|
Health Care
|
| US |
|
Exxon Mobil Corp
NYSE:XOM
|
Energy
|
| US |
|
Pfizer Inc
NYSE:PFE
|
Pharmaceuticals
|
| US |
|
Palantir Technologies Inc
NYSE:PLTR
|
Technology
|
| US |
|
Nike Inc
NYSE:NKE
|
Textiles, Apparel & Luxury Goods
|
| US |
|
Visa Inc
NYSE:V
|
Technology
|
| CN |
|
Alibaba Group Holding Ltd
NYSE:BABA
|
Retail
|
| US |
|
3M Co
NYSE:MMM
|
Industrial Conglomerates
|
| US |
|
JPMorgan Chase & Co
NYSE:JPM
|
Banking
|
| US |
|
Coca-Cola Co
NYSE:KO
|
Beverages
|
| US |
|
Walmart Inc
NYSE:WMT
|
Retail
|
| US |
|
Verizon Communications Inc
NYSE:VZ
|
Telecommunication
|
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
198.65
240.2243
|
| Price Target |
|
We'll email you a reminder when the closing price reaches SEK.
Choose the stock you wish to monitor with a price alert.
|
|
Johnson & Johnson
NYSE:JNJ
|
US |
|
|
Berkshire Hathaway Inc
NYSE:BRK.A
|
US |
|
|
Bank of America Corp
NYSE:BAC
|
US |
|
|
Mastercard Inc
NYSE:MA
|
US |
|
|
UnitedHealth Group Inc
NYSE:UNH
|
US |
|
|
Exxon Mobil Corp
NYSE:XOM
|
US |
|
|
Pfizer Inc
NYSE:PFE
|
US |
|
|
Palantir Technologies Inc
NYSE:PLTR
|
US |
|
|
Nike Inc
NYSE:NKE
|
US |
|
|
Visa Inc
NYSE:V
|
US |
|
|
Alibaba Group Holding Ltd
NYSE:BABA
|
CN |
|
|
3M Co
NYSE:MMM
|
US |
|
|
JPMorgan Chase & Co
NYSE:JPM
|
US |
|
|
Coca-Cola Co
NYSE:KO
|
US |
|
|
Walmart Inc
NYSE:WMT
|
US |
|
|
Verizon Communications Inc
NYSE:VZ
|
US |
This alert will be permanently deleted.
Sandvik AB
You don't have any saved screeners yet
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'm 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 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's in good condition at the moment.We're also been working with the portfolio management. And we are -- 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 wires as well as the Fagersta divestment. Also, the stainless wire is coming to an end. At the -- and then we are moving into the direction that we want to move to, to grow Sandvik and to expand our core businesses. And we are happy to present during this quarter 2 acquisitions: Metrologic as well as Inrock. Metrologic, you are well aware of, we have had press conferences regarding that. And Inrock is a 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 #1 or #2 in the businesses that we operate in. Varel was bought earlier in a direction when Sandvik was supposed to move into the more -- into the oil and gas industry, which we have said that that's not the direction we like to move the company at the moment. The company has developed fantastically well during the last year, and we're 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 that is what we call tricone bits, where we, together with the Sandvik range, are market leader when it comes to these products. But we'll 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, as we -- in Europe, up 16%; North America looks -- 8%. It looks a little weak. Actually, that is the area which is developing best also sequentially. We see as high as 19% if we take away onetime orders during last year and this year. So a good development there. U.S. is around 10% there. When it comes to Asia, it's up 17%. And China there is around 7%. So good development within all these regions. And I mentioned before, it is a record order and record revenues. They're 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 -- both the profit is growing but also the margin. We are at the record profit of SEK 5.067 billion. This is equivalent to a 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's 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 metal, the positive metal effects as well as the FX and some structural from the divestments that we have done, we are actually 25%, 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 or Machining Solutions, also here we have record revenues as well as order intake, good numbers. We see continuous good growth here, 8% on orders and 10% on the revenues. Very, very good overall. If you put in the positive effect I mentioned, there was a little bit positive FX there. You take it by approximately 1%. So it's moving well. The demand is there, and we done a somewhat increase in inventory on that part, which is very much in line with the -- our expectation. And that is for the deliveries, which is normally during the Q3. The effects 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 also seen here improvements 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 or -- is actually Finland where we have the euro. And 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 and more to wish for, but I think we are moving definitely in the right direction. And it's also good to see that all the product areas and business units there are starting to perform quite well. And that's, of course, very positive. SMT, the problem child that we presented 1 year ago that we will go into a restructuring program, and we said that during the next 2 years, we are going to reach 10% EBIT level. We have also new management since the second half of the year. 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 result 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 17% here. But if you actually remove the 2 big orders -- we had a large order last year in this quarter and a big order but a 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're very happy about that. The work will continue, and we are optimistic that we will reach the targets for next year.So Tomas, can you help us a little bit with the balance sheet, also on financials?
