Sandvik AB

STO:SAND

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, welcome to the Sandvik Interim Report Q2 2023 Conference Call. I am George, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. You will now be joined into the conference room.

[Louise Tjeder, executive]

Good afternoon, everyone, and a warm welcome to Sandvik's presentation of the second quarter results 2023. I am Louise Tjeder, Head of Investor Relations, and beside me, we have of course our CEO, Stefan Widing; and CFO, Cecilia Felton. We will, as we always do, start with listening to Stefan and Cecilia talking about the quarter highlights of the second quarter and then we will move on to the Q&A session.So without further ado, over to you, Stefan.

[Stefan Widing, executive]

Thanks, Louise. And also from my side, welcome to the second quarter report in 2023 and especially thanks to all of you that joined today. I know we have some competition this time when it comes to these webcasts so welcome. If we summarize the second quarter, we are very pleased with the quarter. It was our ninth consecutive quarter with double-digit revenue growth. We continue to see a solid momentum with good growth in both order intake and revenues. Order intake growth at fixed exchange rates grew by 7%, organically it grew by 3%. Revenue growth at fixed exchange rate grew by 16% and of that, it was 12% organic growth. And of course 12% organic growth and 3% positive order growth in this macro environment we believe is a very strong performance. We also see solid operating leverage.Adjusted EBITA increased by 28% corresponding to a margin of 20.5% versus 19% last year, solidly within our target range and a good operating leverage that we will show also later in this presentation. We had some items affecting comparability as planned related to our restructuring program that we announced last year. Cecilia will go into more details of that. And adjusted profit for the period improved by 11% to SEK 4.1 billion. We continue to see good achievements in terms of our shift to growth execution. As already said, good growth organically on both revenues and orders in the quarter. We continue to see strong momentum in our mining automation business and also very good to see very strong growth in our Rotary Drilling division.As you know, we have a focus to grow on the surface and Rotary Drilling is the single biggest opportunity we have to grow and capture market share on the surface now. So, really good to see some really nice order intake and revenue in that division this quarter. We also completed 2 acquisitions and we have continued to launch some really new and exciting innovations to the market. One that we want to highlight this quarter is our new generation battery pack for our BEVs. This battery pack, we call it Version 4 or Generation 4 of the battery pack, has as a main feature that it improves the battery capacity in the same physical size by 36%. For our customers, this of course means longer tramming distances or fewer battery swaps in their operations.We have achieved this with the same high safety battery chemistry LFP, that we have had in our previous generations, a battery chemistry that is specifically very well designed for underground mining operations. Also positive that this is fully backwards compatible with previous designs, which means that customers that operate for example under battery as a service contract will gradually be able to take advantage of this new battery as well throughout their operational lifetime. Many other improvements as well in this battery taking into account the feedback we have received through all the machines that we now have there out in the field. So a very good product launch in the quarter. If we go into the market development, we can see that our biggest regions, Europe and North America, are stable; up 3% in Europe, down 2% in North America at the group level, Asia a bit weaker at minus 6%.If we look at this from a pure cutting tool perspective, which is maybe more of sort of an indicator for the underlying economy or industrial production, Europe and North America are both up in the mid-single digits while Asia is slightly down driven by China and China is down a little bit more in the mid-single digits. Then if we look at the other 3 regions, which is more mining driven, what stands out is of course the high growth we have had in Australia. We had a bit weaker Australian market in Q1 so we think this is more a matter of order timing than that Australia is particularly stronger than the other mining markets throughout the world. If we look at the segments, we have highlighted mining as stable; stable at a high level is how you should read that. And of course we have become a bit spoiled with very good growth numbers here. In fact, as you have seen, order intake was up 6% and both equipment and aftermarket orders are up, revenues up 18%.So maybe we should have had this up, but again a bit spoiled with higher numbers and we think that stable at the high level is the way to express the underlying sentiment in mining despite the good growth figures that we show. General engineering, however, a bit more negative and it's overall in terms of order intake flat in all regions about up 1 percentage point, but of course there's a price component in there. So the underlying development we consider to be a softening of the general engineering segment. Maybe not so surprising either given where the PMIs has been now for quite some time. Automotive flattish, good growth overall; but also there are price components. So stable underlying market development. We see a positive development in Europe, we see actually even more positive development in North America while China has been a bit weaker in the quarter.Energy down in the quarter in particular driven by North America and to some extent India while Europe has been positive. Infrastructure has continued to be negative. We have seen that now for almost a year. It started with Europe and now we think we see a negative development in most parts of the world in particular driven by the construction part. Aerospace on the other hand very positive double-digit growth; strong in Europe, very strong in North America, also here a bit weaker in China. Then we have what we call other here that we haven't had in the past. It's fully related to the cutting tool business. Some while back this was embedded into the engineering column, then it's been lacking for a while; but we now