Sandvik AB

STO:SAND

Earnings Call Transcript 2021-Q3

[Louise Tjeder, Head of Investor Relations & VP]

Very welcome to Sandvik's presentation of the third quarter results 2021. My name is Louise Tjeder, Head of Investor Relations; and beside me I have of course our CEO, Stefan Widing, and our CFO, Tomas Eliasson. Stefan and Tomas will, as usual, start with the presentation and take you through the highlights of this quarter. And then we will spend approximately half an hour on the Q&A session. And the questions you can ask on the conference call as per instructions from the operator or online in written. And with this, it's time for the presentation. And I hand over the word to you, Stefan.

[Stefan Widing]

Thank you, Louise. And also I would like to welcome you to our third quarter report in 2021. We will for sure return to this picture here of our beautiful electric 50-tonne truck later in the presentation. But I'll start with the summary of the quarter, which was a quarter we would say, have a solid demand and solid performance. Organic order intake were up 21% organically and a full 31% total growth adjusted for currency. We saw a continued strong underlying demand in the mining and infrastructure businesses, where in many areas, we saw record high order intake levels. Also, demand in automotive and general engineering was robust, and we saw a positive development in aerospace this quarter. Revenues, they grew by 13% organically, and this is then despite the supply chain bottlenecks that we did see a little bit in the quarter. Our invoicing could have been slightly higher if it were not for some of these issues. We also see an improved profitability. The adjusted EBIT margin was 17.6% versus 17.3% last year.And even more importantly, adjusted EBITA margin of 19.1% versus 17.7%. I will comment a little bit more related to this divergence later in the presentation. Our rolling 12 months adjusted EBIT, excluding metal prices are sitting at 18.4%. We saw permanent savings in the quarter of SEK 230 million, but this was more than offset by reversals of temporary savings, especially short-time work weeks of, in total, SEK 615 million, and Tomas will break this down further in his part of the presentation. We also saw a successful execution of our shift to growth strategy. Seven strategically important acquisitions were signed or closed within and after the quarter. This also meant that we, during the quarter, have updated our financial target for Sandvik Manufacturing Solutions to SEK 6 billion in 2025 with an EBITA margin of at least 20%. And I would say these acquisitions means that we have taken vital steps in becoming a more digitally focused and more growth-oriented company. I mentioned the 50-tonne battery-electric truck in the beginning. This is the second product we launched that is a result of a combination of Sandvik's knowledge in underground mining equipment and Artisan's knowledge in state-of-the-art electrical drivetrains and battery technology. We launched this earlier this quarter at MINExpo in Las Vegas. This follows our philosophy, which is that we should rethink the equipment not the mine, which will help mines deploy battery-electric vehicles in their existing mining infrastructure. This we enabled through our patented AutoSwap and AutoConnect technology, which means that the big battery you see at the front of the truck can automatically, while the operator is in the cabin, be put on the ground and disconnected. There's a secondary battery in the truck, so it can go to another already charged battery, which can then be reconnected and off you go. So in a seamless way, you can switch to a fresh battery, avoiding a lot of infrastructure investment in fast charging infrastructure in the mine. So very positive and another great innovation in terms of battery electric mining equipment. Going into the market development overall. We can see our main regions. All see strong underlying demand. Europe up 16%; North America up 25%; and Asia up 23%. We can say that North America is up more than Europe, driven by strong order intake in SRP and SMT. If we look at the more underlying business in the bigger business areas, the development is fairly similar. Africa, Middle East, South America, of course, driven by strong mining demand. Australia being negative is simply because we had a major order in Australia in the same period last year. Otherwise, the demand is underlying at a strong level. You can see mining segment up across the board, very strong demand. Same growth for infrastructure. General engineering, strong demand, up. Automotive more flattish year-over-year. Automotive had started to come back quite a lot in Q3 of last year. And we now see that we are more on par from a year-over-year perspective.Energy has started to come back further, which is positive. And I think for me, the most positive signal in this quarter was that we now see growth again in aerospace, not only science, but actual order intake growth in aerospace in the quarter. So if we summarize this, an order intake at a very high level at SEK 26.3 billion, up 21%, and as I said, 31% total order growth in the quarter. Revenues trailing a little bit, but if you look at the bars there, you can see that revenue is step-by-step also ramping up, just shy of SEK 25 billion in the quarter, up 13%, 23% total growth. And as I said, this could have been a bit higher, probably closer to the SEK 25 billion, had it not been for some supply chain and logistics issues, especially in SRP, also a little bit in SMR. Looking at the profitability development. Profits were up 25% versus prior year. Adjusted EBIT of SEK 4.37 billion, which is a margin of 17.6%. Adjusted EBITA margin of 19.1%. And you can see also on the graph that these 2 are starting to diverge a bit because of the acquisitions coming in. The only difference is amortization of surplus values. We had a bigger impact in the quarter in SMR because of some inventory treatment in DSI. So the difference will not be this big going forward, but it will still diverge, which is why we will focus a little bit more on EBITA going forward since it represents the underlying business performance in a better way. You can also see we had M&A costs, transactional M&A costs and the SEK 33 million in write-times