Sandvik AB

STO:SAND

Earnings Call Transcript 2022-Q2

[Louise Tjeder, Head of IR]

Good afternoon, and welcome to Sandvik's presentation of the Second Quarter Results 2022.

I am Louise Tjeder, Head of Investor Relations and beside me, I have, as usual, our CEO, Stefan Widing; and CFO, Cecilia Felton.

We will spend this hour together and start with the presentation when Stefan and Cecilia will take you through the quarterly highlights and some details on the financials and then we will open up for the Q&A session. [Operator Instructions]

Without further ado, I will hand over the word to you, Stefan.

[Stefan Widing, CEO]

Thank you, Louise and also I would like to welcome you to our second quarter report now in 2022. If we summarize the quarter, it's been a quarter where we have continued to deliver on our shift to growth strategy. We have a 25% revenue growth at fixed exchange rates in the quarter. Overall, we have seen a solid demand across the businesses. And also, we have seen strong contributions from the acquisitions in this quarter.

On order intake, we have an increase of 22% at fixed exchange rates, and of that 4% is organic. And as I mentioned, for revenues, 25%, of which 6% is organic. If we exclude our Russia market, we have had an organic increase for both of 10%, and that's just to show you how the underlying development have been outside of Russia. And this would be our sixth consecutive quarter of double-digit organic growth, which we're really happy with.

We haven't increased earnings, but we do have short-term pressure from cost inflation. Adjusted EBITDA increased by 23%, and that's a margin of 19%. As you know, we have some items affecting comparability of SEK1.1 billion, most of that then related to our wind down in Russia, which we communicated a couple of weeks ago. The adjusted profit for the period improved by 23% to SEK3.7 billion.

Of course, now we continue to focus on having an agile execution. Price management is on top of the agenda to continue to catch up and mitigate the cost inflation. We'll talk a little bit more about that as well during this presentation.

We have also launched a new savings programs to reduce our footprint that we launched in May. We have also announced five acquisitions in the quarter to strengthen our core and also increase our aftermarket business. We'll come back to as well later in this presentation. I usually highlight a few innovations from the quarter. This first one, I think it's quite interesting.

It's our first real synergy case between the DWFritz ZeroTouch equipment and our Metrologic software. This combined solution allows us in a very fast way, inspect components when they come out of the CNC machine. It's more than 10x faster than traditional solutions. It allows us to do 3D measurement of the components, and it addresses an emerging need to measure every part.

The more tighter tolerances you have, the more the need is to measure each and every part and not just samples. This is, for example, a need from a specific customer here, Arena Global watchmaker. It's also a need that is emerging, for example, when you manufacture components for an electric drivetrain because the precisions and tolerances are so tight.

So at first, I would say, really important order for this solution during the quarter. We have also showcased our first electric surface drill rig at an exhibition here in the Nordics. We have based this on our Commando product line, which is the smaller type of rigs typically for use in urban areas or even in your own backyard, if you have the need to do some drilling. We believe this is the first customer segment on the surface where this will become relevant. And it's both battery powered as well as can be used via cable electricity through a cable.

If you look at the market development, I want to call your attention to that the blue column here with the year-over-year Q2 order intake. Here, we have excluded Russia, just so you can get a sense for the development, excluding Russia, I will comment also later on what it would look like with Russia.

But excluding Russia, then Europe is up 2%. North America is strong, up 21%. Asia is down 4%. This is driven by China. In SMM, China is down 15% in the quarter, primarily driven by weak automotive market. And then the other markets, which is primarily mining has been strong in the quarter.

Having a segment view, mining continues to be strong basically across the board. General engineering, also a solid performance in the quarter, high single-digit growth. Automotive, a bit mixed picture, slightly to the weaker side, but very mixed picture with Europe being stable. North America actually strong, low double-digit growth, while Asia then China weak. Automotive China down 30% in the quarter.

Energy continues to be strong for maybe obvious reasons across the board. Infrastructure is flattish with maybe slightly weaker development flat, but weakening in Europe, otherwise, basically stable across the board. Aerospace, strong growth over 20% in the quarter as aerospace continues to recover.

If you look at the European line, if we add back Russia, you basically get a flattish development across the board and slightly to the weaker side in some segments. Russia impacted primarily energy and aerospace for us in SMM and, of course, mining.

Order intake, SEK28.7 billion, ahead of revenues again, revenues at SEK27 billion. So we continue to build order intake, but -- sorry, build order backlog, but the gap has narrowed compared to the big gap we saw in quarter one.

So we are ramping up on revenues and orders continues to increase. From a growth perspective, we see continued strong growth, both orders and revenues, excluding FX, above 20% growth. And you can now see that because of tougher comparables, the organic part is declining, while we continue to have very strong inorganic growth component into our numbers, which we will, of course, continue to have based on the already announced acquisitions.