want to make it visible here specifically. You can see in the fine print at the bottom what this contains. So these are segments that we can identify.We know what the end customer are, but the segments themselves are too small to highlight in this picture. So things like die and mold, consumer electronics, medical, pumps, rail, defense, et cetera. We want to highlight it here because there are some of these that are high growth segments for us so certain quarters we might want to highlight specific things from those segments as well. But it follows fairly well also the general engineering overall and we also here then see a softening in the market in the quarter. Commenting maybe also a little bit on how the quarter played out sequentially especially in relation to the cutting tools and general engineering. We did see a bit of a softening towards the end of April and that's what we see now in the outcome. However, since then it's been stable. So sequentially, we haven't seen a progressive decline. It's been stable and that also has continued into the first weeks of July.Looking then at order intake and revenues overall. Reported order intake of SEK 31.7 billion and revenues of SEK 32.2 billion so a book to bill slightly below 1. Looking at this from a different angle and separating organic from acquisitive growth, we can see again here ninth consecutive quarter of revenue growth and revenues are gradually catching up now with order intake. EBITA development was very positive in the quarter up 28% versus prior year, SEK 6.6 billion and margin of 20.5% versus 19% last year, solidly within our target range. And we see good leverage, we have positive impact from volumes and price. So the price component is positive year-over-year. It is fully compensating for cost inflation as we have seen it in the past couple of years. So that's the perspective we have there. Then we have some negative contribution from structure and currency in total 40 basis points. And the rolling 12 and year-to-date EBITA figures are both also above 20%.Going into the various business areas then starting with Mining and Rock Solutions now just over half of the group. This is the second highest order intake we have ever had this quarter and we see growth in both equipment and aftermarket. Equipment up 8% in the quarter and aftermarket up 5% in the quarter and, as already mentioned, particularly strong growth seen in the Rotary Drilling division. In total then it sums to 6% organic growth on the order side. We had some larger orders, we also had that last year. If we take those out of the equation, we still grew order intake by 3%. Very strong margin at 21.6% up from 19.2% last year and this is despite the fact that exchange rate had a dilutive impact by 110 basis points. So very solid leverage and execution by SMR this quarter.We also saw continued good momentum on the automation side, 2 new very good orders totalling SEK 220 million secured in the quarter and as already mentioned, some really good product launches both on the BEV side, but also a new data and software solution for our surface mining operations, which is a priority area for us. Rock Processing saw a bit more of a mixed quarter. We also here see very solid demand on the mining side, but a more soft environment for infrastructure. And to remind you, this business is about 60% infrastructure and 40% mining overall throughout the year. We saw strong contribution from acquisitions here in particular or specifically then Schenck Process, which was good. That's why we can show an order growth of 12% at fixed exchange rate even though the organic growth declined by 16%.Excluding major orders, the organic decline was 12%. This was also -- the negative volume in this quarter was also the main reason for a weak margin in Rock Processing this quarter of 13.7%. But we also continue to see then, as we talked about last quarter, integration costs for Schenck as well as IT investments that have an impact in the quarter. The IT investments will continue also into Q3, but after that we expect to have finalized that part. I mentioned Schenck Process, very strong performance in the quarter and the underlying margin from Schenck is accretive to Rock Processing, but the integration and carve-out cost this quarter had a dilutive impact by 110 basis points. Already talked about the order growth 30% coming from Schenck in the quarter, again very positive.Manufacturing and Machining Solutions, here very positive double-digit order intake growth in aerospace. We saw good support from automotive in the high single digits, but then lower volumes in general engineering and energy compensated by price so negative volume but a PV that was flattish taking us to a total organic order intake of minus 1%. Here it's important to note that the order intake in the cutting tool business was around plus 3% in the quarter. That's aligned with the revenue growth of around 3%. We also have about a 1% negative from working days. So if you want to get a sense for the underlying market development, it was around plus 4%. And the difference between the order and revenue here is driven by timing. Some significant orders in our powder business where order timing then contributed negatively to order intake in this quarter. And as already mentioned, we have seen the beginning of July being stable compared to the daily order intake in the second quarter.So the way you should read this because we also had a stable comment a quarter-ago is that we saw coming into Q1 stable development then we saw a bit of a softness coming in end of April, that has then stabilized again and we now have seen a stable development since then throughout the quarter and into July. Also want to comment on the software part where we saw software revenue growing in the mid-single digits in the quarter. Of course it's a relatively small portion of the business so it doesn't really show in the total numbers. Also some good product launches here in particular towards the midmarket where we see growth opportunities going forward. On the margin side, shouldn't forget that, margin was 22.3% up from 21.5%. Really good leverage in the business this quarter in particular if we consider the volume development, good price execution and really good cost control. So I think a strong resilience shown by SMM in this quarter and acquisitions then they were neutral to the margin.Now with that, I will hand over to [ Sissy ] and then I'll come back with some conclusions.

