Sandvik AB

STO:SAND

Earnings Call Analysis

Mixed Quarter with Resilient Performance

Sandvik's third quarter showcased a mixed demand landscape. General Engineering and Infrastructure volumes moderated, while Aerospace remained buoyant and Mining demand was steady. Despite a slight decline in total order intake by 1% (organic decline of 7%), the company achieved an 8% increase in total revenue, with a 1% organic growth. Adjusted EBITDA rose by 7%, yielding a margin of 20.1%, consistent with the previous year. Adjusted profit was SEK 3.9 billion. Structural savings are on target, with 40% of expected annualized run rate savings realized. Positive developments include continued double-digit growth in Digital Mining Technologies, driven by automation and software solutions, and the strategic bolt-on acquisition by Mastercam. Amid regional variability, with Europe down 8%, North America down 11%, and Asia down 13%, focus segments like Aerospace experienced growth, and General Engineering observed some destocking, particularly in Europe. While the Mining division's order intake dipped due to challenging comparisons and timing, its high backlog mitigates concern, with overall business growth still positive.

Robust Financial Performance with a Strong Cash Flow

The company demonstrated financial resilience with a robust quarter, marked by a strong free operating cash flow of SEK 5.8 billion and a cash conversion rate of 95%, showcasing efficient capital utilization. Net debt reduced sequentially to SEK 38.4 billion due to this solid cash flow, further improving financial leverage with net debt over EBITDA dropping to 1.3. A strategic reduction in inventory by SEK 400 million reflects a deliberate focus on working capital efficiency.

Future-Focused Capital Expenditure and Cost Structure Optimizations

Capital expenditure (CapEx) for the quarter stood at SEK 1.3 billion, in line with the company's revised guidance, attributed to reasons emphasizing future growth and operational efficiency. In tandem, the company carried out a structural program in Finland transitioning skill sets from conventional diesel equipment production to electric and intelligent equipment, indicating a pivot towards innovation and market foresight. This program involved some furloughs but was generally driven by a reskilling initiative, an investment in human capital that will likely pay dividends as industry demands evolve.

Steady Demand in the Face of Market Uncertainties

Despite the challenges in the market, including uncertain macroeconomic conditions and fluctuating volumes, the company maintained solid leverage with a 20.1% margin, demonstrating the efficiency of its business model. The firm believes it is well-equipped to handle upcoming short-term market volatilities due to its strong market positions and focus on strategic growth areas like Digital Mining, Manufacturing Software, and Surface Drilling.

Market-Specific Developments and Outlook

The company approached market challenges with caution and noted a double-digit impact on ground support within the quarter due to price adjustments linked with falling steel prices. This was a transition reflected in organic growth figures but did not affect margins. In terms of market demand, the company experienced varying growth rates across different sectors, with a particularly strong aftermarket performance of 20% growth in the previous year. A conservative future outlook anticipates a normalization to mid- to high single-digit growth rates, taking into account potential pricing and cost fluctuations.

Earnings Call Transcript 2023-Q3

[Louise Tjeder, executive]

A warm welcome to Sandvik's presentation of the Third Quarter Results 2023. My name is Louise Tjeder, Head of Investor Relations. And beside me, I have our CEO, Stefan Widing; and CFO, Cecilia Felton. Stefan and Cecilia will start with the presentation and take you through the highlights of this quarter. And then we will, as usual open up for questions. And with this, I hand over the word to you, Stefan.

[Stefan Widing, executive]

Thank you, Louise. And also I would like to welcome you to this third quarter report in 2023. We start with a summary of the quarter. And when we summarize the quarter, we definitely see a mixed demand picture this quarter. We do see moderating volumes in our General Engineering and Infrastructure segment. But we still have a very positive momentum in Aerospace and the underlying demand in Mining is continuing to hold up well.