If you look at the margin, EBITDA first, in absolute numbers, up 23%, but the margin of 19%. Important here to say we are not happy with that. It's outside of our target range of 20% to 22%. And our goal is, of course, to get back within that range as quickly as possible. It is fairly easy to explain, though, we have a weak leverage, mainly because of pricing, not just offsetting cost inflation.

I will say we are now basically offsetting the cost inflation that we saw prior to the Russian war, but the new surge of inflation that we have seen in steel prices, energy and so on is something that we now have to again, work on offsetting which we are doing through actions as we speak.

We have also continued to see a higher share of air freight in SMR, in particular, to be able to service our customers. And we, of course, have some impact from the wind down in Russia at the beginning of the quarter, in particular, we still have a full organization in place and no revenues, and that we are gradually taken care of. We had a dilutive impact from structure of 110 basis points and accretion from currency of 200 basis points.

On a rolling 12-month basis, the EBITDA is still at 20%. We'll come back with some more bridges here and some explanation of what we expect a little bit ahead of us as well.

Going into the business areas. Mining and Rock Solutions, solid demand, again, particularly strong demand in the aftermarket. Total order intake growth of 46% at fixed exchange rates, 35%; and organic 9%. If we exclude Russia, the organic order intake was 17% and 15% on revenue.

So strong continued demand on the mining side. We also continue to see strong interest in our BEV and Automation solutions, 2 nice BEV orders above SEK100 million in the quarter and the second largest automation order ever also received in the quarter at SEK86 million.

The adjusted EBITDA came in at 19.2%. Here, we have, of course, structure from the DSI acquisition impacting by about 160 basis points. We also have cost inflation versus pricing. And here, we have also done the higher share of air freight, which is actually quite a significant impact for us in the quarter. We did a small acquisition in the quarter of ACCURATE, Finnish technology company, focused on battery management technology and solutions, which fits nicely into our BEV strategy.

Rock Processing, also continued solid demand in the quarter driven by the aftermarket. Here, I mean, organic and revenue organically was 0. We should remember that's against very high compares and also excluding Russia. So if you add Russia or exclude Russia from the calculation, organically, we're up 7% in the rest of the world against that very high compares. So we're quite pleased with that number.

Adjusted EBITDA of 16%, also here impacted by cost inflation, not yet fully mitigated by pricing. Rock Processing is the ones that have been the highest impacted by raw materials because of their high portion of castings in the raw material input. We also have here some negative mix impact when we have lost the business in Russia and also because of the lockdowns had to replace some business in China in the quarter with lower margin business. So some negative mix because of that as well.

Highlight in the quarter was, of course, the acquisition or the announced acquisition of Schenck Process Mining part, which we expect to close later in the year. Earlier today, we also announced that we have a new president for SRP, Richard Harris, which is currently the President of our Walter division. He will take over 1st of October.

Anders, as you know, will leave at -- become the CEO of Konecranes [ph]. He will stay until mid-October. So we see a good overlap there for Richard and Anders to do a good handover.

Manufacturing and Machining Solutions, also solid underlying demand. Again, if we exclude Russia and look at our core cutting tool brands, the growth has been 5% in the quarter organically, driven then by aerospace and general engineering and also to some extent energy.

Total order intake growth at fixed exchange rates were 12%. So solid growth, both organically and with acquisitions. The reported organic growth, as you saw, was 1%.

We have also seen a stable demand in the first 2 weeks of July, and that's then in relation to June sequentially. And I could also say that June was a fairly representative month for the quarter one on average. The margin was 21.5%. Here in quarter 1, SMM was on par, cost and inflation, but it's a constant race, I would say in a dynamic situation. So in Q2, they fell a bit behind again. They were negatively impacted, and they are now, of course, working with mitigating that later in this year.

We did three acquisitions in SMM, a smaller round tools company in the U.S. called Pecan Tool Company and then two highly strategic ones, Press and preset which are both in the area of lightweight materials for automotive. And as you know from our CMD, mastering the automotive shift is one of SMS' six strategic objectives. So really nice to have these companies on board in terms of strategy execution.

And then for the last time, I will comment on Materials Technology, extremely strong quarter in Q2 from SMT. Really solid demand across all segments, record high order intake levels, especially driven by energy and industrial heating. We can say that in the Energy segment, all types of energy is in high demand. And for our important umbilicals, we had order intake of close to SEK600 million in the quarter, which means that they are getting back to very good levels on the order intake side there.

Organic growth, 26% year-on-year, and that is with very little major orders. You can see we had a small major order of SEK0.2 billion. So excluding major orders, it was still up 21% organically. Also strong margin, excluding metal prices, the underlying margin was 11.9%, which is solid for SMT especially since umbilical's invoicing is still trailing at a now very good order intake.