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 I will focus on the second quarter. So if we start at the top right-hand side, you can see all the top line numbers. Both orders and revenues, as you heard, 12% organically. Currency, plus 1%, both 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 we look at the profit, SEK 5.1 billion, almost. That's 36% up, 28% taking out currency and metal price effects. 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 have a bit of over-absorption. This is like, as Björn mentioned, like 1 percentage unit on SMS, 1 percentage unit on 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 the 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 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 a 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 buildup in the second quarter. Returns despite this is going up 24%. We have a higher capital turnover and we higher profits. And earnings per share up 40% to SEK 2.82. If 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, SEK 1.051 in increased EBIT. That's a leverage of 39%, pretty normal. I mean, we had basically 50% for SMS, we had 40% for SMT and a little bit above 30%, 32% for SMRT. So 2.4% in margin accretion or 2.4 percentage units. Currency, plus SEK 145 million. 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 SEK 145 million, about half is transaction, half is translation. And then structural one-offs, here you have the metal prices and the structural changes as well, 0.9%. So all in all, 19.4%. So if you take 15.8%, add 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 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, you 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 is eating up quite a bit now in this second quarter, and CapEx is flat. So that's SEK 2.2 billion for the quarter and SEK 4 billion -- a little bit more than SEK 4 billion for the first 6 months. But we should say again here that we are confident that we will 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 months 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, the Inrock acquisition. But we also had the Hyperion divestment in July. So this all washes out, same kind of money in and out. Gearing, 0.34 compared to 0.71 a year ago. So it's cut in more than half. Last slide. A few words on the guidance or the actuals and the guidance. Underlying currency effect was SEK 140 million. We guided 0. And of course, it's the euro which is driving the metal prices in the quarter, ended at SEK 201 million. We guided SEK 100 million. This is in quarter. So it's not year-over-year, just 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. dollars 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 quarter for the third quarter, SEK 100 million. If we then look at the full year guidance. CapEx for year-to-date is SEK 1.67 billion. We stick to the guidance of SEK 4 billion. Finance items, SEK 1 billion; year-to-date, SEK 520 million. 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 26% -- 26.3%, 26.4% going forward here. So we keep the guidance but in a lower part of it. That's it, Björn. Over to you.
Thank you. To round off this session, I'd like to just 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 new structure is -- 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 setup and structure, Sandvik actually consists of 34 business units and product areas where the businesses 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 a business governance system, the scorecard systems, which is fantastic tools for the businesses to very quickly analyze where we are in the development and make the units take the right decisions. But it's 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 are taken. And it makes them actually 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.
Okay, guys, thank you. And I think we'd start with opening up to see if we have questions here on the floor. And yes, we do.
Peder, please go ahead.
Peder Frölén, Handelsbanken. Normally, in SMS, orders is typically a bit higher than revenues in the second quarter given summer deliveries and so forth. Given the pattern we saw right now, orders growing organically by 8% and revenues by 10%, and given what you see in the books so far in this quarter, how do you see demand is trending if you try to sort of take out the seasonality here? And 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 the -- actually our Wolfram business, which is both the mine but also the recycling of old inserts. And it's also making Wolfram for a lot of businesses. Only 50% of that business is coming to our business and 50% are being sold externally. And that business has 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 after. 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 if that -- I don't think you should make any conclusions that one is less than the other one in that part. But I can mention on the parties that this is probably the best indicator of the industry that you can use because this represent the activity in the production facilities around the world. This is -- 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're 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.