of overlapping assets in SMM, that had an impact of 100 basis points on the group level. So add that back here if you want to take away the effect from those transactional onetime costs. Group of leverage of 32% we are happy with considering we are measuring against the quarter where we were on full effect of temporary savings, including work time reductions in Q3 of last year. And again, we'll comment a little bit more around that going forward.Going into the BAs then, starting with Mining and Rock Solutions. Very strong order intake, the highest ever at SEK 12.1 billion. This is up 21% organically and 41% in total growth. We had strong contribution from all divisions in the quarter. We can also say that revenues, SEK 11.1 billion are ramping up sequentially and this quarter then a growth of 12%. Margins were solid. Adjusted EBITA of 21%, adjusted EBIT of 18.5%. Here, again, a strong dilution from DSI as we had communicated before, just over 400 basis points. If you would take away the DSI impact in the quarter and look at SMR as it was in q2, their margin was actually at an all-time high at 22.6%. So the little bit issues we saw in Q2, they have recovered nicely from them and are now delivering very strong margins again. Then we can also say that we have seen a very good start of DSI in the group, very strong performance from DSI in the quarter, which was just really great to see as well.Rock Processing Solutions also had strong order intake growth, up 26%, very strong actually all-time high order intake on the aftermarket up 38%. This is a little bit driven by pre-buys because of another price increase coming into effect October 1 and also some customers doing prebuys because of simply longer lead times. So 38% is not the underlying demand, but the underlying demand is still very strong. As I said, SRP were a bit impacted by supply chain issues, the revenue of SEK 1.790 billion could have been more around SEK 1.9 billion if it were not for supply chain and logistics issues. So hit the top line a little bit there. That also had a little bit of drop-through effect on their margin, but still a solid margin of 16.8% from them in the quarter.SRP has strong delivery on price, but they are also the one most impacted by raw material. They have offset the raw material. They are still trailing a little bit on offsetting also all the increased freight costs, but they are working on that as well as we go forward. Also new innovation here with a new crusher. The QI353, and I think you will see that while I'm talking right now. Then if we go into SMM. Also here, solid underlying demand. Order intake up 16% and revenues up 18%. Here, we also start to see some impact from the structural growth. So revenue, total growth in the period was actually 21% as some of the acquisitions start to contribute positively to the growth in SMM. We did note some production cuts in automotive, of course, and I think that's well known. So the quarter in automotive was slightly slower than we could have expected prior to these production cuts. Again, positive development in aerospace. We saw double-digit growth in aerospace in the quarter, which is nice to see it coming back. It is from low levels, but the fact that it's starting to come back means that even though it will be a long -- long recovery phase means we should see aerospace helping us on the growth front for quite some time now going forward, which is good.We have also noted that September actually started a bit slower coming back from the holiday period, but then in the second half of September, we saw a very good uptake that has continued now into the first weeks of October. And that's a sequential comment comparing them to Q3 overall. Good margin improvement here, 21.2% on EBITA versus 19.4%. And here, we have close to SEK 200 million then of these transactional M&A costs and the write-downs. So this has a dilutive effect of around 230 basis points. So if we compensate for that, I think it's a very good margin development from SMM in general in the period. You can also see that they have done a very good job with the permanent savings overall, very good structural initiatives ongoing there. And then we took some very important steps in terms of growth in SMM in the quarter. We have 2 strategic growth areas. One is in digital and one is in round tools. And in both of these areas, we did good acquisitions in the quarter; 2 round tools company, 1 in Poland and 1 in China; 2 CAM companies; and 1 company strengthening our metrology offering. And we have gone in the quarter from no presence in CAM to being the market leader in terms of installed seats, which I think is a great achievement by the team. Then going into SMT. Also here, strong organic intake growth of 29%. This is really driven by strength across the board in the business. We see oil and gas continuing a sequential improvement. In the quarter, we had around SEK 300 million of umbilical orders, and we start to become quite comfortable with order intake level there if we look forward into what it means for the business going into next year. Revenues more flattish, up 1% as we are battling strong backlog deliveries in the -- on the umbilical side in the same period last year. Still, SMT delivers a good margin in the quarter. You know Q3 is seasonally usually -- or it is always weak because of the under-absorption when we close for holidays in the quarter. Still, they delivered 4% versus 4.9% last year, and we should again emphasize, they had strong umbilical deliveries in the period last year. Very little deliveries this year. So this is the other parts of the business in control, in application tubing and in strip that is delivering solid performance in the quarter. Then you have seen earlier today, the Board has again confirmed the decision to list SMT next year, a little bit more firm now. Mid-next year is the plan provided that we get shareholder approval during next year. Then also SMT did an acquisition, not very big but strategically important for them with Accuratech Group, which is a medical wire company. That means they can expand their medical business from outside of North America to also Europe and Asia. And this is an important growth business with very good margins for SMT. So with that, Tomas, I hand over to you.