If we include metal prices, we get almost a bit of a silly number, 26% because, of course, we have very high impact from metal price impact in this quarter. SMT also have done a really good job on pricing, and they are fully on par or have caught up with cost inflation mitigated by pricing. And as you know, the AGM decided to go for a listing of SMT as Elena currently planned for end of August.

Now let's go even more into the numbers. So I hand over to you, Cecilia.

[Cecilia Felton, VP Group Control and Acting CFO]

Yes. Thank you, Stefan. All right. So let's start with the box at the top right corner here. You can see organic growth for orders came in at 4%, 6% for revenues. If we exclude the impacts of Russia, both orders and revenues grew by 10%. We also had a positive impact from structure, a quite significant one, as you can see, 18% to 19%. And also currency came in positively, which gave a total order intake growth of 32% and total revenue growth of 34%.

Earnings increased from SEK4.2 billion last year to SEK5.1 billion this year, an increase of 23%. Margin, as Stefan mentioned, 19%. Net financial items came in positively SEK18 million, and that was the result of temporary revaluation effects on our hedges. Tax rate, in line with guidance, 23.5%.

And net working capital came in higher both compared to last year and also sequentially at 26.2%. That was mainly driven by an inventory build-up that also had a negative impact on free operating cash flow that came in at minus SEK49 million. Returns 13.4% and adjusted EPS increased to SEK2.95.

If we continue with the bridge then and starting with the organic column, here, you can see that revenues grew by SEK1.1 billion, an increase of 6%. However, adjusted EBITDA declined by SEK349 million for the reasons that Stefan previously mentioned. And that gives a dilutive impact of 2.7 percentage points. Currency had an accretive impact of 2%, and our acquisitions contributed with SEK3.8 billion of revenue and SEK519 million of EBITDA, and that gives a dilution of 1.1 percentage points.

And all in all, that brings us from an EBITDA margin of 20.8% last year to 19% this year. If we continue with the net financials and starting with the interest net at the top here, you can see that it increased from SEK68 million last year to SEK154 million this year. And that's mainly due to higher borrowed volumes.

Going forward, however, we also expect a bigger impact from the higher interest rates, and I will come back to that in the guidance. Then at the bottom, you can see the impact of FX and other asset classes, plus SEK236 million. And as I mentioned, this is mainly due to temporary revaluation effects from our hedges.

Positive effects from both electricity and currency hedges. Eventually though, as you know, this will net out to 0. Reported tax rate came in relatively high at 29.2%. However, if we exclude the one-off costs related to Russia primarily, the tax rate was 23.5%, so in line with guidance for the year.

Net working capital increased sequentially, both in absolute and also in relative terms. And there are several reasons for this. Firstly, as we mentioned the last few quarters, we are ramping up for growth. On top of that, in the second quarter, we also have a normal seasonality effect as we build up inventory ahead of the summer shutdowns.

And then as you know, there's also an impact from the logistics and the supply chain challenges that we are currently facing. And you can also see in the graph here at the bottom of the page that net working capital increased across all of our business areas.

The inventory build-up or the net working capital build up also had a negative impact on free operating cash flow. In the graph on the left-hand side, you can see cash conversion rates trending downwards to around 50%. And if you look at the table on the left-hand side, you can see that EBITDA adjusted for noncash items was largely in line with last year.

CapEx came in a bit higher, but then you can also see the big impact from the net working capital build up. Financial net debt over 12 months rolling EBITDA increased from 0.6 in the first quarter to 1.2 this quarter. And that's primarily due to the dividend payment and also the closing of the Deswik acquisition.

Financial net debt came in at SEK32.8 billion, capitalized leases increased slightly sequentially. But then we also had quite a drastic decline in the pension liability of SEK3.5 billion. So all in all, that brings us to a net debt of SEK39.4 billion.

Looking then at outcome compared to guidance. Currency came in at SEK98 million, a bit higher than what we guided. The metal price effect for SMT was a bit lower, SEK649 million compared to the guided SEK700 million. CapEx came in at SEK0.1 billion and interest net and the normalized tax rate in line with previous guidance.

Looking ahead then, we've updated the CapEx guidance to around SEK4 billion for the year. This is now for continuing operations only. And will provide an update on their guidance for both CapEx, metro price effects and currency effects at their Capital Markets Day in August.

We continue to expect positive currency effects just above SEK1 billion for the third quarter. And as I mentioned now, going forward, we also expect a bigger impact from the higher interest rates on the interest net. So here, we've updated the guidance to below SEK700 million from the previous SEK400 million. Guidance for tax rate we have left unchanged.

And with that, I will hand back over to Stefan for a summary and conclusions.

[Stefan Widing, CEO]

Thanks, Cecilia. So if we conclude this quarter, continued solid demand with a strong contribution from our acquisitions. The sixth consecutive quarter with an underlying organic growth in the double digits. We continue to see high interest in our automation and digital solutions as well as our BEV vehicles. But of course, the growth development were impacted by the wind down and basically exit of the Russian market.

