Sandvik AB

STO:SAND

Earnings Call Analysis

Sandvik Q2 2024: Stable Performance Amid Mixed Demand and Strategic Progress

In Q2 2024, Sandvik reported stable financial performance despite mixed demand across sectors. Order intake grew 2% with 3% organic growth, while revenues declined 3% and organic revenues were down 2%. Adjusted EBITDA margin was 19.6%, down from 20.5% last year. Strategic acquisitions in China and the U.S. strengthened market positions. Double-digit growth in software and innovations like Manufacturing Copilot were highlights. Looking ahead, Sandvik expects Q3 currency effects of SEK 250 million but maintains its CapEx and tax rate guidance.

Mixed Demand Amid Stability

In the second quarter of 2024, Sandvik saw a stable financial performance despite a mixed demand landscape. Robust demand was observed in the mining and aerospace sectors, while general engineering, automotive, and infrastructure faced declines. Overall, orders grew by 2%, with 3% organic growth, though revenues decreased by 3%, including a 2% decline in organic revenue.

Resilient Margins Despite Challenges

The company maintained resilient margins despite challenging volumes in some business areas. Adjusted EBITDA fell by 7% year-over-year to SEK 6.1 billion, translating into a margin of 19.6%. This decrease was driven by reduced volumes and cost inflation. Restructuring programs yielded savings of SEK 275 million for the quarter.

Strategic Progress and Innovations

Significant strategic progress was achieved, including the acquisition of Suzhou Ahno in China and PDQ in the U.S., which strengthened Sandvik’s presence in key markets. The company also saw double-digit growth in its software business. Notably, a new AI-powered solution, Manufacturing Copilot, developed in collaboration with Microsoft, was pre-launched and is expected to enhance productivity for customers in component manufacturing starting in September.

Regional Market Performance

Regionally, Europe saw flat growth, while North America experienced a 4% decline. Asia showed significant growth at 25% in Sandvik Manufacturing and Machining Solutions (SMM), with China up 14%, albeit partly driven by pre-buying effects. Overall, mining demand remained stable at high levels, but general engineering saw weakness, especially in Europe.

Segment Highlights and Developments

Mining and Rock Solutions continued to see solid demand, achieving significant order volumes and launching key innovations such as electric rotary blasthole drill rigs and new AutoMine features. Rock Processing Solutions faced mixed demand but saw growth in North America. Manufacturing and Machining Solutions enjoyed strong software business momentum and a stable powder business, though cutting tools experienced a slight decline.

Financial Metrics and Outlook

The tax rate for the quarter was high at 30.6% due to a provision for a tax audit. Net working capital increased slightly, and free operating cash flow was SEK 4.2 billion. Financial net debt rose to SEK 49 billion due to dividend payments. Looking ahead, the company expects a stable demand trend and is focused on execution amidst macroeconomic uncertainties.

Earnings Call Transcript 2024-Q2

[Louise Tjeder, executive]

Hello, everyone, and a warm welcome to Sandvik's presentation of the second quarter results 2024. My name is Louise Tjeder, Head of Investor Relations here at Sandvik and beside me, I have our CEO, Stefan Widing; and CFO, Cecilia Felton. We will start with the presentation. Stefan and Cecilia will take you through the highlights of the quarter. And after that, we will move on to the Q&A session. And with this short introduction, I will hand over the word to you, Stefan.

[Stefan Widing, executive]

Thank you, Louise. And also from my side, welcome to the second quarter report for Sandvik in 2024. If we summarize the quarter, we saw a stable development in the quarter, but the demand picture was mixed. We saw a robust demand in mining and aerospace, while general engineering and automotive declined and also infrastructure remained weak, but with some regional variations that I will come back to. Order intake growth was 2% in total, of that we had 3% positive organic growth. Revenues declined by 3% in total and of that organic was a negative 2%.

The margin, we believe, is resilient on the current challenging volumes that we have in some parts of our business. Adjusted EBITDA decreased by 7% versus last year, corresponding to a margin of 19.6%. This puts our rolling 12 months at 19.4%. Savings from our restructuring programs is starting to come through. They amounted to SEK 275 million in the quarter. And from a bridge point of view versus the same period of last year, they were increasing by SEK 243 million. Adjusted profit for the period came in at SEK 3.9 billion.

We also continue to see very good strategic progress. And we expanded in the local premium market in China with an acquisition of Suzhou Ahno, I will come back to that; and also the acquisitions in the U.S. with PDQ that strengthens our offering in the important North American market. We also see good momentum with double-digit growth in our software businesses, and this applies both on the mining side as well as in manufacturing solutions. And we have also launched several new solutions that is linked to our strategic focus on both digital and sustainability shift.