[Tomas Eliasson, Executive VP & CFO]

Yes. Thank you, Stefan. And let's jump straight into the numbers as usual and start in the upper right-hand corner. As you heard, organic growth was strong in the quarter, 21% for orders and 13% for revenues. Currency finally, around 0 after 2 tough quarters at the start of the year. Structure is now 10%, both for orders and for revenues. And as you might recall, this number has of mostly been negative over the last 5 years when we have sold off parts of the company, which didn't fit. From now on and going forward, this will be a strong positive number. We have also added alloys here, alloy surcharges, which relates to SMT at 1%. So all in all, 32% growth for orders and 23% growth for revenues. If we then look at the income statement, earnings came in at SEK 4.4 billion compared to SEK 3.5 billion, so 25% up despite the fact that we had a lot of M&A costs and transactional accounting effects and so on in the third quarter. Margins, 17.6%, and we'll go to the bridge in just a few seconds. I will spend some time also in the presentation explaining why the finance net looks a bit strange and also the reasons behind the very low reported tax rate. Cash flow, SEK 3.9 billion. Returns finally coming back approaching the 20% level here, driven, of course, by the improved margin by -- but mostly by the higher capital turnover rate. And then also earnings per share, a nice increase up to SEK 3.03, driven by the increased earnings, of course, but also by the lower tax rate this quarter. So let's move to the bridge. And we can start with the organic part, 13% organic growth. That's SEK 2.5 billion or SEK 2.6 billion really in increased revenues. SEK 823 million in added EBIT. That gave us a leverage of 32%. And we are satisfied with that level. As Stefan mentioned, we are comparing here with a quarter where we had huge temporary savings running through the income statement in the company, but 32% is good. Of course, SMM had the best leverage. SRP -- sorry, SMR was good, too. SRP a little bit lower. And SMT, of course, suffering a little bit from the lack of big oil and gas orders, which we still had last year. We have nothing of that right now. Adjusting for that, SMT was also pretty good in terms of leverage. So 32% leverage, margin accretion of 170 basis points. Currency close to 0 on the top line, EBIT, plus SEK 112 million in bridge effect. But this is a bridge effect. So the majority of this number is actually a negative revaluation last year, which didn't happen this year. So it's just a year-over-year effect. The in-quarter effect is pretty low. Metal prices had a positive effect both on the top line as well as on the EBIT line. And structure, SEK 1.9 billion, that's the 10% in structural growth in the quarter. And you might wonder, do you only buy loss-making entities? No, we don't. This is because we have lot of M&A costs, transaction accounting and what have you in the numbers this quarter. This will look different as we move forward. But this had, of course, a negative impact on the margin. So that's the journey from 17.3% to 17.6%. Now let's look at the savings table. And exactly the same table as we have looked at over the last 2 years. And the first line is the 2019 program, we just keep it in here for reference. The second line is the program we started last year, and we are right now at an annual run rate of SEK 900 million, SEK 230 million this quarter in a bridge effect. The full impact or the effect of this program will be SEK 1.3 billion as it's done. The deliveries are mainly in 2021, but also a chunk in 2022. And then after that, there will be like a fourth quarter tail effect, of course, just mathematically in the bridge as such. But good progress, 70% done and the rest will be done in Q4 and Q1 within the next 6 months. So in total, plus SEK 230 million in the quarter. And as you can see here, mainly SMM and SMT. Then we come to the short-term savings or the temporary savings and work time reduction, which helped a lot last year, is now more or less gone. We had an in-quarter effect, just in quarter of SEK 10 million. So that means that the bridge effect is minus SEK 460 million because we had SEK 470 million in Q3 last year.The in-quarter effect on other temporary savings, however, is better. The in-quarter effect is SEK 475 million. It was higher in Q3 a year ago. So the negative effect is minus SEK 155 million. And SEK 475 million in quarter, of course, is a good number, and it shows that we are prudent, we're careful. Travel is not free all over the world yet and so on, and people are careful with the income statement and with the costs. So total temporary savings is minus SEK 615 million.Now this table or this, let's say, a presentation of temporary savings will probably stop after the fourth quarter, probably, I'd say, because we are still comparing with the spend level pre-COVID. And as we move forward here, it becomes more and more clear that we will not go back to the pre-COVID spend level in all our businesses and all our divisions. So it becomes gradually more and more irrelevant to do this comparison, but probably 1 more quarter and then it's over. So let's move to the next slide here, the finance net. The interest net on the top line is really the interesting part here, the most important part, and you can see it went down despite the fact that the debt went up. But this is because we have a very big mix change in the debt now. We have nearly half of it in short-term commercial papers, and that's -- the interest rate is very, very, very low. So lower interest net