Just my short follow-up, sorry. You mentioned that the inventory build in SMS gear was sort of normal just due to seasonality. At the same time, it was mentioned that it helped the margin by 1 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?
[indiscernible] you can answer that.
Yes, if you can 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 try to build up, but we didn't manage -- we just didn't manage to build up stocks. And this year, it's quite normal. That's why you have a year-over-year bridge effect, which is maybe then a little bit higher than normal.
Yes. But 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 scrap buying. They buy these inserts in the market, and they bought for SEK 200 million more into that part. So we would buy less during their part. And that's part of the recycling of inserts when we make parts. 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 SMRT. You mentioned that -- in the presentation that -- or you said potential for further structural improve the business. Could you please elaborate on which areas you see a potential during the coming years?
Absolutely. I mean, you have been following the SMRT development, during the last 3 years have seen, 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 improvements. So each of these businesses, they have their action plans to become a little bit better. It's everything from launching the right product, making sure that their production is becoming -- lead times that are shorter and more efficient. At the moment, the business is, I say, hampered by enormous pressure from orders, especially the part which is the underground business that is load and haul 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 complete all the equipment before they deliver out. So there are still unefficiency 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 autonomize mining. And we have numerous project. That drives our automation solutions, but that also drives demand for equipment because you cannot use old that equipment for that. You need the latest. So that's probably the most exciting. The other part is that we're seeing the aftermarket now quarter after quarter after quarter where we grow over 10%. And that is important. That is important for the 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 a little bit better.
Thank you very much. And operator, can we move to the conference call, please, to see if we have any questions there? [Operator Instructions] I know there's quite a few people wanting to ask questions. Operator, can we please have the first question put through, please?
We go to the line of Markus Almerud of Kepler Cheuvreux.
Markus Almerud here 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 maybe about -- talk 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. A little bit short in SMS. We've seen the growth leveled. It is up around 8% to 10%, which is good. We're seeing growth in all segments. We're seeing growth in all regions. Where we've seen the best sequentially development during this period is actually North America, and that is positive. That also includes the automotive, which you probably remember that during the last quarter, we were -- it was -- you saw was a little bit of flatten out. Year-over-year, we put it still on flat, but it has had a good development in that market. 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, a good growth number 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 units all over that 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 rates, we are maybe not seeing a growth in the daily rates, but we're seeing them on a very high level and still growth numbers.
And just to follow up on that because it's -- I mean, there's lots of concerns and worries out there, especially about the PMI falling and then decelerating growth. And you talked about production units across-the-board are ramping up. Do you see any -- I mean, are there any worries out there among your customers about this, about the economies, about the slowdown? Or is it a pretty steady rate in how they are conducting the business?
I mean, we know that market goes up and down. So at a certain stage, that will be going down. How it will go down and how it will be affect 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 slowdowns? Are you seeing anything that would affect this part? And they say no, we're not seeing it at the moment. But this is, of course, now. Tomorrow, we cannot answer, of course. The important thing is that we are preparing ourselves for able to handle both ups as well as taking care of a flattening out or if we'll see a softening off. The good thing with the SMS business, that is not like many other businesses where you can see, for instance, for 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, they are normally a couple percent. If it's a lot, it could be 5%, 6%, maybe you'll remember from a previous downturn. So it's a little bit different from some of other businesses in the market. It's an aftermarket business. It's 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 where you see a very rapid growth, which is kind of new. You haven't really seen that before. Is it -- what part of crushing and screening? Is it both the portable and then the -- and the fixed? Or -- and is there -- are there any special big orders there which is impacting?
I don't know what we -- have we said especially that we have more significant in the crushing and screening?