Total order intake declined by 1% and organically we declined by 7% in the quarter. Total revenue growth was 8% and organic growth was 1% in the quarter. We do believe in this context that we show strong resilience in the quarter. Adjusted EBITDA is up by 7%, corresponding to a margin of 20.1%, which is the same as we had in prior year. We also see good execution of the structural savings program that we announced in May of last year, and we are now at 40% of the annualized run rate savings that we expected, which is according to plan.

Adjusted profit for the period amounted to SEK 3.9 billion. We also continue to execute on our shift to growth strategy. Great to see momentum in some of our strategic focus areas. We, for example, continue to have double-digit growth in our Digital Mining Technologies division, driven by our automation and software solutions. We did another bolt-on acquisition on the manufacturing software space with possibility, which is an acquisition that was done by Mastercam, one of our business units.

We also continue to see good pace on innovation and launched several new exciting products in the quarter. One of them we always highlight, and this time we choose this one. It's a heavy jaw crusher, and it's fully electric crusher. It can also be driven by, for example, green diesel or hydro vegetable oil. But it can also be run fully electric, and we normally talk about electrification in underground mining. So we wanted to highlight this as an example, that the same transition is actually happening also on the surface and also our mobile crushing fleet. Just like when it comes to electrification in underground, the electrification here has other benefits than just sustainability. For example, it leads to increased productivity for our customers.

So an important step in the journey of electrifying also our mobile crushing fleet. Looking then at the market development. First, starting a little bit with the regional view. Europe, minus 8%. And to highlight where we are on the cutting tool side since I know that's a particular interest, Europe was down in the mid-single digits from a cutting tool point of view. North America, minus 11%. And on the cutting tool side here, we are down 2%. So North America holding up a bit better than Europe. Asia minus 13%. Here, the 2 major markets, China down 10% on the cutting tool side and India is flattish. Then we have the mining markets, which, as you know, can vary quite a bit between the quarters.

Taking a segment view. Mining, we continue with all the arrows sideways. So we continue to be stable at a high level. In this particular quarter, we did report a negative organic order intake on the Mining side due to a very tough comparison in some parts of the business, but also due to timing of orders. But we continue to believe that the demand here is holding up as it did in the first half of the year. General Engineering is negative, and this is maybe the sort of the weakest part of the business right now. It was down in the low double digit overall, and it's down in all the regions. This is maybe not surprising. General Engineering is typically correlating very well with PMI, for example, which has been down now for in parts of the world for over a year. So in a way, we have been expecting this to happen sooner or later.

On the Automotive side, it this flattish development, but volume development is a bit down. It's a mixed picture. North America actually holding up very well with growth in the low double digits, so also volume growth. Europe is up in the low single digits, which means slightly down on the volume level. Asia or China is negative in the quarter, however.

Energy smaller segment, mixed picture, down overall, up in Europe, quite a lot down in North America because we had a really big order in energy in Q3 of last year, and Asia also down.

In Energy, since it's a fairly small segment, it can vary a bit between the quarters. So we shouldn't read too much into these figures, but overall downward trend is more correct then. Infrastructure continues to be weak. It's been weak now for quite some time. The main difference there is that we now see Europe as being flattish. That is mainly because we are now meeting easier comps, where Europe was down already a year ago. Whether this is a sign that we now have bottomed out here remains to be seen, but at least it's a small step in that direction.

Aerospace, very positive, as I mentioned already, with good growth, both in Europe and North America and a bit more flattish development in Asia. The other segments follow quite closely to General Engineering at this point, so not so much to add to that comment. Maybe we should also mention that in General Engineering, besides the underlying demand, we are also seeing some level of destocking, in particular, in Europe. So that might also eventually become more of a positive when we reach more of the underlying demand in that segment.

Looking then at order intake and revenues. We have a book-to-bill below one in the quarter, in particular driven by the Mining business already mentioned. We are, of course -- if we look at this graph, you see the black trend line well above the blue line for over 2 years. That's another way of saying that we, of course, have a significant backlog in the Mining business. So that's also why we are not so concerned about the weaker order intake we had in this particular quarter.