despite that we have more debt. At -- in the middle of this chart, you can see what is called here of the financial income and costs. You see in Q3 a year ago, a plus of SEK 589 million. That was a big divestment we did in China a year ago, and it was accounted for as a financial asset. So that's why the capital gain out of that ended up in the finance net. So that's the reason why the q3 finance net was plus SEK 529 million. And this quarter, it's only within brackets plus SEK 66 million. So let's move to the tax rate. And of course, this looks, let's say, a bit strange or a little bit different this time as well. There were some items affecting comparability. So adjusting for that, it was 14%, but it's still very low, way below the range of 22% to 24%. But there were some -- a few things happened in the quarter. We had some tax reimbursements from tax authorities in the world, tax disputes, which were finally settled, some of them in our favor, which gave us a refund, basically. If you adjust for that, the underlying -- or normalized, I should say, normalized tax rate was 22.2%, well within the range of 22% to 24%. And some of you might ask what happens now going forward with the tax rate. So let me preempt that question and answer it right now. There has been discussions -- there's been 2 major discussions on the regulatory area lately here. One of them is a possible increase in the corporate income tax rate in the United States. If that happens, we estimate the impact on the tax rate to be 30 basis points. And then we have the OECD initiative, which is gaining momentum globally, with a minimum tax rate -- corporate tax rate of 15%, that will impact the tax rate with another 30 basis points max. So that's 60 basis points. So from that point of view, everything else equal, there is no need to change the guidance for the tax rate upwards. So if that's the only thing that happens, the 22% to 24% stays. But you will hear more about that in January at the Q4 closing.So let's move on to the balance sheet then. Working capital, if you look at the left-hand side, working capital is going up, of course, as we build inventory. But if you see the red line on the left-hand side, the relative number is still under control below 25%, which is a kind of an unofficial target that we have for ourselves. On the right-hand side, you can see the business areas, building inventory, but the relative number is still under control. If we then move to the cash flow. If you look at the left-hand side here, you can see the blue line and the red line. The blue line is the earnings. The red line is the cash flow. And you can see now that the blue line is overtaking the orange line, which is just the way it should behave. Of course, when you grow, when you build inventories, you have to invest in working capital. So that means that earnings will be a bit ahead of cash flow now for the buildup period. Probably more on par in 2022 compared to 2021. If you look on the right-hand side, you can see this in numbers. You can see how earnings are increasing. Quite good. But you can also see that net working capital change has quite a negative impact on the cash flow. CapEx is basically stable. So that explains the difference between the SEK 3.9 billion and the SEK 4.8 billion a year ago in free operating cash flow. So let's look at the net debt. Now in Q3, we have paid for quite a few acquisitions, DSI, Mastercam and a few others. And the financial net debt has now turned into a net debt. It has been a financial net cash position for quite some while now, but now we're up in that territory. SEK 7.4 billion in financial net debt. There are no excess cash anymore. The total net debt is on SEK 18 billion, and the gearing is 0.25. We have started to borrow money in the third quarter on the short-term market, commercial papers. And of course, it has went well. And moving forward, of course, we'll see what happens, depends on the pace of acquisitions, but some of that short-term borrowing will be turned into bonds and some of it will be rolled forward in new commercial papers. So it depends on what happens. So we'll see, but well under control. So let's look at the outcome here on some of the items we guide for. The underlying currency effect, meaning transaction and translation effect was SEK 2 million, plus 2, we guided 0, so spot on. The total effect was SEK 108 million. That includes revaluation and hedges realized and unrealized and all that. But as I mentioned before, this was mainly bridge effect coming from last year, not from this year. The metal prices in the quarter basically came in at guidance, SEK 190 million compared to SEK 200 million. At the bottom part of the table, CapEx moving steady ahead SEK 800 million in the quarter, interest net SEK 100 million, and the tax rate, as I explained, 22.2%. Finally, the guidance for the fourth quarter and the full year 2021. CapEx -- normalized CapEx level for Sandvik is around SEK 4 billion or a little bit above SEK 4 billion, and we have said that it will be a little bit below SEK 4 billion in 2021. That guidance still holds. We were quite down during 2020 during the COVID pandemic. And in 2021, we have started to pick up, but we will not reach or go beyond SEK 4 billion for this year. Currency, underlying transaction translation, probably SEK 150 million for the fourth quarter. Metal price effects in quarter plus SEK 50 million. Interest net, we keep the guidance on SEK 400 million and tax rate, we stick to the guidance of 22% to 24%. And with that, I'll hand over to you, Stefan, for summary and conclusions.