No. 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 in 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 quarries. One development which I like to talk about here because I was a little bit rough on them when I was new here, that is the mobile crushers. But the mobile crusher have now reached the margin numbers that was a little bit magic at that time. Remember, you -- I said there might be a question of divestment in the future. Now they have, during 2 years, improved their performance, fantastically are doing good numbers. On the stationary crushers, it has been -- it's a much more stable business moving on, both in the mining and big crushing. That has had a good development quite some long time, and it continues to be on a good level. It represent both quarry as well as mining.
Thank you very much, Markus.
Over to the line of Max Yates of Crédit Suisse.
I just want to ask a question on mining and rock. I think you've talked a lot about in the past about we should be looking at commodity prices and how they move as the key driver. I just wanted to sort of check given we have seen some declines in the copper prices recently. Are you seeing that reflected in customer conversations and negotiations and 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. You know how 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's no signals or -- that this would slow down. If you follow the mineral prices, they went up, and now they're moving sideways on a high level. At the moment, we don't see any big changes there. We follow it carefully, yes.
Okay. 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 on the balance sheet? Or could we start thinking about any shareholder returns?
Well, okay, on the balance sheet and net debt right now, just to give some background, it's SEK 18 billion and, given what we said about the free cash flow generation for the rest of the year, could most likely end up below SEK 10 billion before the end of the year, which would mean then if we don't do anything major, would lead to a 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 1/3 for dividends, 1/3 for M&A and 1/3 for CapEx really. And the target is not really to live with a 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 business which are profitable and stable. Björn?
I think it's correct. And we started our acquisition journey in our core businesses, and we have, as I mentioned, [ probably ] these 2. But there are, of course, a lot of things going on, and we would be happy to talk more about that when they are coming in, in coming quarters.
Thank you, Max.
We are now over to the line of Alexander Virgo with Bank of America Merrill Lynch.
Just a quick one on...
Hello?
[Sorry, is that better?
Yes, that's better. Thank you.
Is that better? Okay, sorry about that. Just a quick one, I guess, on SMS. And I was looking at your -- if you look at the report last year, Tomas, 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 3 or 4 quarters, clearly they've come down as the production system aligns with your -- 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 of 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 inventory build in Q3 perhaps a little bit harder than you did last year? And then perhaps in terms of follow-up, Björn, 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 called 7% for China, but I think that was for the group overall.
Okay, Tomas, 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 a situation where we were understocked, and we have talked about this over the last, like, 2 or 3 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, and [ we don't want to leave ] that situation. So we're sort of back in balance now plus a little bit of overstocking for the Q3 shutdown. Incremental margins, I mean, we are not changing anything. I mean, 35%, 40%, around 40% or something like that, that's what we're seeing going forward.
Good. When it comes to China, yes, it's correct that China is the higher growth for SMS than it is for the group. That's correct. But we don't -- normally don't talk about those numbers individually. But it's a little bit higher. China is very strong. It's strong in all the segments there in the market, and it's developing well. When you see in the group being high, between 20% and 30% on that high side, SMS has never been on that level. They've been lower on that part, so it's more -- when it comes to equipment sales within the mining part, which is more affected on that part. I think I saw our 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+ ] 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. There's a lot of things happening in that part. So we feel very comfortable about the development in China. No indication for a slowdown there.
So if I could just follow on that, Björn. The fact that you saw SMS Asia grow 10% in Q2 versus 14% in Q1 against a, I guess, against a tougher case -- against a tougher comp, is that comp driven, not China slowing down?
No, I think Asia, what we have is 17%. I mean, we do not talk so much, but one of the markets where we are growing 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 it 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 it that way. I think we are [ experiencing ] it well. We are close to the customers. We are close to the market, and it looks quite good. But it is, of course, very high numbers. And we know the automotive industry is making close to 30 million cars every year, so it's a big market.
Thank you, Alex.
That goes to the line of Guillermo Peigneux of UBS.