One of these solutions is something I want to highlight as the innovation this quarter. We have collaborated with Microsoft to incorporate the latest AI technologies into several of our software solutions. This is a solution called the Manufacturing Copilot. It's been trained on our proprietary knowledge and is unique also for each of the brands. And we have prelaunched this, and it will be available on the market in September for 3 of our software brands: Cimatron, GibbsCAM and SigmaNEST. And this will help our customers further increase their productivity and efficiency in component manufacturing.

Going then to the overall market development, starting with a regional view. We saw a flat growth in Europe, 0% in the quarter. Looking at SMM, specifically, we saw plus 1%. Of that, cutting tools were down in the mid-single digits, but that was offset by strong growth in powder in particular and also some support from software. In North America, we were at minus 4%. SMM were at plus 2%. Here, cutting tools were down in the low single digits, and this was offset by strong growth then in the software businesses.

Asia up 25% in SMM. China, up 14%, but this was partly driven then by prebuying effects in one of our Chinese brands that increased prices at the end of the quarter. And if we neutralize for that effect, the cutting tool business in China was more in the mid-single digits, so still a positive growth in the country. Then we have the mining regions, which, as you know, can vary quite a lot between the quarters. So we'll not comment specifically on them.

Overall, mining demand remained stable at a high level, as you could see also in the numbers, comment more when we get to that. Looking at general engineering, we saw continued weakness. We had a low single-digit decline overall in SMM here. This was driven by a particularly weak Europe with high single-digit declines, a bit stronger in North America, but still weaker with low single-digit declines, but offset by strong performance in China, double-digit growth, although part of that then is again related to this pre-buy effect that I talked about.

Infrastructure remains weak. Europe is down. North America, a bit more stable. We started to see some green shoots there. I'll come back to that. And then if we look at Asia, Asia overall is down. We saw good growth in India, but it was offset by a negative China. Automotive, weak in the quarter, down high single digits. Here, in particular, Europe was weak, down high single digits. North America, a bit better, but down mid-single, offset a bit by growth in Asia with China up low single digits.

Aerospace continued strong momentum, mid-single-digit growth, strong Europe with double-digit growth. However, North America in our quarter was down mid-single digits. But as you can see here, we still consider the market momentum to be strong. This was related to timing of larger orders that we can get in the aerospace sector. Asia flattish here, but aerospace China SMM down low single digits.

If you look at the other segments, we have a flattish development. Europe down mid-single digits, offset by high single-digit growth in both North America and China and then Asia overall, more on the stable side. This sums to an order intake of SEK 32.4 billion. As you can see on the graph, the second highest order intake we have had as a group in the quarter. Revenues, SEK 31.4 billion, giving us a book-to-bill of 103%, which, of course, we see as a positive in this time of the year.

If we look at this from a different angle, we can see that after 3 quarters in a row with negative organic order intake, we now turn positive. And we do, however, still have now 2 quarters in a row with a negative organic revenue decline even though we improved in this quarter versus Q1. This also leads to an adjusted EBITDA of 19.6%, SEK 6.1 billion approximately, down 7% versus the same period last year. Here, we have lower volumes in our businesses, partly offset by savings and good cost control. We also have an effect where from a year-over-year point of view, we have some dilution from cost inflation versus pricing.

Overall, we are offsetting and continue to offset inflation, but we were accretive last year. So from a bridge effect, this becomes a negative in this quarter. And then we have a slight support also from currency of 20 basis points.

Going into the business areas. Mining and Rock Solutions, continued solid demand. Here, quarter again, the second highest order intake we have had in SMR, which speaks to a good demand situation. We have good momentum in automation, double-digit growth in our Digital Mining Technologies division. We also see strong growth in parts and services, underground drilling and surface drilling. If you look at orders, they grew organically by 4%. Here, we saw very good performance again in the service business, up double digits. That was a bit offset by less growth than in the consumables side. So overall, aftermarket up in the high single digits.

Equipment down 4%, but some really good major orders in the quarter of, in total, SEK 1.5 billion. If you look at the margin, came in at 20.8%. Overall, I would say, a solid performance, but a little bit impacted by the lower volumes in the quarter. We do see savings coming in at SEK 64 million in the quarter as a bridge effect and also a bit of support here with 40 basis points from the currencies. We have launched 2 new important features for our AutoMine solutions in this quarter that will further strengthen our position here.

We have also started a collaboration with a large customer, and this has been press released. So I can mention it's Glencore, which relate to deploying our second life -- deploying our batteries that we have in our BEVs in the second life application, where they are being used as energy storage and a backup energy for the mines. And so this is part of our circularity ambitions, and we're looking forward to seeing this collaboration take shape.