[Stefan Widing]

Thank you, Tomas. Yes. Again, so this was a quarter with a solid performance and overall, a strong underlying demand of our products and services. We continue to see strong order intake growth, both organic and now also with good contribution from our acquisitive growth. We have had a successful execution of our shift to growth strategy with 7 acquisitions in and after the quarter. We have also shown -- continued to show, I would say, resilient margins, strong margins with an EBITA margin of over 19% in the quarter despite various impacts then from transactional costs that are more of a one-off type nature. We do see the global supply chain challenges, and it has certain impacts on our operations, a little bit on the ability to invoice, a little bit on the freight cost, but overall, very well managed by the organization. We continue with our shift to growth strategy. We have now reaffirmed and more firmly announced a time line for the planned spin of SMT. We have so far this year already added over SEK 8 billion in revenues from acquisitions. So we will have strong contribution from acquired growth in the upcoming periods. Then we have also taken important steps to become a more growth and digitally focused companies. In particular, pleased in the quarter that we have built a leading position in CAM for the company. So thank you for listening. And I guess we hand over now to M&A -- sorry, to Q&A. You see what's top of my mind.

[Louise Tjeder, Head of Investor Relations & VP]

Thank you Stefan and Tomas. And yes, we open up the Q&A session, and I know there's a lineup of questions on the call. So we start with these right away. So operator, please, we can take the first question.

[Operator]

That comes from the line of Magnus Kruber at UBS.

[Magnus Kruber, Associate Director and Research Analyst]

Stefan, Tomas and Louise. Magnus Kruber from UBS. A couple of questions for me. Maybe if we start with SMS. If you could give us some guidance to how fast automotive business grew there as well as if you could narrow the range a little bit on the aerospace side from double digits. What specifically do you -- what level do you talk about here?

[Stefan Widing]

Yes, when we say double digits in aerospace, it's really at the very, let's say, barely double digits. It's in the low teens in the quarter. Automotive, as we showed, it's basically flat year-over-year, in that neighborhood.

[Magnus Kruber, Associate Director and Research Analyst]

Perfect. And then on the savings side, and Tomas, you already commented a little bit on this. And maybe if you could sort of help us a little bit how to think about the other temporary savings coming in Q4 and into 2022? And will they sort of gradually -- will the headwind gradually taper off from the level we saw in Q3? Or how should we think about sort of the new structural level for these costs into next year?

[Tomas Eliasson, Executive VP & CFO]

We don't really have any guidance on that. And I mean, it depends. The world has not yet gone back to normal. So it depends very much on that. I mean, when travel is free all over the world and you can send your service technicians and salespeople and what have you freely, so to speak, then they will be -- well, not gone, but then they will start to reduce dramatically. I don't know if you want to comment on that more.

[Stefan Widing]

No, again, we don't -- as Tomas said, we don't have any specific guidance. I would say if we look how much of these temporary savings are actually still there, if we take away the whole work time reduction aspect, I'm quite optimistic that we will see a lower spend level going forward because, yes, we have not started to travel in, let's call it, new normal yet. I think that's clear. But travel has started a bit and we are back in the office in most places, which means -- yes, considering how much of those lower spend levels are still there, I think we will see a long-term benefit from this, but we don't have a specific number for it.

[Tomas Eliasson, Executive VP & CFO]

No, let me exactly let me correct myself or add. Of course, we will not go back to previous spend levels. If we do that, then we haven't learned anything during this period.

[Magnus Kruber, Associate Director and Research Analyst]

Got it. I guess one final one. On SMR, could you help us with how much equipment grew there adjusted for large orders?

[Stefan Widing]

Overall, it grew by 28%. Then if you take away the large orders, is it 20%. I would be very careful with adjustments around large orders because sometimes we get a large order, sometimes we get 3 mediums, 3 months in a row for a customer and then it doesn't count as a large order. And sometimes you get 1 that is SEK 5 million below the threshold. So it's relevant. We show it because we want you to be able to sort of look at that perspective, but I don't discount it in terms of the order levels.

[Operator]

Our next question comes from the line of Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

Stefan and Tomas, it's Klas at Citi. So a couple of questions, please. First of all, I'm trying to understand the monthly year-over-year comparatives a bit better in SMM. And if I got this right, it looks like 10% growth in September and perhaps 5% to 7% growth at the start of October. And the question is really, are the comparatives considerably tougher for the rest of the quarter? I hear you still kind of think sequentially now look better end of September and early October. But I'm trying to understand the year-over-year growth here in September and October. That would be very helpful.

[Stefan Widing]

If I talk quarters first. I mean, for sure, Q4 of last year, we had higher -- yes, tougher compares in Q4. That's absolutely true. I mean you can see that in the numbers, of course, from last year. Then I don't want to mention any specific numbers because we have done it in the past, how did the quarter start? It's almost -- I'll almost, call it disinformation because if you look at how the weeks vary, the first couple of weeks and give a specific percentage point, it doesn't correlate with how the quarter then evolves. So that's why we have been this time a little bit more vague and just say that it continued in October at a good pace, but not giving a specific percentage. But in general, I think your reasoning makes a lot of sense.