[ Golmero Peigneux ] or Guillermo Peigneux from UBS here asking kind of a related question to the one that we have from Virgo, but it's more detailed in a way. I think, Tomas, you mentioned that you were expecting the free cash flow from operations to be aligned with last year. If my memory doesn't serve me well or best serve me well, you recorded around about SEK 15 billion cash flow, which means that you have additional anything between SEK 11 billion to SEK 12 billion cash flow. Is that -- given the stage of a cycle we're in, in which you're still growing, right, do you still take away the seasonally adjustment that you need to do in Q3? Would it be possible for you to meet demand from customers in Q4 without inventory buildup or actually being able to meet that cash flow number easily? Or would you need basically to be a lot more constrained on receivables as well and -- as well as inventories?
I think on the cash flow, we saw a 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. SMS is enormous and it is -- I mean, it's amazing. They are running on a really high 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, it's correct that during the -- traditionally in this industry, of course, that business drives more because you buy from sub-suppliers, you have more product being built and then you have deliveries. If you are, for instance, delivering a mining truck to Australia, it's actually 3 months before it leaves the factory until it -- they're being invoiced to the customer. So yes, it takes more inventory. But at the same time, they are 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 deliveries, which will also generate cash going forward. So I think we feel comfortable to say that to reach the numbers that we gave before, those are our pre-action. Those are coming from the businesses and those that we support. So yes, we think we can even this year -- and that will be the third year in a row where we have a 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 they're putting quite a lot of effort to make sure that we reach these targets.
Yes. Yes, I'm a bit concerned because it's almost a doubling. It's not a doubling, but it's just basically last year, second half, you did SEK 7 billion cash flow -- sorry, it was a bit higher than that. In fact, actually about SEK 10 billion.
It's actually SEK 11 billion.
SEK 9 billion, yes. So we're talking now about SEK 11 billion to -- SEK 11 million, SEK 12 billion. So finally, it is reachable. I think, yes, you need to focus. But I'm a bit concerned.
But I can assure you there is no inventory buildup in the mining business, which are not products which are placed in order, billed to customer. 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 the big crash. 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 cannon, 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. But I think for us, the financial situation is good. We have a good cash flow position. And I don't think this is a big worry. I think people are making a little bit too big thing out of this. We'll reach the cash flow in the end, and we would be reaching those financial targets based on that. So I talked too much about...
Maybe I could -- yes, maybe I could just add, I mean, Guillermo, 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 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 a lot of money, but this is -- yes, we feel quite confident.
Well, yes. And maybe I have a clear -- question around Machining Solutions. How much of the recycling business is recycled in China?
Recycling in China?
Yes. How much of your recycling operation? Or why is it dependence, let's say, from a -- from the business -- 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 will be used. So in a new insert, approximately 50% of the Wolfram, which is the main content, is actually coming from recycling that 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 go 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're doing a hell of a job. They are performing fantastic. It's not easy when you have your brothers and sisters that are stars, and you'll have to get up to over 20% to even be looked at. This is the environment where they're working, and I think they're doing a great job.
Thank you. Hello? There seem to be a little bit of a technical issue here.
Sorry. We go to the line of Klas Bergelind at Citi.
Yes. Björn and Tomas, it's Klas from Citi. I have 2 questions. First, on the moving parts within SMRT. It seems like the aftermarket is growing at a similar strong pace as in the last quarter at around 10% in parts and service, and consumables running at high single digit. Can you just tell us, was there any increased price/cost pressure on the consumables side? I wonder if this had changed versus last quarter. And if you could help us with the margin ex PPA and including PPA for Varel in the quarter?
Yes. First, I think service and spare parts is over 10%. And they're not just a little bit over, it's good 10%. I'm not allowed to say more, but that's developing fantastic well. So when we talk about the aftermarket, it's correct that 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, prices, it's a good market. We're seeing good prices. And the part we are 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 a, pricing-wise, a stronger performance now than we did in previous quarters. So we're following that, and that's an important part of, of course, driving profitability and good returns.