An important innovation launch in the quarter is also our launch of our first electric rotary blasthole drill rigs. This is part of our ambition to grow our market share on the surface. This is a product offering we have not had. It's only been one supplier for these type of solutions in the market. So this fills a gap for us and allows us to compete in a part of the market that we have not been able to compete in the past. So a really important product launch.

Rock Processing Solutions, also here, continued stable demand in mining. Infrastructure, as I mentioned, remained weak, but with some regional variations. Overall organic decline of 8%. But here, we saw growth in North America, up 3%. It's a mixed picture, though. We do see dealers continue to have high inventory levels, and that's impacting the business. But we have seen the OEM customers with lower inventory levels and have started to place more orders, especially for attachment tools in the quarter. So a bit more positive in North America here.

Continued decrease in Europe. Here, we see inventory levels have come down, but the customers are satisfied with that and I have not used that as an opportunity to put more orders yet, at least, considering the general uncertainty of the economy. Asia down 4%. We saw really good and strong growth in India, but it was offset then by also a decline in China. Good margin, 15.1% versus 13.7% last year, considering they get no support from the market as of yet.

Strong cost control, savings coming in SEK 41 million in the quarter. And also, they had, of course, some extra costs last year that you are aware of that they did not have this year. Also some headwind from currencies here of 10 basis points. As part of our sustainability ambitions here as well, a new solution and magnetic drug separator for mobile screens means we can extract metals from demolition materials that is both valuable and helps us reduce our wear and tear of the equipment. So a good launch as well here.

Coming then into Manufacturing and Machining Solutions. Highlight was, of course, strong momentum in the software business that grew double digits in the quarter. Same we can say for the powder business, which had a strong development, of course, partly on the back of low comparison the prior year, while cutting tools then declined by 1% in the quarter. We see solid demand in Aerospace, as I mentioned, while Automotive and General Engineering were on the weaker side. Total order intake increased 5%. Of that, the organic increase was 4%. And as mentioned, minus 1 for cutting tools offset then by good growth in software and powder.

We can say, if we look at the quarter overall that the demand picture has been stable throughout the quarter, month-over-month, and at the same level, if we look at daily orders as we saw in Q1. So the first half of the year has been stable from a daily order intake point of view. And we see the same thing continuing so far into July. The margin was weaker than last year, SEK 20.5 million versus SEK 22.3 million. Here, we have, of course, lower volumes impacting the margin negatively. And then the dynamic I mentioned around cost inflation and pricing in the quarter, where we do offset in the quarter, but we have a negative bridge effect from being accretive last year due to the timing of when price increases have occurred.

Good effect from restructuring and savings programs here with SEK 139 million as a bridge effect on the positive side in the quarter and then some headwind from currency as well down -- diluting by 20 basis points. Very important strategic progress here in the quarter with the acquisition of Suzhou Ahno. This is one of the leading players in the Chinese local premium market segment. We have had a strong position in China. We have a strong position in the international premium segment. But the bulk of the growth in the Chinese markets in the past years has been in what we define as the local premium segment, and we really had not had a play in that segment.

We have had Yongpu since a few years, but that's a smaller company. Now we take a really important step with this acquisition, gives us a play in the local premium segment in China. So super happy with that acquisition. Then we also have a decent acquisition in terms of size in the U.S. with PDQ which is fixtures and work holding and tool company, strengthens our position in terms of offering a total product range on the important U.S. market and also strengthens our partnership with the machine tool builders that is working a lot with this company. So good progress here on that front. Now I will hand over to Cecilia and will come back for conclusions and Q&A.

[Cecilia Felton, executive]

Thank you, Stefan. All right. So let's take a closer look at the numbers then together. And as usual, let's start with a growth bridge. Here on this slide, you can see that organically, order intake grew by 3%, while revenues were down by 2%. Structure did not have a material impact in the quarter, whilst currency had a negative impact of 1% on orders. And that brings total order intake growth to 2%, while revenues were down 3%.

And as Stefan mentioned, adjusted EBITDA came in at SEK 6.1 billion, corresponding then to a margin of 19.6%. Net financial items improved year-over-year, and I will show you a more detailed table in a few minutes showing the development there. Tax rate, excluding items affecting comparability and also on a normalized basis was in line with guidance, 23.9%. Net working capital on a 12-month rolling basis came in at 30.2%. Free operating cash flow, SEK 4.2 billion in the quarter, corresponding to a cash conversion of 74%. Returns at 14.1% and adjusted EPS came down year-over-year driven by the lower earnings.

If we continue with the bridge then, and starting with the organic column, here you can see that revenues came down by SEK 775 million, which resulted in a reduction of EBITDA by SEK 485 million. And that gives a leverage of minus 63% and a year-over-year dilution of the margin of 1 percentage points. Currency was slightly accretive, 0.2 percentage points and structure was neutral to the margin. And that brings us from a margin last year of 20.5% to 19.6% this year.