[Klas Henrik Bergelind, Director]

That's very good. We get a lot of questions from investors this morning on this. I just want to clarify. My second question is North America. So an uptick through the quarter last time. And now when I checked in with you guys, I checked in with Louise this morning, it seems like North America on the pure general engineering side is slowing a bit, and I'm talking sequentially here. Would you link this to the general bottlenecks in North America that we hear so much about. Is it weighing on production levels? Or is it something else we should think about?

[Stefan Widing]

It's difficult to pinpoint. We saw a slight sequential slowdown in general engineering in North America in the quarter. I think some of it -- or we believe some of it is related to automotive. As you know, some of the general engineering goes into automotive as well. And then it's fair to assume that the general bottleneck situation is also having an impact. But yes, general engineering overall is actually -- we're quite positive around it. It was just that specific North America a little bit slower in the quarter.

[Klas Henrik Bergelind, Director]

Okay. Quick very final one is on China. It seems like it's just autos still seeing weakness. Was there anything there in China, Stefan, outside autos at the end of the quarter that got worse? And I'm talking -- or in early October.

[Stefan Widing]

No, it's primarily a slowdown in automotive, I would say.

[Operator]

Our next question comes from the line of Andrew Wilson at JPMorgan.

[Andrew J. Wilson, Analyst]

I've just got 2. I'll start with one on the mining side. I'm interested in what seems to be a different message on the supply challenges and the invoicing between SMR and SRP. It clearly seems a lot more difficult in SRP appreciating the businesses are different. But just, I guess, how concerned we need to be that we might see an impact in SMR in terms of the Q4? Are things getting a little bit harder from an invoicing perspective? Or do you think that that's under control?

[Stefan Widing]

I think the main difference between SMR and SRP and that we talk a little bit more about the impact in SRP is simply a matter of size. SMR is a bigger business. They have -- yes, they are present in more locations. They have more factories, et cetera, et cetera, which means if they have challenges in 1 area, they can try to offset it in another in a different way. SRP, if stationary crushers have an issue to deliver a few crushers at the end of the month, there is really no -- they have no way to really offset it. So I don't think the situation is worse or better for anyone. I just think SMR has a little bit more opportunities to manage the situation due to scale and size. So I think that's more of the reason. As for going forward, we don't think that the situation will get worse. But we think we will have to live with the situation we have also for the rest of the year. And then exactly when it will improve, I guess, your information is as good as mine on that.

[Andrew J. Wilson, Analyst]

That's helpful. And then just on the -- and probably just coming back to the auto side within SMM. I guess I'm interested in your talking about kind of flat development year-on-year, which we've seen much better than where the IHS forecast as kind of pitch production volumes? And kind of thinking about that number and also thinking about the kind of future quarters, how -- I guess, simply how good a guide should we think sort of IHS numbers are likely to be for your auto business? Or do we need to think about kind of supply chain and stocking and aspects like that? Just looking for a little bit of, I guess, help in terms of [indiscernible] where that auto business might be?

[Stefan Widing]

Yes. I think historically, it has been a good guide when the numbers have moved much slower, so to say, or with bigger -- smaller changes. I think we have seen all the way from the start of the pandemic that there is more lag in the supply chain sort of a rubber band than we might have seen historically simply because of the bigger changes. So over time, I think we clearly must correlate with production data. But from a specific quarter perspective, it can vary.

[Operator]

Our next question comes from the line of Mattias Holmberg of DNB.

[Mattias Holmberg, Analyst]

You've had a pretty interesting lineup of acquisitions in SMM recently. And I'm curious as to how far along you would say that you've come in better positioning SMM towards the structural shift away from internal combustion engines? Sort of will the acquisitions that you've made so far be enough to offset that headwind or perhaps rather how dependent will SMM be for further acquisitions in metrology and CAM in order to have a business that overall will be able to grow faster than, say, underlying industrial production in the coming years?

[Stefan Widing]

I would -- there are really 3 parts to the answer, I would say. First of all, it's actually the acquisitions done in round tools, which is part of the strategy to offset this. But that was not really your question, but I want to emphasize that there is an important part in the core business as well to offset that headwind, which we are very happy with the progress made in the quarter. Then to your question, I would split the answer in 2. We have a target in SMF as we have said now to be at SEK 6 billion by 2025. And we are -- since we upgraded the target after these acquisitions already in a good position to achieve that, we are clearly already seeing that we will be above the SEK 4 billion without further acquisitions really. Up until 2025, just the growth up until the SEK 6 billion organic and through acquisitions will be by far offsetting the headwind from this transition because we have an acquisitive component that's fairly aggressive. If we look at the state in 2025, and SMF being at SEK 6 billion, growing at high single digits organically because that's where we should be with this in these markets. The growth from SMF will more than offset the headwind we will see from that transition in the latter half of the decade. This is, of course, part of the strategy to exactly get into this position. We haven't delivered on all of it yet, but we are in, I would say, very good progress. So from our point of view -- I know not all of you are convinced yet, but from our point of view, we are now in a very good position in terms of managing this headwind. So we feel quite confident.