[Cecilia Felton, executive]

Thank you, Stefan. All right. So let's dive into the numbers in a bit more detail then and as usual, let's start with the box at the top right hand corner. And as Stefan mentioned, growth was strong in the quarter. Organically, orders were up 3% and revenues 12%. Structure contributed with 4% and currency 3% to 4%. So in total, orders were up 10% and revenues by 19%. Earnings increased by 28% to SEK 6.6 billion in the quarter. As Stefan mentioned, EBITA margin now well within the EBITA corridor. Net financial items came in at minus SEK 704 million and I will show you details here on the year-over-year development in a few minutes. Tax rate, excluding items affecting comparability and also on a normalized basis, 24.4% so also in line with guidance. Net working capital still above our informal target of 25%. Free operating cash flow SEK 4.6 billion corresponding to an in-quarter cash conversion of 71%, returns 15.3% and adjusted EPS increased to SEK 3.25.If we continue with the bridge and starting with the organic column. Revenues increased by 12% SEK 2.8 billion and generated an EBITA of SEK 1.1 billion. So a good leverage of 38%, which was also accretive to the margin by 1.8 percentage points. The currency impact was positive on both revenues and EBITA, but slightly dilutive to the margin by 0.3 percentage points. And acquisitions that we've done over the last year contributed with almost SEK 1 billion in revenue, almost neutral to the margin slightly dilutive 0.1 percentage points. So all in all, that brings us from a margin of 19% last year to 20.5% this year. We've also booked the second and final part of the charges or costs relating to the restructuring program that we announced last year. And if you look at the totals on the left hand side, you can see that the costs came in in line with what we previously communicated so SEK 1.7 billion.We've, however, worked through the details in a bit more granular basis now and revised the estimated run rate savings and FTE reductions as you can see here. So the estimated run rate savings are now SEK 785 million and we expect to realize 50% of those on a run rate basis by the end of this year and around 90% by the end of 2024. If we then continue down in the P&L and looking at the finance net and starting with the most interesting row here, the interest net. You can see that increased year-over-year to SEK 411 million and that's due to a combination of both higher borrowed volumes and also higher interest rates. Then at the bottom of the table here, you see FX and other asset classes and as you know, these are the temporary revaluation of our hedges, mainly currency and electricity. Last year this effect was positive, this year it's negative and that's mainly driven by the currency hedges in this quarter.The reported tax rate came in at 24.9%. Excluding items affecting comparability, mainly the restructuring charges, it was 24.4% so in line with guidance. If we then continue with net working capital and looking at the absolute development in the bars on the left hand side, you can see that total net working capital increased by SEK 3.2 billion. SEK 2 billion of that was currency impact and SEK 1.2 billion was the volume impact mainly driven by accounts payables. Inventory increased slightly in the quarter SEK 0.2 billion, but was actually down in June by SEK 400 million mainly driven by SMR. And free operating cash flow then SEK 4.6 billion. And if we look in the table at the year-over-year development, you can see that earnings were up. The adjustment for noncash items is mainly relating to the restructuring costs. The net working capital buildup in volume SEK 1.2 billion as I just mentioned so lower than last year and CapEx a bit higher.And the in-quarter cash conversion was 71% and on a 12-month rolling basis, which is what you see in the trend line in the graph, we're at 73%. Financial net debt over 12 months rolling EBITDA came in just within the external target so we're currently at 1.5. Financial net debt increased sequentially to SEK 42.6 billion mainly driven by the dividend payment, but also a currency impact on interest-bearing liabilities. Capitalized leases and the pension liability increased slightly sequentially so net debt came in at SEK 50.4 billion. Looking then at outcome versus guidance. The currency impact landed at SEK 232 million, here we guided SEK 200 million and then CapEx SEK 1.2 billion, interest net SEK 0.4 million and normalized tax rate 24.4% for the quarter. And looking ahead then at the third quarter and the full year, we've left CapEx guidance unchanged at SEK 4.5 billion. We expect currency to have a negative impact of SEK 100 million on EBITA in the third quarter and we've also left the interest net and tax rate guidance unchanged.And with that, I will hand back over to you, Stefan, for summary and conclusions.