We'll continue to have an agile execution to support our resilience going forward. We do have market-leading products and solutions, enabling price mitigating actions. And so this is something we continue to work with, and we expect Q2, meaning this quarter to have been the toughest quarter in terms of headwind in this regard.

We have announced a savings program already that will run for the next 2 years. Of course, there are macroeconomic risks related to the current geopolitical situation. But we believe our decentralized operating model means that we'll continue to have our ears close to the ground and if the market condition worsen, we will act quickly and decisively to ensure we protect our margins.

We have had the Capital Markets Day as well in May, evolved our strategy, make the set strategy with some increased ambitions. Financial targets now a growth of 7% through the cycle, which, I believe, we are more than delivering on currently.

We have an EBITDA margin corridor of 20% to 22%. We are below in this quarter. But with this corridor, what we are telling you is that our aim is to get back within this range as quickly as possible. And then we have the financial method to EBITDA target of being below 1.5. I also think there is a strong commitment in the organization to deliver on the shift to growth strategy, our priorities and our financial targets.

And then finally, we have upcoming a big transformation of the group with the listing of SMT selema, which is planned for August 31 of this year. So thank you for listening, and I'm sure you have a lot of questions, so let's go to that.

[Louise Tjeder, Head of IR]

Yes. Thank Stefan, and thank you, Cecilia. We will now open up for the Q&A session indeed. Before open up the conference call questions, we'll take a question online from John Buckland, Waverton Investment Management [ph]. If you can comment the price-mix component on the top line development? Yes. Or something about the volume, organic growth? And also the second question is what level of pricing is needed to offset the input cost?

[Stefan Widing, CEO]

The organic, which is PV price volume is both price and volume, of course. We are not giving specific details on that sort of mix. but it is both volume and price in all the business areas. And what is needed -- that's something where -- I mean, of course, we have some internal plans and so on. I don't want to share a specific number because it might change and we know we -- everyone will hear the lowest possible number that is listening to this from a customer point of view.

So we will do what it takes, but I don't have a specific number to give. As I said, we are always aiming to mitigate with the knowledge we have. The reason we are still behind now is because we -- the plans we did at the beginning of the year did not anticipate the war in Russia and the Chinese lockdowns, which has added to the impact.

And, we see inflationary data coming in higher than expected constantly and almost daily, which is, of course, something we also have to readjust all the time for. So I mean the ambition and the plans are there, and we are implementing price increases almost every month somewhere in the business, and we'll get there eventually. As I said, Q2, we expect to have been the worst month -- quarter from this perspective.

[Louise Tjeder, Head of IR]

All right. Then we open up for questions on the conference call. So operator, please, we can take the first question. [Operator Instructions] The first question comes from Andre Kukhnin from Credit Suisse. Please go ahead.

[Andre Kukhnin, Credit Suisse]

Good afternoon. Thanks very much for taking my questions. My first one is very much on lines of what's -- you've given some light on already. I just wanted to understand that gap from 19% margin that you have right now to the midpoint of your range, that 200 basis points. Is that sort of roughly 50-50 between China and the net price effect at 100 basis points each? Or is there anything else in there? Or should we kind of calibrate those two factors up and down at all?

[Cecilia Felton, VP Group Control and Acting CFO]

Yes, I can give some comments on that. So if you look at a group level first, so price versus inflation at group level had a dilutive impact versus last year of around 160 basis points. Then we have, as Stefan also mentioned, the higher share of air freight, and that's primarily within SMR. That has a dilutive impact of 0.6 percentage points to 60 basis points.

Then on top of that, we have then also the negative mix effect from the loss sales in Russia. So those are the main components.

[Stefan Widing, CEO]

So if you add those back, you are at the midpoint.

[Andre Kukhnin, Credit Suisse]

Really helpful. And that 60 bps is at group level that SMR freight?

[Cecilia Felton, VP Group Control and Acting CFO]

That's also related -- that comment was also related to group level. However, the shift from boat to air, almost all of that effect is related to -- is within SMR.

[Andre Kukhnin, Credit Suisse]

Perfect. And not to abuse it. But my second question was kind of much broader taking a step back and thinking about what you talked about at the beginning about this move towards every single item inspection on production lines as a result of generally move towards kind of high precision components and EV drive train being a key part of that.

Have you done -- well, I'm sure you've done the work on this case. Is there anything you can share with us in terms of what would be the right level of penetration of this kind of every line, every single item inspection on the line post production versus what the current kind of penetration is?

[Stefan Widing, CEO]

Unfortunately, I don't have the data that is available or that I can share on what we think is the potential of the end game here. What I can say, it's still very uncommon, but it is something we see -- there is a demand for these type of solutions that we see. But I think it's still quite, I would say, experimental, but -- we think it's an opportunity that's why partly why we have put this together and I've been excited to get the first orders.