[Mattias Holmberg, Analyst]

Interesting. One more question for me, if I may. You mentioned some preordering or stockpiling from certain customers or certain segments. Do you see any risk of backlash of this going forward? And in particular, have you seen any such behavior in SMM?

[Stefan Widing]

No, that was not really an SMM comment. It was more on the sort of spare parts side, especially in SRP. I mean also aftermarket in SMR was up 16%. Part of it is because of strong underlying demand, but it might be also there just securing the supply chain since everyone knows the situation globally. I don't foresee a backlash, but I would say if you take SRP, for example, going into next year, the focus will be to maintain order levels at the level they are now. To add another significant growth number on top of it will probably be challenging. So not the backlash but a slowdown in the order growth is probably to be expected in those type of businesses.

[Operator]

Our next question comes from the line of Max Yates at Crédit Suisse.

[Max Yates, Research Analyst]

Just my first question was on the comment that you made about now being the CAM market leader. So I just wanted to understand kind of a little bit around the sort of market structure there and kind of what you think your market share is to make you a leader? Who then maybe sort of 2 and 3 would be in that market, whether they're kind of larger companies with a smaller presence in this market or it would be kind of smaller niche players that were maybe perhaps not aware of? So just a little bit of detail around the market structure, that would be helpful.

[Stefan Widing]

Yes. When we say we are now the market leaders, it is in number of installed seats, which in a way is how present you are with customers. If you would measure it on revenue, we are top 3. But we choose to measure it in a way that makes us the market leader. But it's very even between the top 3, top 4. So a little bit how you measure, you will get to different positions. But market leader in a number of installed seats, top 3 if you take revenue.

[Max Yates, Research Analyst]

And the...

[Stefan Widing]

The other..

[Max Yates, Research Analyst]

Who do you take as the others?

[Stefan Widing]

Yes, the top 4 players are Dassault, Siemens, Autodesk, Hexagon and us. I realize that was 5, so top 5.

[Max Yates, Research Analyst]

That's helpful. And just a quick follow-up. You mentioned the round tool strategy and sort of buying that was a defense against -- or buying into round tools was a defense against the challenges on the traditional auto business. Could you talk kind of a little bit more around that? And the reason I ask is just when I look at some of the sort of larger round tool manufacturers in Asia, they still seem to have quite high auto exposure. So is it just they're exposed to different parts of manufacturing, which isn't affected by the EV transition? Or is it actually the businesses that you're buying have less auto exposure relative to your own? So just to understand that comment a little bit better.

[Stefan Widing]

The growth in round tools is higher than in inserts in general. And it started from our perspective really with aerospace. Round tools is more important in aerospace. It is -- I mean you have a better reach with round tools to machine complex parts. And yes, so to get more exposure into aerospace, that has been an important part. Also in auto, the components and parts needed for EVs are more geared also towards round tools. So if you want to be at the -- successful in auto going forward, we need to shift and extend our product range also more into round tools. And it's a little bit similar reasoning when you want to do more fine components, reach further into the components you machine, round tools is more suitable than insert, which is a little bit more clumsy in that sense.

[Max Yates, Research Analyst]

I don't know whether you would have this kind of figure in mind. But I mean, I think we've kind of quite helpfully before been given kind of the -- effectively for an electric car has about sort of 1/3 of the sort of cutting tool needs of a traditional vehicle. Do you have a figure in mind for kind of how that would look for round tools, if we do so you make a larger acquisition with auto exposure? Whether there would be as many round tool needs in an EV versus a traditional car? Or is it pretty similar? Is it less? I presume it's less negative as you said, than the kind of the traditional tooling inserts, EVs versus traditional cars.

[Stefan Widing]

The normal index we use is 40% in EVs and 110% in hybrids and 100% in ICE. I don't have what you ask for in round tools. So I cannot answer that. We will have to look into it and maybe come back.

[Operator]

Our next question comes from the line of Gael de-Bray of Deutsche Bank.

[Gael de-Bray]

I have 2 questions, please. Firstly, could you elaborate on the slowdown you're seeing in China this quarter? It would be helpful if you could put a figure on the revenue development for SMM as in China in Q3, perhaps including autos and excluding autos? And the second question is on -- well, it's still about SMM. From a strategic perspective, do you think it would make sense to try and balance a bit better the regional exposure of the Machining Solutions business and make it less dependent on Europe? I mean is this something that is on your mind or not really?