We see good progress on the execution of the restructuring programs. For the '22 program, we have now realized savings of SEK 139 million. The year-over-year bridge effect is a little bit smaller as we also had some savings last year. And for this year's program, we have now realized SEK 136 million of savings. And this corresponds to annualized run rate of 71% and 44%. If we continue down in the P&L with the finance net, starting with the interest net here, you can see that it came down slightly year-over-year. And this is despite the higher yield costs and is driven by lower borrowed volumes.

Then at the bottom, you see here in FX and other asset classes, we had a big negative impact last year. And as I think most of you remember, this is due to temporary revaluations on orders, currency hedges and orders not yet invoiced. But from 1st of January this year, these temporary revaluations are now booked in equity. And that's the main driver of the year-over-year improvement here.

The reported tax rate in the quarter was high at 30.6%, and this was impacted by a provision for a tax audit related to transfer pricing for the years 2018 and 2019. This is an impact -- a one-off impact in this quarter, and we are not expecting any further charges here going forward. Adjusting for this, the tax rate was in line with guidance. Net working capital, if we start with the graph on the left, you can see that in absolute terms, it's increased sequentially. This is driven by higher accounts receivables and also a little bit less prepayments from customers. Inventory volumes in the quarter came down a little bit as opposed to the normal seasonal buildup that we have in the second quarter normally.

And on a relative basis, you can see on a 12-month rolling basis, we increased sequentially to a little bit just above 30%, whereas on a quarterly basis, we came down slightly versus the first quarter. Free operating cash flow was SEK 4.2 billion in the quarter and corresponding to a cash conversion of 74%. On a 12-month rolling basis, cash conversion was 84%. And if we then look at the year-over-year development, you can see here that EBITDA adjusted for noncash and other items was largely in line, slightly lower. CapEx was a little bit lower, but the net working capital buildup in volume was higher. And as I mentioned, mainly driven by higher accounts receivables.

Financial net debt increased sequentially driven by the dividend payment and reached SEK 41 billion. Capitalized leases and the pension liability was largely unchanged, which brought net debt to SEK 49 billion. And also our balance sheet target, financial net debt/EBITDA increased to 1.5. And normally, we see a seasonal increase in the second quarter, as I mentioned, as a result of the dividend payment.

Looking then at outcome versus guidance. The currency effect came in at SEK 22 million for the second quarter. And then for the items where we provide annual guidance, you can see that CapEx is now at SEK 2.3 billion, interest net at SEK 0.8 million and the normalized tax rate is right in the middle of the guided range. And then looking ahead at the third quarter and the full year. Here, you can see that the currency effect for the third quarter is expected to land at SEK 250 million. We have left CapEx and tax rate unchanged, but we have increased the interest net a little bit to SEK 1.5 billion.

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

[Stefan Widing, executive]

Thank you. Cecilia. Yes. So if we conclude, again, it was a good quarter with a stable financial performance. We do have a mixed demand picture though in the quarter that we have to manage. And that's why we do see -- we think we have a solid performance despite the volume challenges that exist in some parts of our business. We have a good momentum when it comes to driving our strategic agenda as exemplified many times during this presentation.

So we made good progress in the repositioning of Sandvik, launched several important innovations and partnerships linked to both our digital and our sustainability ambitions. We do this in close collaboration with our customers to make sure that we provide value to them and that our innovations are relevant in the market. We have also seen this quarter, further expansion into faster growing regions and segments through the 3 acquisitions we have made.

If we look forward, we continue to have strong focus on execution. We do have an uncertain macroeconomic and geopolitical backdrop to manage, but we have a solid financial platform, we have strong market positions, and we will be persistent in focusing on delivering our strategic agenda and our financial performance and the targets we have set. Thank you for listening, and let's go into Q&A.

[Louise Tjeder, executive]

Yes, indeed. Thank you, Stefan; and thank you, Cecilia. It's time for the Q&A session. And operator, please, we can have the first question.

[Operator]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Sebastian Kuenne with RBC.

[Sebastian Kuenne, analyst]

I have two. The first is regarding the operating leverage, which you show very nicely in your bridge analysis of minus 63%. I recall that in Q1, it was also a fairly high number and the explanation was that the SMR is running at full capacity, but the revenue recognition will happen later this year. It now appears that this revenue recognition for equipment is not happening or hasn't happened in Q2. And I was wondering if you could give us an update when those sales will be made? That would be my first question.

[Cecilia Felton, executive]

Do you want to talk about the revenue recognition? I can talk a bit about leverage.

[Stefan Widing, executive]

Yes. When it comes to sales and revenues for SMR in the quarter, I think they were solid. They were up sequentially by SEK 1.8 billion or 13% versus Q1. And it's true, they are organically slightly down, but I don't think there is any drama in that. We had record high deliveries in the same quarter of last year. And with the solid order intake as well, we will gradually see -- continue to see deliveries to be at a good level.