[Operator]

The next question is from Klas Bergelind from Citi. Please go ahead.

[Klas Bergelind, Citi]

Klas Bergelind at Citi. First, in SMM, you said stable demand in relation to June here at the start of July and that June also represent a demand for the quarter on average. I would have thought June was stronger as China came back, but I guess that suggests very solid demand outside of China in April and May.

Can we talk about ex China in July? Is Europe and Germany, in particular, a bit weaker now with continued strong growth in North America? Or is Europe unchanged also against June?

[Stefan Widing, CEO]

So when -- I have to keep my tongue right there. So when we say June is represented the end of the quarter, what I mean is that what we saw in June is similar to the average roughly similar to the average in the quarter. But the average in the quarter, of course, also contains June. So you're right, we had a catch-up in June in China because the DC opened up.

But for SMS, we -- it was not that we couldn't ship at all into China. We had to fly things in through Beijing in April and May. So when we entered June, we were maybe lagging a week or 1 to 2 weeks of shipments because of that delay.

But it wasn't that June, we caught up the whole quarter. Now Germany, Europe, in general, no specific pattern in that sense towards the end of the quarter. It was not that we saw a strong start and then a weaker ending or anything like that. I would say that so far, demand has been holding up.

[Klas Bergelind, Citi]

Okay. That's helpful. My second one is on SMT and the spin. I mean, obviously, very strong trading, which is great. I just got a man on the inflation on the energy side. You previously said any margin weakness going to energy inflation is not the reason to close the spin. But I guess given possible gases mean in Germany, I just want to check with you still -- if that message still stands?

[Stefan Widing, CEO]

As I said, we -- the planned spin is August 31, and that's with everything we know up until now. So I would say, I -- the formal decision in terms of all the formalities is still a few weeks out. But my bet is going to happen regardless of the gas situation.

[Operator]

Next question is from Magnus Kruber from UBS. Please go ahead.

[Magnus Kruber, UBS]

Magnus from UBS. A couple of questions from me. And I wanted to return to the pricing question on SMS, and I appreciate you definitely on talking about the specific levels, but could you say anything about your sort of general pricing hikes compared to the market?

Do you think you follow the same order of magnitude of hikes as your peers and as the general distributors are doing? And separately. Could you talk a little bit about how the price hikes now in this cycle compares to what you saw in the years, say, 2006 to 2009 in the previous very stronger cycle?

[Stefan Widing, CEO]

The latter question, I don't have an answer to, honestly, I wasn't around. I haven't actually looked at that data. So I have to pass on that. And I guess the same is true for my people here. So yes, we will have to go back and look at that in that case, so I cannot answer that.

In terms of -- I mean, in Machining Solutions, we are price leaders, I would say. I mean, typically, we are the first movers because we are the market share leaders and with Sandvik, we have the most premium offering. So in that sense, I would say, any price changes we do tends to be fairly similar as the rest, but we start.

[Magnus Kruber, UBS]

Got it. And how long time does it take for you -- from the time you announce your hike until it gets implemented?

[Stefan Widing, CEO]

In SMS, we have various agreements that might mean that we need to announce 3 months in advance. But once we do the change in the price list, it basically starts immediately, let's say, with the month's lag.

[Magnus Kruber, UBS]

Got it. And then just moving on to SMR. I mean, historically, the order intake has followed the price on commodities quite closely. But is there any factors this time around we should consider that could be made different this time?

[Stefan Widing, CEO]

Yes. I think you have to -- it depends on where the commodity prices are on the cost curve of the commodity because if you are on the cost curve, of course, as prices move up, a number of profitable mines move up or down.

So then you have that correlation. But where prices have been, they have been off the chart, so to say. So basically, even now if you take copper as an example, even now when it has come down, it's still at the very end of the cost curve. So I think -- in that sense, I think the correlation has been -- will be much smaller to a certain extent.

But then, of course, once you're down on the cost curve, you will start to see the correlation again where prices are now, we are not so concerned. Of course, I cannot predict how the mining companies will -- what their thinking will be. But at least from a profitability perspective, basically all our customers are making good money also now.

[Operator]

The next question is from Daniela Costa from Goldman Sachs. Please go ahead.

[Daniela Costa, Goldman Sachs]

I have 2 as well. The first one I wanted to check on free cash flow, you commented a little bit on the working capital build out, but I think we've seen free cash flow conversion in your Slide 19, I think, has been going down for a while, and it's even -- I understand 2020 is really -- was really high. for maybe artificial reasons.

But it's down also versus '18 and '19 quite a lot. Can you comment on how do you see the path of the reversing back, how long would it take to get you back to those levels that you used to have historically? That's my first question.

And then my second question I was wondering if you could comment regarding the SMR leadership change and sort of what's the plan there and sort of forth, whether the change means any direction in terms of the strategic things that we've heard in the CMD?