[Stefan Widing]

Yes. Thank you. If we look at the sequential development going into china in Q3, we saw a slowdown, as we said, mainly because of automotive, and it was in the low single digits coming from Q2 into Q3. So fairly limited, I would say. But since we usually rely on china for growth, it, of course, had an impact, but low single digits. You know if you want to add to that, Louise. Yes. Go ahead.And it came primarily from auto. I don't have the numbers with and without automotive, but that is what's the main driver. Geographically, SMM, yes, absolutely. It's one of the key initiatives they have is to grow outside of Europe, outside of mature markets in general, but in particular, outside of Europe since they have about 40% of the revenue in Europe, which is why we have seen some of the acquisitions we have seen in the quarter here, we had Yongpu, a very nice acquisition in round tools in China, over SEK 400 million in turnover, good growth, good profitability. Fanar in the quarter, yes, it's in Europe, but it is in the eastern part in Poland, also an area where we want to grow more. We had Miranda Tools end of last year in India, very good development, and one of the reasons our Dormer Pramet brand is growing very nicely in India. So absolutely, increased exposure outside of Europe is a key strategy for SMS going forward.

[Gael de-Bray]

And apart from acquisitions, is there any possibility to invest more organically in some specific geographies?

[Stefan Widing]

Yes. That's ongoing, always something we evaluate as part of the normal business. In some of these regions, though, if you take India, what we can see is an acquisition like Miranda Tools with established routes to market and channels in, let's call it, the fine grain network in India is something it's super hard for us to build organically. I don't think we really could do that. And it's much better to go with an acquisition strategy. You also get a company that sort of from a cost perspective and speed perspective is geared for the local market and have the right products at the right cost level and so on.

[Operator]

Our next question comes from the line of Gustaf Schwerin of Handelsbanken.

[Gustaf Schwerin, Research Analyst]

Two quick ones on the mining side. Firstly, if you could give us the replacement greenfield brownfield split for equipment orders in Q3, it will help more. And then secondly, I'm wondering if you're seeing any indications of softening demand from some of the larger miners on the recent developments we've seen in iron ore?

[Stefan Widing]

Yes. Strong development on brownfield, about 2/3 of the business was brownfield. Let's say, 1/4-ish replacement and the rest is greenfield. So greenfield is still a relatively small or it's the smallest part of the development. So it's extensions, new investments in existing mines and replacements, really, that's driving most of it. I haven't gotten any signals of hesitation or slowdown by the larger mining customers at this point, no.

[Operator]

Next question comes from the line of James Moore at Redburn.

[James Moore, Partner of Capital Goods Research]

I have 2 for Stefan and 1 for Tomas, if I can. Maybe I'll go one at a time. Can I come back to Andy's question earlier on SMM and global automotive. Great that your sales are flat in the quarter, but production, I guess, was down 15 or more percent globally. And nice to hear about your positive momentum into October. I just wondered whether given your visibility and discussion with your automotive customers, you see a delayed pressure that could come into your business after it's happened globally, but still lies ahead.

[Stefan Widing]

In terms of conversations, we have no visibility to that in that sense. But as I said, of course, if the automotive slowdown would persist for a longer period of time, we cannot be at a higher level than the underlying market, that's clear. If it is more of a transitionary slowdown and it will come back in a reasonable time, it's more likely that -- but they will use this as an opportunity to secure their own supply chain. So I think it's all a matter of how long these issues will persist on the component shortages.

[James Moore, Partner of Capital Goods Research]

And if I could ask about SMS. And if you were to look inside the deals in the existing business, what sort of speed of growth are we seeing across CAM 3D printing metrology? Are you sort of broadly growing in line with your strategic targets? Or are we running ahead or a bit behind? How is that looking?

[Stefan Widing]

Yes, I want to be a bit careful. Since as you have seen some -- one of these acquisitions we even closed today. So I mean, we don't have them in our books yet, so to say, but the trading is good in these companies. And I don't have a strong view as of yet on growth versus market growth. But at least current trading is at or above the business cases we put forward when we did the acquisition. So I would say a good momentum in the businesses at least, so which is a positive start. But let's come back to the question when we have had them for a bit longer maybe and can speak a little bit more confidently around the development.

[James Moore, Partner of Capital Goods Research]

And Tomas, you mentioned that the savings programs will come to an end in the next couple of quarters. As we look ahead, the company has always had some form of ongoing productivity. But do you see any additional permanent savings potential as another plan going forward after this one?

[Tomas Eliasson, Executive VP & CFO]

I think it's better that Stefan answers that question. But as you say, there will always be savings programs ongoing. There will always be bigger and smaller activities and productivity and whatever combinations and consolidations and what have you. And I think it's better that you answer that question, Stefan.

[Stefan Widing]

As Tomas said, the current program we have will run into Q1, Q2 next year-ish before most of the activities have been completed. So we are busy executing on that. But yes, as you say, we always have something going on. So we will have to come back to that. But I -- at some point, there will be another program. But exactly when and how much and so on that we will have to come back to when we have done our plans.

[Louise Tjeder, Head of Investor Relations & VP]

Thank you. And now we have to close the Q&A session. There are many questions. We will come back to you for those that have written questions to us. And for the others, please don't hesitate to call IR. So thank you very much for calling in, and have a nice day.