[Stefan Widing, executive]

Thank you. So if we conclude, we continue to see a solid momentum in the business, double-digit revenue growth again. We do see some softness then in infrastructure and general engineering, but it's being offset by positive development in other key segments such as mining, aerospace and automotive. Our margin is within the target range and we see a solid leverage in the quarter due to good cost control and price and again I think we show good resilience in the businesses where we've had some negative volume development. We continue to make progress in our strategic focus areas. We had good momentum in automotive and surface especially Rotary Drilling. We've completed 2 new acquisitions and we continue to have a very good innovation pace launching new products to the market. We believe we have a strong commitment in the organization to continue to drive the shift to growth strategy. We are well positioned to capture the growth opportunities we see ahead. And we have shown again in this quarter that we can have an agile execution and we have proven resilience. So we are confident going forward.Thank you. Let's go to the Q&A.

[Louise Tjeder, executive]

Thank you, Stefan. Thank you, Cecilia. Yes, we will open up the Q&A session. Let me remind you again that please stick to a couple of questions each so everyone has a chance to ask their prioritized questions. So operator, please, we can have the first question.

[Operator]

[Operator Instructions] Our first question comes from the line of Gael de-Bray from Deutsche Bank.

[Gael de-Bray, analyst]

Can I ask first -- we've heard from a few other companies this quarter that they've started to implement new short-term cost measures in light of weakening demand. So is this something you've considered as well in addition to the already announced structural cost cutting initiatives given the lower volumes you're seeing in general engineering and infrastructure? And I guess in relation to this question, one of investors' concerns in particular is that SMM margins have now peaked and will come under pressure in the next few quarters. So I mean do you see indeed your current cost cutting measures as enough to protect profitability for SMM in the next few quarters?

[Cecilia Felton, executive]

Shall I start? So with your question in terms of measures to respond to the weakening demand volume declines that we've seen in some segments, there we worked very hard over the last couple of years and especially within the SMM business. We made a conscious decision after the COVID-19 downturn to ramp up with a more flexible cost base using a higher share of third-party personnel for instance. So overall we have contingency measures in place. In some divisions those are activated. And overall I think we have a very good cost control within SMM.

[Stefan Widing, executive]

I just want to re-emphasize that the whole point with the strategy we have had is to not have to go to structural programs as soon as there is a bit of softening in the market. So the program we announced last year was based on continuous improvement and continuous sort of reduced the fixed cost base irrespective of the economy overall. And what we're seeing now, the reason we see such good leverage in SMM this quarter and good margin development is because they have a much more flexible structure. They can with very short -- I mean we saw even within months, they react to how the market develop and can adjust their cost base. So we believe -- we know this is a cyclical business, it's not a secret. So this is business as usual in a sense. They will adjust. They will invest and capture growth where there is growth like aerospace. They will be a bit more on the defense and adjust costs where needed such as now general engineering. So I don't share the concern that you mentioned here as well going forward.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

Just my first question was just thinking about the growth rates that we've seen in SMM over the past sort of 2 or 3 years. I think if I look at volumes by the end of 2023, I think they will still be lower than where we were in 2019. So I guess I was wondering if you could comment. Do you think when you look at kind of your SMM business that it has kept up with kind of market growth rates with the growth rates of your peers? Do you think there's been any kind of market share loss or would you put the fact that volumes are maybe still a bit sort of depressed? Is that just down to certain end markets like auto and aero not having recovered yet? Just any commentary on kind of how you're thinking about that trajectory over the past 2, 3 years.