[Cecilia Felton, VP Group Control and Acting CFO]

I'll start a bit with cash flow. So as I said, we are at -- and as you also commented at elevated levels when it comes to the inventory at the moment. And we expect part of that to come down already in the third quarter as part of the normal seasonality and also expect a positive cash flow.

However, we still -- we have been investing quite a lot in the growth that we've had, and we still have an expected supply chain and logistics challenges to continue. So for this year, we are expecting a cash conversion rate below 100%.

[Stefan Widing, CEO]

And I also want to add, you said it's been weaker also maybe in '21, but that was also during a period of growth and beginning of some supply chain issues. I think there is nothing operationally that has changed in terms of our ability to generate a very high cash conversion rate. But it will now be dependent on -- to get back to the just below 100%. We need supply chains to be robust.

On SMR, yes, there is no change in strategy. I mean we presented a strategy update and more details of the strategy at the CMD, as you noted. That strategy was not related to any individual. It's bottoms up from the 9 SMR divisions. It's, of course, iterated top-down from group strategy. It's aligned with the Board. Everything that was presented at the CMD is the SMR strategy. It will continue to be followed, so to say.

The recruitment process is ongoing. It will not be as quick as the SRP one, as you saw, we have already concluded that 1 simply because we started later and now we get into some holiday logistics and so on. But course, we'll announce something there as soon as we are ready. But no change in strategic direction.

[Operator]

The next question is from Andrew Wilson from JPMorgan. Please go ahead.

[Andrew Wilson, JPMorgan]

I just wanted to start with -- and I appreciate you may or may not want to help us on this, but I just wanted to try and understand, in terms of customer indications, I guess, in SMM, but I'm just as well, if you're seeing anything across any of the their market segments in terms of indications of a slowing whether that be, I guess, order numbers starting or being deferred, being delayed.

I guess anything -- anything that you've seen that can kind of help us, and I'm thinking across kind of auto, aerospace, energy and general industrial just because I expect there's perhaps some different trends across the segment. So I guess, please?

[Stefan Widing, CEO]

I'll start SMM. No, not really. But on the other hand, of course, we -- so we get an order we deliver in 24 hours. So it's a very -- that's why it's so much of a real-time business in that sense. So we're not expecting to give -- be given sort of a heads up in that regard. But as we have said so far, up until now, I would say that the demand is -- it's solid.

As we said, automotive has been weaker, but it's primarily been driven by the slowdown in China. Auto production, I think the forecast going forward is about 4% year-over-year. That might be revised, but that's the current forecast. And we maybe expect the tooling demand to be slightly below that because we were overshooting a bit end of last year. But yes, that's what we -- that's the view we have there right now.

Energy relatively comfortable with what Europe and U.S. is facing that investment level feels fairly well underbuilt by demand and needs. Aerospace, it's still below pre-COVID levels. So we continue to see good growth. And of course, we have seen good growth for a number of quarters now, as you know. So just the waterfall effect means we are already at higher level than upcoming quarters. So I guess what we will see first is where general engineering goes.

But as we said in high single-digit growth in general engineering, actually across all regions. So yes, I understand your question. We are also, of course, very -- tried to have the sensors out there, driven by all the news we see. But currently, the demand picture looks okay. On the mining side.

Sometimes, we get comments that yes, maybe some projects or decisions are dragging out a bit. But we also know there are price increases coming through. We have long lead times. So it might also be our ability to deliver that impacts those decisions. So I don't really read too much into it from a demand picture point of view. Yes, I think I'll stop there.

[Andrew Wilson, JPMorgan]

Yes. That's very helpful. And I guess, switching a little bit. I'm interested in the restructuring program and which of the divisions is all business areas is that in? And also, kind of what's been the trigger for introducing this program today rather than previously or rather than in the future?

[Stefan Widing, CEO]

It's -- from a size perspective, it's mainly in SMM, but also in rock processing. And in relation to turnover, I would say, Rock Processing and SMM have similar shares of the program. While SMR has -- maybe can be understood, they are more focusing on sort of a ramp-up problems. The timing is not driven by current market developments and so on.

It's just that we had a program 2 years ago that we had sort of -- we were done with that. We see more opportunities, acquisitions coming in and evolving the structure to be more efficient. So we just saw opportunities to become more efficient. So we -- in terms of continuous improvement. So we gathered all of that and launched this program.

[Cecilia Felton, VP Group Control and Acting CFO]

I think we can also say that the savings are structural savings. So there are no or very limited volume-related savings in the program as well.

[Stefan Widing, CEO]

And that's a good point because some -- I've seen some comments that it looks like an expensive program because of the ratio between savings and cost. And that is because this is -- volume-related savings are much cheaper because it's usually a layoff. So if you have a 3- or 6-month layoff period, that's your payback time. But these are all structural savings. It's putting factories together, which is much more -- it's more expensive, it's harder, but they are sticky.