But I meant -- sorry, Björn, I meant on the consumable side, some of your peers have highlighted price/cost pressure at least last quarter, and I was just wondering on the consumable side whether that has changed anything quarter-on-quarter.
No, for us, we see positive price development in consumables. And so from our part, that is developing well. So I hope our customer -- competitors are not lowering their prices too much.
Okay. 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 sharp slowdown from the 15% to 30% we've had over the last 2 years. If China is 8% and Japan is much stronger, then China must be slower than 8%, I would have thought.
No, we are -- China is higher than -- it's higher than 8%.
For SMS?
For SMS.
In orders? Okay.
Yes.
The next question is from the line of Lars Brorson at Barclays.
Björn, Tomas, Ann-Sofie, just following up on that question. And sorry to belabor the point, Björn, on the trends in SMS, particularly in China, but it does look like quite 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 pin you down on some numbers here in China for the quarter as we exited, can you help us a little bit with the run rate in Q2 or in early parts of July? Maybe to be specific, did China actually grow in June, July for you in SMS?
To be honest, I think we pinpointed that down pretty much. And if you compare to the previous quarter, it's pretty flat. I think it didn't -- I mean, sequentially part. So what you saw in orders during your Q1 is the same level for SMS in Q2. That I know. So it's not a slowing down. You're always comparing with the previous year. And so it depends a little bit what happened during that period. But it is not a softening, it's a flat development quarter-over-quarter in actual terms.
Understood. And can I turn to your European automotive segment in SMS? I mean, you obviously had a very good Q2, perhaps a little bit beyond normal seasonality. Do you think you benefited from some pre-WLTP ramp in Q2 among some of your European automotive OEM customers, i.e., these new test procedures that seem to be impacting both the quarter that we've been through but potentially negative to going forward in the next couple of quarters?
And of course, that question we were expecting. And of course, our SMS people, the Coromant and -- they are, of course, putting their ear to the market actually to listen 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 this -- 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 and listening to will there be any impact. I read, I think, in the numbers here that during Q2, automotive was up in 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. So we'll see. 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's 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 level? 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're producing in line now, which means it should be something similar, negatively impacting your EBIT bridge in Q3 '18 versus last year. Is that fair?
I think it was during this quarter was about 1%, which gave an extra in this -- difficult to say. And do we know what...
For Q3?
For Q3?
No, we don't have any guidance for that.
No.
So -- but...
It depends on, of course, where the -- but I can assure you we are not building any more inventory during this period. If the level will stay like this or go down a little bit, that depends. And also, they have a number of closures of factories during this period, and that's why we're doing it.
Yes, and the EBIT margin is always seasonally down in Q3.
And I think you also know, I mean, you can look back in Sandvik that you see that Q3 is weaker when it comes to profit levels than Q2. So this is the strongest one.
Sure. I'm talking year-over-year, but thank you very much.
So…
Thank you.
Okay. We go to the line of Sébastien Gruter at Redburn.
I will be quick. I mean, we haven't touched on the U.S.-China trade dispute. Do you export from China into the U.S. in any of the business units? And maybe if you can give us some breakdown of the cost of goods sold in offshore U.S. subsidiary by region or how much of the COGS are domestic or derived from China and Mexico and Europe, that would be good to assess.
It's very little. We have about -- I think we had a number of SEK 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 things in Tampere. So that is just a little bit of a capacity reason why we're doing it. So if you're seeing, there's no impact whatsoever when it comes to these customs. And yes, 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 exception becomes sufficient. So that comes up a little a lot of interesting deals where competitors say that there is no production locally while we can say, yes, we can. So there is opportunities coming up. The cost increases, they are being -- they are already being compensated above with prices. So, so far, it has -- 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, mining equipment, in the U.S. is the [ electro ] where we're making the surface mining equipment, but they are not buying anything from China. What I know, I think there's probably more local supplies there. So no effects whatsoever there.
Thank you very much. And on that note, I -- it's time for us to close this session, and we bid you all a continued good summer. And we'll see you again in October, I assume.
Have a great summer.
Thank you.
Thank you. Bye-bye.