[Stefan Widing, executive]

Sure. We, as you can imagine, track things like market share very carefully and we also have competing brands so they themselves. We have multiple sources where we look at this as well. We are very confident that we have kept or held market share throughout this period and increased market share even if we add sort of the acquisitive aspect to it. But I guess that was not your question. But we do have to realize we're still -- if you look at auto production as an example and compare it to end of 2018 levels, we're still below quite a lot. Aerospace is still not recovered. That is recovering at a good pace now so that should eventually be back on track and contribute positively to the growth. But we are not concerned in terms of market share loss, I think we have a good grasp on that.

[Max Yates, analyst]

Okay. And just a very quick clarification on the auto comments you made. Did you say that auto was up around high single digit, but ex pricing it was more or less stable? And I guess what I was trying to understand is if I look at sort of auto production numbers, this quarter they were growing sort of double digit. So I was just wondering kind of how we sort of bridge that gap if that is correct in terms of kind of stable and high single digit. How do we bridge that gap? Is that they're holding stock? Is that the EV impact? How should we think about that?

[Stefan Widing, executive]

No, we don't see an EV impact. I think EVs was around 10%, 12%. Hybrids were around 16% as far as we have seen in the production figures so far in the quarter. And you're right in how you should read it, up high single digits. You take away the price, it's roughly flattish from a volume point of view. But we have got this question many quarters now since COVID and sometimes it's because we're lagging, sometimes it's because we are overshooting. And my answer has been since then that we do see a lag in the supply chain where some while back we were overshooting production figures quite a lot. The main explanation we can see for that is that it's the difference between auto OEMs final assembly of cars, which is in the figures and the production for their sub-suppliers, second- and third-tier suppliers, which is our customers where they machine the components. And now when the supply chains are easing up, more cars can be completed, but it doesn't mean that the component manufacturing has to follow immediately.

[Operator]

The next question comes from Colin Moody from RBC.

[Colin Moody, analyst]

I just had a couple on oneoffs this quarter sort of beginning with about the SEK 800 million restructuring charges. This does seem a bit higher than we and the sell side have been expecting for Q2. So just given that you have reaffirmed your total restructuring spend, is it fair to say that this is perhaps just a little bit more of the front-loading than we had previously expected on the sell side? And could you give a little bit of color on the expected future development of spend? And just to kind of follow up, a related one on the increase in net finance charges, presumably the currency hedging is truly a oneoff, right?

[Cecilia Felton, executive]

So if I start first with restructuring charges, last year in the regional communication we said we would take the first part of the charges in 2022 and the second part in 2023 and that's what we've done this year. And the total cost came in in line with what we communicated and we're not expecting any additional charges related now to this restructuring program. In terms of the finance net charges for the regulations of the hedges, those are getting revalued on a monthly basis and sometimes it's a positive and sometimes it's a negative.

[Operator]

The next question comes from Andreas Koski from Exane BNP Paribas.

[Andreas Koski, analyst]

I have a couple of questions as well. And if we could start with the relatively weak order intake for Sandvik Rock Processing Solutions, I understand it was mainly related to infrastructure. So does that mean that order volumes for the infrastructure business in SRP are down closer to 30%? And if you look at the volume level in Q2, how would you say that compared to historical levels? Do you think we have now reached some sort of trough in terms of infrastructure order volumes?

[Stefan Widing, executive]

I mean we should if we compare -- first SRP, as I said, 40% mining, roughly 60% infrastructure. If you compare it to a year-ago, we had excessive I would say and definitely with a hindsight, excessive order intake for infrastructure in SRP and that was the last quarter. Then we started really to see things softening. But in Q2 of last year we still saw, I would say, stocking orders more or less. It's very much an indirect business that drove up order levels. And now in a way we see the reverse where because of shorter lead times, the customers do not have to place orders early and they might even have placed orders already last year for what they want to receive now. So it's a little bit of a bullwhip effect I would say. And whether this is the trough or not, I cannot really say. But what we can say is we definitely have much -- we come into easier compares already next quarter and we just need to see that excessive order backlog so to say being worked through.