So I -- the leverage we're talking about here is not driven by the same dynamics as we saw in Q1 in that regard. So you can comment on that Cecilia.

[Cecilia Felton, executive]

Yes, of course. So the main reason for the low leverage in the quarter is the dynamics around price normalization. Last year, as Stefan mentioned, price versus inflation was accretive. And this is driven by the timing of the price increases versus the pace of inflation. So in Q2 of last year, price was overcompensating for the current inflation in the quarter. Whereas this year, what we see now is that price offsets inflation. But in the year-over-year bridge, this is a dilutive impact and also the main reason for why leverage is so low in the quarter.

[Sebastian Kuenne, analyst]

Okay. Understood. Second question would be on the issue in Asia and the high growth in China, 40%, due to the prebuying of some of your distributors, I assume. Could you just give us a number in Swedish krona, how big that impact is. It seems to really change the growth dynamics for the tooling business and whether you expect a reversal of that effect in Q3?

[Stefan Widing, executive]

Yes. So I mentioned, from an organic point of view, it was 14% in China and more underlying, more mid-single. So talking about an impact of maybe 10 percentage points in the quarter. I don't honestly have that translated into SEK, but Louise can, maybe, come back to you on that after the call. We will, of course, gradually see a reversal. It should not come all in Q3, that we don't expect. But throughout the rest of the year, of course, if it's a pre-buy, we will have to give that gradually back. That's clear.

[Sebastian Kuenne, analyst]

Okay. I understood it was 40%. So...

[Stefan Widing, executive]

No. Then it would have been a much more severe impact, I guess. Yes.

[Operator]

The next question comes from the line of Klas Bergelind with Citi.

[Unknown Analyst]

Stefan and Cecilia, [indiscernible], not Klas Bergelind. My first one is on SMM, Steve, on powder and software. You said that powder was strong. I'm not sure if I heard the impact here on the growth. Was it perhaps 1% of the Covid. It was 2%, but probably because of more restocking at the time if 1% was the right number. And then on the double-digit growth in the software business, it seems to be accelerating, which is good to see. Can we see -- can we say sort of what verticals and markets and how much is software now of orders and sells in both in SMM, if any difference between each?

[Stefan Widing, executive]

Let's see. I try to remember all the questions here. On powder, I don't know, Louise, if we have given a specific contribution in terms of percentage on the growth. So cutting tool minus 1%, SMM plus 4%, and how we split it out further. I'm not...

[Louise Tjeder, executive]

Not really.

[Stefan Widing, executive]

No. So -- but again, what we can say is double-digit growth in software. And then you can say the rest is powder. And powder is more than normal double digits. It's, as I would say, probably -- I'm guessing now. We will -- a little bit -- 3/4 of that is on the powder side and maybe 1/4 on the software side, something along those lines. It gives a little bit as well on that.

Yes, on the software growth, it was a strong quarter. I wouldn't say -- I mean, we are not counting on that this is going to happen every quarter. We have said we think this is a high single-digit growth business over time. Then of course, some quarters might be stronger than others. So yes, I wouldn't count on continued double digit every quarter just because we see it now, but strong performance in this quarter.

When it comes to percentage, I mean, we have the target. By the end of next year, this should be a SEK 4 billion business. And then we have some growth that needs to happen to get there, both organically and through some additional M&A. So it is not yet hitting the 10% of -- high single-digit 10% that we aim for with that target. So lower than that, more around the 5%, 6% currently.

[Unknown Analyst]

Okay. Yes, that's helpful. My second one is on your stable comment on daily sales into July. And obviously, we had this China pre-buy, which was 10% to China growth roughly. Do you sort of adjust for that? Or is there anything else getting stronger here offsetting that hangover, if you what I mean?

[Stefan Widing, executive]

No, I would say we -- I mean there are always a little bit of puts and takes in the quarter. So when we say it's stable, it doesn't mean that you should think that, that was the China effect and otherwise, it was weakening. That's in the -- in this context, I would say that's in the noise of that comment. So we saw a stable -- I mean, when we say stable, it's not that it's on the -- now a tenth of a percent the same, because there are always some type of variations. But overall, same daily pace on average month after month.

[Unknown Analyst]

Overall. Yes.

[Operator]

The next question comes from the line of Max Yates with Morgan Stanley.

[Max Yates, analyst]

I just wanted to ask on the mining business. And I guess sort of it's been a very good quarter of equipment orders. So I just wanted to understand kind of -- is there any way particularly you call out that you think you're taking market share? And then the extension of that question, I guess the aftermarket, I was quite sort of pleasantly surprised with 8% order growth. That's quite a bit better than, I think, what others are generating.