[Operator]

The next question is from Gael de-Bray from Deutsche Bank. Please go ahead.

[Gael de-Bray, Deutsche Bank]

My first question relates to the working capital buildup you had in the quarter, but also over the past couple of quarters now. You -- firstly, could you quantify the impact from the rise in finished goods inventories in the quarter. I'm actually trying to understand if there was any margin benefit from a better absorption of fixed cost on the back of this?

And then more broadly speaking, what's your view on your current level of inventories and maybe the level of inventories in the chain, I mean, usually, when companies enter a potential recession that tried to trim inventories down. So I mean, can you comment a little bit on this, please?

[Stefan Widing, CEO]

Do you want to start with the margin question?

[Cecilia Felton, VP Group Control and Acting CFO]

Yes, I can start with that. So there's no material margin impact from the higher inventory levels in the quarter. When it comes to the type of inventory, we've seen an increase of goods in transit, particularly in the first quarter. That still sort of remains, but we also now have a bigger share of finished goods as part of the inventory buildup in the second quarter.

[Stefan Widing, CEO]

And it's important to say that is actually a negative margin impact offsetting maybe some of the finished goods dynamics coming from slow moving because -- not because the inventory per se will not be sold, but because of the way our algorithms and methods work.

When the inventory goes up, we tend to reserve more also for slow moving or obsolete. So net-net, we don't think it has a material impact. When it comes to inventory in the supply chains. And yes, first of all, we don't see that our customers are building inventory with our products. On the SMM side, we deliver within 24 hours, even our distribution partners hold very little inventory because they don't have to because we deliver to them directly.

And on the mining side, for sure, we -- our customers are not keeping what we deliver in inventory. We know maybe some customers keep slightly higher buffer stocks on the parts side because of the supply chain logistics, but not -- we don't believe it's material, but some impact from that.

Then, okay, we usually go into a slowdown with slimming inventories. I would agree with that, but what should I say, it's very quick turns there between ramp up supply chain disruptions, still expanding order backlogs that we need to deliver on. And if we would go into a slowdown, we would have to manage that, but I don't see what we could have done differently because the option would be to turn down orders firm orders and say we will not deliver.

If you take some of the parts or rock tools we have, we might have had a robust 30-day delivery time to a customer, we are both. Now it might be between 45 and 90 days. We want to keep a 95% service level. You just have to do the math and then you see what extra it means that we need to keep in the supply chain.

And we have said we will prioritize them serving the customers. So it is a bit of an elevated risk when this happens, but I don't think we can act differently. There is none of the inventory we have that's sort of, I would say, excessive in terms of what we need to eventually deliver to customers. And as Cecilia said, it will start to come down now. We are confident of that.

[Gael de-Bray, Deutsche Bank]

Okay. I appreciate and I understand it's a tricky situation for you.

[Operator]

The next question is from Lars Brorson from Barclays. Please go ahead.

[Lars Brorson, Barclays]

Maybe I can just firstly revert back to Klaus' earlier question with regards spin of SMT, you're committed, I think, I heard to the listing regardless of the gas situation. I find it quite difficult to believe in a scenario of she was a more material and sustained disruption to gas suppliers in Europe.

I know we're going to hear from your team next month at the CMD, but just what are your high-level thoughts on the operational implications on SMT, if you say, North Stream one doesn't start flowing again next week?

[Stefan Widing, CEO]

Well, if you take the direct gas impact, SMT is not that vulnerable from the perspective that their main operations in Sandvik and Hallstahammar is not consuming that, let's call it, Russian gas. It's more based from the Swedish grid.

Of course, there might be impacted hedging levels that are actually increasing based on experience from last winter. So I don't think the operations is that dependent on the actual gas supply, but they are dependent, of course, on price levels. So that's my view on that. So that's why I don't think it's that, let's say, super critical for them in terms of running the operations.

I'm sure Johan can speak much more to it on the CMD. I don't want to over -- say things he doesn't agree with, but that's my perspective in terms of why I think it does not risk the spin. But I'm also saying the decision is still a few weeks out. So I guess everything is -- nothing is done before it's done.

[Lars Brorson, Barclays]

Understood. Can I ask secondly, just to organic drop-through in SMM, did I hear you say that you expected the second quarter to mark the low point and expect an improvement in the second half on organic drop-through. And maybe more generally, Stefan, historically, we've talked about incrementals in SMM in the 50s.

I wonder if SMMs a period of more material sustained negative volume development, how do you assess the margin resilience versus that historical 50% drop-through. I'm just trying to understand in 2023, if we see more sticky inflation, particularly around EU wages wage levels in Europe, energy costs, etcetera, at the same time, of course, should have 1 -- couple of hundred million SEK from structural savings in SMM next year. Trying to understand how to think about margins in a more negative volume environment that may transpire?