[Andreas Koski, analyst]

Understood. And then on pricing in SMM, is it fair to say that -- because my understanding is that your price increases at least in the automotive segment is close to high single-digit levels based on what you said about the organic growth versus the volume growth. And is it fair to say that you're seeing similar kind of price component for most of the cutting tools business in SMM?

[Stefan Widing, executive]

It's relatively similar across the board. I don't want to single out a certain segment. So there are a little bit more in some, a little bit less in others depending on -- also when it comes to realization depending on in some segments, you have longer contracts, it takes longer to get to a point where you can renegotiate and so on. But we keep it fairly similar I would say. So you shouldn't assume a big difference in any of the segments.

[Andreas Koski, analyst]

And maybe if I can squeeze in one last one and it's on the currency dilution that we saw in SMR on the margin. Was that again related to revaluation effects or was it more related to, say, call it the underlying operations?

[Cecilia Felton, executive]

No, that is just the underlying currency effect. So the revaluation of unhedged balance sheet items, that ends up in the organic column in the leverage bridge.

[Operator]

The next question comes from Jonathan Day from HSBC.

[Jonathan Day, analyst]

If I start with the growth in the software business. I mean whether you could just comment a little bit more about the drivers for that mid single-digit growth and whether you're happy with that level and whether that level was in line with your expectations.

[Stefan Widing, executive]

The driver I mean it's the underlying demand for these type of solutions. Of course you also have the way the business works, it's still you sell a license and then you have a software maintenance type contract. So what we can see now is that even if overall as we've seen the market softening a bit, you still have sort of a waterfall effect where you'll continue to see good progress on the software and maintenance side. I think it's fairly aligned with our expectations. So we should say we don't have too much -- I mean it's fairly new business for us so we're still learning a bit of the dynamics around it. But the companies themselves, they think they are sort of aligned with where they should be.

[Jonathan Day, analyst]

Okay. And maybe if I could just squeeze one other in perhaps. Can you just remind us on pricing with the price cost, where you stand to price carryover and your thoughts about pricing power for the rest of the year?

[Cecilia Felton, executive]

So in terms of price versus inflation, there we aim to offset the inflation with price over a 2-year period, which we do both at group level and across all of our business areas. That means that when you do a year-over-year comparison, price versus inflation is accretive as we had a gap last year.

[Jonathan Day, analyst]

And the price carryover?

[Cecilia Felton, executive]

Can you repeat the question, sorry?

[Jonathan Day, analyst]

Sorry, just on your price carryover from last year to this year?

[Cecilia Felton, executive]

Yes, we're not giving any more specific in terms of quantifying that. Just that it's accretive on a year-over-year basis.

[Operator]

The next question comes from Rizk Maidi from Jefferies.

[Rizk Maidi, analyst]

Just 2 quick questions on SMM, please. So firstly, Stefan, on energy, a bit surprising to see it down I think North America and Asia. Is this the timing of orders or is there something more sort of underlying happening? And if you could also there just remind us of where energy and aerospace sits versus pre-COVID levels. I think it's something that you gave us in the past.

[Stefan Widing, executive]

I mean energy is a relatively small segment. This is the smallest one we actually break out and if you take a quarterly regional perspective, we can definitely have some volatility based on it's a bit of a smaller business. So I wouldn't read too much into that especially since it's positive in Europe and then a bit more negative in the U.S. But we have seen the rig count for example in the U.S. coming down a bit. And those are the type of indicators that -- the leading indicators also for some of that plus it's very much about pipes and fittings and stuff like that. But I'm not reading too much into it this quarter alone to be frank. Sorry, what was the second question again?

[Rizk Maidi, analyst]

It was just where we sit there with the aero and energy versus pre-COVID?

[Stefan Widing, executive]

Yes. Energy is more or less back to pre-COVID levels, aerospace 85%, 90% I would say.