So could you just talk a little bit about kind of what's driven that? Are you seeing an acceleration? Was it any kind of specific rebuild or mid-life projects that were happening this quarter? Just talk about those 2 items please, would be helpful.

[Stefan Widing, executive]

Yes. On the equipment order side, I would not, based on this quarter call out sort of market share gains in any specific area. I think this is within the margin of, let's call it, the normal lumpiness we can see on equipment orders. We were happy with the strong intake and SEK 1.5 billion of major orders. But it was not -- I can't say it was in any new areas that we were not expecting in that sense. So -- but one big order in automation, in surface, also underground. So it was across the board and more, I think, an indication of a solid demand picture and that we have strong product offers out there.

On the aftermarket side, I think there are some specific drivers. First of all, we see high activity with our customers because of high metal prices. So they are running the machines as much as they can. Machines are on average older than they have been in the past, and we can see that, that the older machines, of course, have a need for more service and spare parts. So that helps the aftermarket business.

On top of this, we are seeing that the improvements in fleet size and market share that we have gained on surface in the past years. Those machines are now getting a little bit older, and we can now see that, that's generating increased aftermarket sales on the surface side as a consequence of a bigger fleet, which is very positive, of course. So those would be the things I would call out.

[Max Yates, analyst]

Okay. So I mean if I was to summarize, it's much more underlying market trends and work that's been done in the past rather than anything specific to this quarter or a large rebuild order or anything like that?

[Stefan Widing, executive]

Yes, I would say so, yes.

[Operator]

The next question comes from the line of Andrew Wilson with JPMorgan.

[Andrew Wilson, analyst]

Just around the powder development and maybe just picking up on where [ Klas ] was, is there anything we need to think about in terms of the timing of those orders? I might be misremembering, but I know that there are certain periods where the powder orders tend to be pretty good, and I know you've talked about kind of comp effects. Is there anything in the second half to be aware of on powder just so we kind of -- we don't get in the wrong place on that?

[Stefan Widing, executive]

Yes. Of course, the high growth this quarter is partly driven by good underlying orders, demand, but also to a big extent by very low comps in the same -- in Q2 of last year. And I don't remember the exact figures, but we had -- we will have low comps also in Q3. And you can -- I think we mentioned something around that in the Q3 report. So you can probably go back to that and you will -- yes, you can probably sort of normalize for that versus Q3 of this year.

[Andrew Wilson, analyst]

That's helpful. And then maybe just 2 super quick clarification ones. None of the comments you've made around pricing seemed to me that you're worried about pricing dynamics in the market, but I just wanted to confirm that. And I guess, very simply, in terms of the daily order intake comments, and I know there's obviously lots of moving parts. If we just look at the typical seasonality in the business in terms of SMM Q3 versus Q2, given what you're saying, it would seem to me that, that would be a pretty good starting point all else equal for where we should see Q3 orders? Maybe if you just confirm those 2 that I'm not making a mistake in how I'm meant in the comments.

[Stefan Widing, executive]

Yes. If I start with the latter one, it's, of course, a little bit, let's say, complicated in the sense that what we can see now in July, we are seeing a stable daily order intake. How -- and there is seasonality over the vacation or holiday periods here. How that will be impacted with by what we see now is, of course, very difficult to say. But I guess what we're saying is that the underlying market sentiment from what we can see is so far stable. It should imply, let's call it, normal seasonality for the rest of the quarter as well. If nothing else changes, which of course, it might. Did that answer your question?

[Andrew Wilson, analyst]

Yes. No, no, that's very clear. And just on the pricing, just to check that I'm right that there's no change of market conditions there.

[Stefan Widing, executive]

No. I mean what Cecilia explained the dynamics in this quarter and so on, this is more sort of residual effects of the dynamic pricing situation we have gone through in the past years. We are seeing that we are converging sort of towards that. When we go into next year, pricing/cost inflation should be, I would say, normal again.

And now we have some quarters with some bridge effect that we have to manage through, but we are going towards a more normal or normal price situation. That's what I would say we see right now. Then there are some pockets where there might be some challenge driven by current inventory levels and so on. We have seen that on wear parts on the infrastructure side where too high inventory levels has been discounting and campaigns and so on.

We have on ground support driven by lower Chinese steel prices. There are some pricing challenges because of companies selling -- or trying to take business at lower prices and so on. But -- so there is plenty to manage, but our philosophy is quite clear that we stick to our value-based pricing. And in some cases, we rather sacrifice a few deals if we have to maintain a good pricing level.

[Operator]

The next question comes from the line of John Kim with Deutsche Bank.