[Stefan Widing, CEO]

I would say we expect them to be, let's call it, back on track in the second half. I would not commit to Q3. I definitely think they should be back sometime in Q4. But I expect Q2 to have been the low point. I think if we go into next year, I mean, we should have just a bridge upside going into next year from the fact that if in Q4, we can be back on track, we have been trailing for a couple of quarters this year.

So that should provide some just general mitigation in that sense. They will always have the ambition to compensate for any further inflation. So something might have to be done also then beginning of next year.

And that we think -- that we have seen historically, they have been able to push through pricing regardless more or less of the demand environment. I expect them to be resilient, I would say. But let's assume we have a downturn next year and some negative growth.

We would expect them to be resilient, that's my expectations. We have been working with the ramp-up now for the past 18 months, ensuring that the ramp-up is done with flexible cost structures so that we can also handle a downturn. Of course, they will not be completely unimpacted. But that, I guess, is the upside with the fact that now in the upturn, we have seen a low leverage so far. It also means that we should be able to have a low leverage on going downwards again.

[Operator]

Next question is from Sebastian Kuenne from RBC Capital. Please go ahead.

[Sebastian Kuenne, RBC Capital Markets]

My first question is on the order book order intake. You mentioned organic order growth 4%, but if you include Russia, it would have been 10%. Could you just explain what you mean by that? Is it that you had Russian orders during this quarter, and they account for like 6% of the total order intake? Or is it an adjustment of the order book that relates to Russia, that does take out of these orders?

[Stefan Widing, CEO]

No. We can basically say orders in Q2 this year was 0. But if we also take out the orders we had in Q2 of last year, so we take that out. So we get a lower compare then it was 10%. So if you exclude Russia from the equation last year versus this year, the rest of the world at 10% organic.

[Sebastian Kuenne, RBC Capital Markets]

Understood. And how big was Russia and the order book for SMR for existing? Is that roughly 5%-ish 5%, 6%.

[Stefan Widing, CEO]

Yes. From a revenue perspective is more like -- yes, it's around 5%, 6%.

[Sebastian Kuenne, RBC Capital Markets]

And then for the order book, the existing order book in SMR, can you give us an indication of the backlog that you currently have, how many months or what's the volume? If I assume 9 months backlog for equipment, it would be like SEK15 billion. Would that be a fair number?

[Stefan Widing, CEO]

Overall, you mean?

[Sebastian Kuenne, RBC Capital Markets]

For SMR.

[Stefan Widing, CEO]

Yes. Yes. I don't -- we don't provide the overall order backlog. But...

[Sebastian Kuenne, RBC Capital Markets]

But it would help us to understand the cost price mismatch, timing missing that we've talked about the last 6 months.

[Stefan Widing, CEO]

From a timing perspective, you can assume May takes, on average, 9 months. I mean it's different on different types of equipment. But on average, the order backlog, you can assume around 9 months.

[Sebastian Kuenne, RBC Capital Markets]

Perfect. And then last question on the service intensity again for mining. I wonder if we can go higher from here because you are now servicing machines that were sold in the boom of 2008, 2012, where doubled the equipment sales, what we have now. And this is now very much aging equipment, old equipment that still need to be service. What's your view? Is the service level going up in the future? Or do we -- should we expect a drop off and basically replacement of service business with new equipment business.

[Stefan Widing, CEO]

I don't have a strong perspective on your specific question when it comes to servicing of that old equipment. But partial services right now is on very good levels. And of course, we have longer lead times for new equipment. Customers are running their equipment as much as they can. And as I said, there might be some element on the parts side of customers because of the supply chain, they are placing early orders a little bit or some buffer stock.

We expect it to continue to grow, but not at all at sort of double-digit levels that we see now. So we think it will a bit -- flatten out a bit at this level with a small growth, yes, in the next period ahead of us, meaning into next year. That's what we can see now.

[Louise Tjeder, Head of IR]

Sebastian, just a quick one, a quick comment from you. Henrik Move from Danske Bank is asking, given the drop in listed equities and hence, the valuation. Are you expecting acquisitions to become cheaper now? And do you see risk that Sandvik paid too much last year?

[Stefan Widing, CEO]

You pay the prices that is in the market, so to say. So I think or we see that it's easier to have negotiations on the price, for sure. And we see -- we are more successful as well with those conversations, definitely.

I think some of the private assets in the sense, I mean it doesn't follow one-to-one with the stock market, of course, but we see that, which means that if some of these assets, maybe we could have gotten them even cheaper now than a year ago. That's just life. I mean that was not an option then someone else would have bought them and we felt they were important for us.

[Louise Tjeder, Head of IR]

Thank you. So that will conclude this hour and this webcast. And we, of course, thank you for calling in, and wish you a great summer. Thanks.