[Rizk Maidi, analyst]

Okay. And then just quickly, the second one is just how would you basically characterize the level of stocks amongst your distributors? I think you had a little bit of destocking in North America in Q1. Some of your peers have talked about similar things now in Q2. Just perhaps where do you see levels of inventories at your distributors currently?

[Stefan Widing, executive]

We don't see them as traditional sense I would say overstocked, but it's fair to say that we see them maybe being a bit more cautious on stocking levels. So that might have a small impact not something we can quantify. But we have had certain larger distributors that have been a little bit more cautious with stocking orders and so on.

[Operator]

We have a follow-up question from Andreas Koski from BNP Paribas.

[Andreas Koski, analyst]

It's on capital allocation priorities. Would you say they have changed in any way because of the higher interest rate environment and do you plan to pay down your debt at a faster pace in the coming years and you might not be as aggressive on acquisitions going forward? How are you thinking about that?

[Cecilia Felton, executive]

In terms of what we see here again is the balance sheet target so financial net debt to EBITDA below 1.5. In general, we've said we won't take on any additional long-term debt apart from refinancing debt that is maturing. So it will be the cash flow that we generate that will determine how much headroom we will have or how much capital we will have for acquisitions. In terms of -- so no immediate short-term change apart from we're quite high in this quarter so we will look at building a bit more headroom and not being at the very top or in line with the balance sheet threshold that we have. I don't know if you want to add anything more there, Stefan.

[Stefan Widing, executive]

No, I agree. And just to be very clear, the interest levels are not changing our strategy or our priorities. We steer towards the financial target below 1.5. Of course if the interest would double again or triple again, maybe this is a different story. But where we are now, it doesn't impact our strategy or our priorities. So we will continue to be active, but with the financial net debt to EBITDA target of course in mind.

[Operator]

The next question comes from Christian Hinderaker from Goldman Sachs.

[Christian Hinderaker, analyst]

I have 3 questions if I may. Firstly, just interested in how large the powder business is and what's driving the timing issues that you mentioned on the order side there. And then I'll come on to the other 2.

[Stefan Widing, executive]

I'm not sure we have disclosed exactly how big it is. Let us come back if we can give any data on that, but it's a multibillion SEK business. What's driving the order timing? Well, first of all, it's just regular sort of customers decide to place larger frame orders and sometimes it slips into one quarter or the other quarter. This is also a business that is very early in the supply chain, which means it is a bit susceptible to sort of bullwhip effects. So you can have really high order intake at one point as customers want to secure supply and then if they see a little bit of weakness or they are overstocked, then suddenly they don't place basically any orders at all in a given quarter. So it can be relatively volatile. And in that sense, this quarter was actually down quite a lot or very much to the extent, as we mentioned, that it had definitely an impact on the overall SMM order intake figure. So that's the main reason. So it's nothing we haven't seen before, but worth calling out this quarter because it changes a bit the picture on the cutting tool development if you are not aware of that dynamic.

[Christian Hinderaker, analyst]

Secondly, I wanted to ask on SRP, you had a 13.7% margin, which was a bit light relative to recent quarters. Just wonder how significant a drag on the IT investments had on the margin. And then also if you could talk about some of the demand dynamics within infrastructure particularly as it relates to pricing and potential price sensitivity of customers. We've heard some peers talk about heightened price elasticity of demand and wonder whether that would likely see you look to reduce your prices or effectively accept lower volumes?

[Cecilia Felton, executive]

Yes. I can start with the margin development. So also for SRP on a year-over-year basis, price versus inflation was accretive as we also in SRP had a gap last year. Then the biggest impact on the margin development is the volume decline. Then we have the integration costs in structure, 110 bps impact from that. And then we have the IT cost, which is a smaller part of the total. Would you like to comment on the infrastructure development?