[John-B Kim, analyst]

Just wanted to check whether the discussion or the guidance you gave previously in Q1 about seasonality and sequencing is tracking, i.e., did Q2 deliver the way you thought it would given your equipment pipeline. I know your value-based pricing, but given stronger copper prices and tight production, is there not an opportunity to make more here? Or maybe I'm missing something?

[Stefan Widing, executive]

Yes. On the first point, yes, we are tracking in that sense. Sales in SMR has continued to develop in line with what we saw at the beginning of the year. Value-based -- higher copper price, yes, short term, you might be able to capture more. But on the other hand, we are in this for the long term, and we have, in general, built a lot of trust with our customers, many of them being the larger mining companies and taking advantage of a short -- potentially fluctuating, let's say, commodity prices in our own pricing strategy. I don't think that is wise.

Then suddenly, if things turn south, we will have to give things back and potentially more if we start to tie pricing to commodity prices. So I'd say we stick to our value-based pricing approach. That served us well long term in the past, and I think it will continue to do so.

[Operator]

The next question comes from the line of Vlad Sergievskii with Barclays.

[Vladimir Sergievskiy, analyst]

Two questions, please. First one, how do you see demand momentum for your better electric machines offering developing in perhaps next few years? Any changes in the outlook here at all? And second one is more nuance than related to the inventory position. Could you comment on how close do you think your inventory position to a level which you will consider optimal for this part of the cycle? And maybe discuss if there are any differences in inventory positions across different business lines?

[Stefan Widing, executive]

You take the second one. I start with the BEVs in mining. I would say so far this year, it's been a fairly muted, let's say, deal orders in terms of the BEVs. We have not had any of the bigger fleet orders that we saw some last year. I would say the interest is still very high. The interest is there. But is -- I would call it a little bit of a wait-and-see in the industry where there are a number of these larger fleet orders being delivered right now. And I think the industry is a little bit waiting to see how that will go, how it will perform.

We know we can prove performance on individual machines on 3, 4 machines. Now it's the first time where you have more or less greenfield mines or large brownfield expansions that will go fully electric. And I think that's, in a way, the next proof point on the journey towards a more scaled up -- more fully scaled up electrified mines.

So yes, a little bit of a plateau right now in terms of the demand picture. On the other hand, I want to say we set the target a few years ago that we thought around 50% will be electric or non-diesel by 2030. And that target we set before the significant uptick we saw in the past years. So in that sense, I think it may be the growth in the past 2 years that's sticking out a bit. And we are maybe coming back to a more sensible sort of growth path here now. So yes, that's where we are right now.

If you take the inventories?

[Cecilia Felton, executive]

Yes, sure. So on the inventory side, we are still at elevated levels. Last year, from June onwards, sequentially, we started to be able to bring inventory levels down. Now in the first half of this year, first half of this year has been largely flat, a small reduction in volume in the second quarter.

I would say that typically, during the first half of the year, we built inventory and particularly in the second quarter ahead of the summer period.

In terms of the different business areas, I would say that SMM is at a good level. Where we have more work to do is particularly in the SMR business area, but also still in some divisions in Rock Processing. And before we've had an informal net working capital target or ambition of around 25%. And we will see inventory and net working capital levels gradually start to come down. We will not reach the 25% this year. That work will continue into next year, but we should see a gradual improvement.

[Operator]

The next question comes from the line of Ben Heelan with Bank of America.

[Benjamin Heelan, analyst]

I just wanted to ask one around your aerospace exposure, and we've seen a couple of warnings or some of the large OEMs and whether you've seen any impact from that through the supply chain so far? And then you've pointed to some weakness in automotive. Can you also help us understand just a little bit about how auto has been performing through Q2 and how you see that in the second half of the year?

[Stefan Widing, executive]

Yes. Absolutely. Aerospace, yes, I noted as well, there has been some -- there are challenges in production ramp-up in particular, in some areas. We haven't really seen that in the momentum in our business, at least not so far. I think it's worth noting that it's still a very positive mid- to long-term demand picture in the forecast also from these OEMs. And this more relates to the next year or 2 and how they think they can ramp up their supply chain to manage and increase demand.

So I think it's still fundamentally positive and it's more about how -- what kind of growth momentum that we can see rather than, I think, a risk of a decline. As I said, we did see a timing of orders in the North America in Q2, turning us negative, but we don't believe that has to do with underlying momentum. We tend to get larger orders, frame orders in this space, and they can shift between quarters. So yes, I wouldn't call out any negative signs for us at this point in time at least.

On automotive, yes, as mentioned, I think Europe was weak. It was down high single digits. And overall, if we look geographically, we see a weak Germany, we see weakness in the surrounding industrial regions as well, Northern Italy and also a bit into Central Europe and automotive supply chain there. So clearly, there is an impact there. North America was a little bit better, but also down in the quarter, but China a little bit more positive than with some growth.

If we look at the forecast going forward, I guess, we can read the same reports. It points to decent demand picture, but that auto production levels will be slightly down this year versus previous year and even more down if we take out China from the equation. So it is a bit of softness around auto right now, I think, is the view we have.

[Operator]

The next question comes from the line of Andreas Koski with BNP Paribas.

[Andreas Koski, analyst]

So firstly, on aftermarket in SMR, it was very strong organic growth of 8%. And I think this should have been a record high quarter for aftermarket orders. So did you have any large orders or similar driving that? Or was it driven by the underlying business?

[Stefan Widing, executive]

Yes, you're -- I haven't looked at that specifically actually. But I think you're right that it was a record high if I look at some of the numbers there. No specific larger things to call out. It is the drivers I mentioned earlier, high utilization of the equipment, older equipment starting to gain benefits from a larger fleet on the surface. Those are the 3 things I would call out.

[Andreas Koski, analyst]

Yes. Understood. And then on cutting tools, I don't know if you have done the exercise, but if I look at growth in Q2 last year, you -- the cutting tools business grew, while in Q3, it was down mid-single digit levels. So if daily sales rates are unchanged during the third quarter compared to the second quarter this year, I would guess that translates into quite solid growth year-over-year in the third quarter. Would you agree with that?

[Stefan Widing, executive]

I think you can do the math yourself, because I don't want to guide further than what we have. I mean we don't guide, so I cannot comment on that. But -- I mean, you can do the math if you assume stable demand, which, of course, and I want to emphasize that again, a stable start of the quarter does not mean it will not change throughout the quarter, but that's the data point we have at the moment.

[Andreas Koski, analyst]

Yes. And then lastly, I just want to better understand your comments about price increases and cost inflation and how that dilutes the margins year-over-year. Does it mean that cost inflation has now been stronger than your price increases over the past 12 months and because of that, we see this dilution? And how long will this dilution continue? Is it for the next 3 quarters? Or how to think about that?

[Cecilia Felton, executive]

I would say that, of course, when we make the price increases, we take into consideration how we think the inflation will develop going forward. And last year, we had the impact from the normal price increases in the beginning of the year, but we also still carried with us some of the impact from the price increases, the extra price increases that we did in 2022.

So that means that in Q2 of last year, price was running a little bit ahead of the inflation. And we also mentioned on the call -- of the Q2 call last year that price versus inflation was accretive. This year, it offsets, but year-over-year, then it's a dilutive impact. When we look at Q3, price versus inflation was also accretive last year for the same reasons, it's the same dynamics. And then over time, this will gradually come down. And as Stefan said, it should be pretty much normalized beginning of next year.

[Stefan Widing, executive]

Another way of saying it in the words used here is that we were running ahead with price increases in Q1 last year. Now, inflation has caught up. So we believe we are now in balance, but we get a bridge effect that's dilutive.

[Operator]

The next question comes from the line of Daniela Costa with Goldman Sachs.

[Daniela Costa, analyst]

It relates to both the return on capital employed and the free cash flow conversion. I think if we look back at just before pandemic, you were running return on capital employed above 20%, cash conversion around 100%. We're now obviously seeing this at low teens and around 80% for the cash conversion. So how sort of do you plan to get -- is it possible to get back to those levels? Or do you think the business has sort of structurally changed? What are the normalized figures that you view as for the medium term for these metrics?

[Cecilia Felton, executive]

I would say if we start with ROCE, I think what's changed in particular are all the acquisitions that we made over the last few years, impacting, of course, building up goodwill in the balance sheet. Then on the BA level, when you look at returns, is impacted by the net working capital buildup. At a group level, that's largely offset by decreasing excess cash in the balance sheet. So the main driver is the acquisitions that we've been making over the last few years.

Cash conversion, it tends to be over 100% in drastic downturns. Normally, we are between 80% to 90% over time.

[Daniela Costa, analyst]

And then just following up on the point on the acquisitions, I guess, over time, sort of you do expect to generate the returns from those acquisitions? Or do you think the business configuration changed and 20% plus in the medium term is not -- is it possible or...

[Cecilia Felton, executive]

Over time, yes. But in the first few years, it has a negative impact on ROCE. And we also said for when we make acquisitions, we want to return higher than WACC at least 5 years out, but it means that there's a negative impact in the first few years when we make these acquisitions.

[Operator]

[Operator Instructions]

Ladies and gentlemen, there are no further questions at this time. I would now like to turn the conference back over to management for any closing remarks.

[Louise Tjeder, executive]

Thank you. And thank you, Stefan and Cecilia. It seems that we are finished earlier than usual. Summer is calling. And indeed, we are looking forward to it. And before we say goodbye, we want to wish you all a good summer. And of course, thank you for calling in. Goodbye.