[Stefan Widing, executive]

Yes. When it comes to our sort of main equipment, we have good price realization and there we are sort of not so concerned around the price elasticity and so on. We have good products that provides value to customers and they are prepared to pay the updated price for them. There are certain things in the aftermarket though, certain wear parts for example steel plates, et cetera, where there are what we would label pirates or so some might say third-party suppliers that can compete with us on those type of parts. And there we have seen more price competition because, as I said before, we are not the only ones I think that saw maybe excessive order intake or buildup in infrastructure about a year-ago so there are more costs out there. And here we have to balance do we want to sit on that inventory until we can flush it through at current price levels or do we want to through campaigns or what have you maybe get a bit more out there to not sit on the inventory and sell it through? And those are not decisions I'm particularly involved in, it's our business and divisional heads that have to make those calls, net working capital versus what the price campaigns would do to margins or contribution margins and so on. But that is an area where I agree there are some dynamics that we have to manage.

[Christian Hinderaker, analyst]

And then finally, just on SMR, I guess quite a solid performance. You're targeting an expansion of share here in particular in the surface part of the market. I wonder if there's a regional bias to that at all? And also in the quarter, how much of the growth would you say was led by efforts to raise your share be that in surface or in underground?

[Stefan Widing, executive]

It's not a particular regional aspect in terms of how we approach it, but of course there are -- from a surface mining perspective, that's more prevalent in some parts it's more. In South America for example there are some, more in Australia. So from that point of view, it might have a bit of a regional aspect, but we approach it from more of a global standpoint. I cannot give you a specific figure on how much the growth in for example Rotary and also the boom drills sort of drove incremental growth in this quarter. I can say definitely it had a positive contribution.

[Louise Tjeder, executive]

Do we have any more questions?

[Operator]

We have a follow-up question from Max Yates from Morgan Stanley.

[Max Yates, analyst]

Could I just ask a quick follow-up on China in SMM. We can obviously see kind of that or Asia as a whole was the region going down. Was China kind of materially worse than the overall kind of growth rates that we're seeing in Asia? And just curious kind of is there any sign of that sort of stabilizing? Is China getting worse? Is it kind of related to any individual end markets? Just a bit of color on what you're seeing there would be helpful.

[Stefan Widing, executive]

China was worse than Asia as an average so China was down mid-single digits while for example India was very positive. So there were other markets that pulled Asia up towards almost flattish development. In terms of end markets and in terms of sequential sort of development, it's been stable, but it has not taken off the way we had expected it to. So since April, it's been basically sequentially stable also now into July. And from a segment point of view, the one that has been negative really has been aerospace.

[Max Yates, analyst]

Okay. And just maybe a quick follow-up just on your SMR aftermarket performance, I mean that's been kind of very strong in orders for a number of quarters now. We're kind of still growing off of very tough comps and it looks like when I kind of benchmark aftermarket versus your nearest competitor, you're outgrowing them. So I was just wondering kind of when you look at what you are doing internally in your mining business, is there anything you would point to kind of whether it's pushing more into equipment rebuilds, whether it's kind of getting more service contracts, whether it's just retaining more of the installed base into your service network versus say 6, 7 years ago when you were selling equipment back then. I appreciate you weren't at the company then. But is there any sort of internal initiatives that you can really point to that are driving this growth or is it just a market dynamic when you think about sort of what's happening?

[Stefan Widing, executive]

I think there are several explanation points. One is actually the growth of equipment. Of course aftermarket ultimately driven by your installed fleet and we have been growing the equipment significantly. And also I think it's quite evident by now after a number of quarters where we can see the figures that we have been taking market share on the equipment side, which of course gives you a bigger installed base to also drive your aftermarket business from. So that's 1 aspect. We also see that we gradually get slightly higher share of the aftermarket on our own installed fleet. That's a strategic goal we have had to grow that. One thing driving this is automation.With automation, there is materially more aftermarket on each piece of machine and it's also more difficult for others to take the aftermarket of those machines. They are more complicated. They are small electronics software and so on embedded into the equipment. Then in general growth in aftermarket is of course that customers [ metal ] prices are good, customers want to maximize output. They run the machine at sort of max and they will not let the machine sort of standstill because of a missing spare part. So they will invest into service and the aftermarket aspects of the business as well. To some extent, it might also be -- there's been longer lead times on equipment. In some cases customers have then chosen to do a rebuild instead of waiting for a new machine, but that's a relatively small part of this.

[Operator]

Ladies and gentlemen, this was the last question.

[Louise Tjeder, executive]

All right. Thank you very much. And with this, we conclude the webcast. And we all wish you a nice rest of the day and of course a great summer. Thank you.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.