We have also said now for a few quarters that Mining is stable at a high level. It means that we are now starting to meet the high levels from previous periods. And with the lumpy order intake that we can have in this business, it also means that some quarters will be negative while others will be positive. So maybe it looks a little bit more dramatic than we think it is.

This is another way of looking at it, orders and revenues, where we see the order intake now than a negative organic order intake in the quarter. Unfortunately, our 9 quarter streak of double-digit revenue growth has come to an end. So now we will continue to focus on the 11 quarter streak of organic growth that we have still had. Let's hope that, that can continue. So still, I think overall, good performance when it comes to growing the business during this period.

Coming to EBITDA and the development. We are happy with the results this quarter. EBITDA is up 7% versus prior period, margin of 20.1%, absolute number, SEK 6.3 billion. We see strong resilience, positive impact coming from pricing. The savings program, as we mentioned, also general sort of cost cautiousness initiatives across the business. We also see freight costs starting to come down, which is helping us. We did have 60 basis points dilution from FX and 10 basis point dilution from structure. So if we combine this with maintaining the margin at the same level as last year, you have an underlying very solid operational leverage, which Cecilia will talk more about in her session. Rolling 12 months, EBITDA is at 20.2%. So all numbers here point to being within our target range.

Coming to the various business areas, starting then with Mining and Rock Solutions, demand, as already mentioned, held up well, driven in particular by the aftermarket. We do report minus 3 on the aftermarket, driven primarily by 2 things. One is a very high comparison with 20% growth in the prior period, driven by some very good aftermarket deals that we had.

On top of that, we have a negative impact this quarter from alloy effects or metal prices, in particular in ground support. If we normalize for this, the aftermarket business continues to trend at the growth rate, albeit at a lower growth rate than we have had in the past.

So order intake declined by 5%, of which organically 7%. We had no major orders in the quarter, which is fairly rare that we don't have, but they can -- the timing is always a bit uncertain with us. On the margin side, we had a very good development, 21.3%, up by 1 percentage point especially good considering we had 100 basis points dilution from FX effects. Pricing contributed positively. Reduced freight costs as well and of course, a volume leverage as well coming from the increased sales. Some effect also coming through from the savings programs of SEK 10 million.

Also here, we have done some important product launches. I want to highlight here the new rotary drill rig, DR613i, which is a new size class for us for an automated rotary drill rig, in particular, suited for high altitude open pit Mining, which is part of our strategy to grow market share in Surface Mining.

Rock Processing. Also here, we see demand holding up well on the Mining side, but offset by a very negative picture on the infrastructure side, really across all the major regions. Here, we're also seeing negative dynamics coming from, for example, overstocked dealers in North America as one example, something we're working through. Total order intake growth was 29% even though the organic intake declined by 8%.

This is, of course, the dynamics coming from the Schenck acquisition. Schenck is performing really, really well and is, of course, 100% Mining business. If we would add the organic, and they, of course, reported now fully in structure. If we add the organic growth of Schenck to the organic growth of the rest of the business, overall, SRP has organic growth on the order side in the quarter.

And that says a little bit on the dynamics between Mining and infrastructure as well as how well Schenck is performing in the quarter. We also booked a major order in Schenck of SEK 150 million that we count as a synergy order, meaning it's an order that neither Schenck nor Sandvik would have gotten unless we had joined forces. So it's a good validation of the strategy there.

The margin in SRP was on the weaker side. It was slightly better than Q2 at 14.1%, but lower than last year and lower than where we want them to be. Of course, lower volumes is impacting, but also, as we have talked about now for a few quarters, both integration costs and IT investments are impacting the margin negatively. IT investments should now be over in that sense, and we are nearing the end of the integration cost headwind.

So we expect this to continue to improve. So we really believe that Q2 was the trough, and we should improve -- continue to improve here from here. Also here, we have a restructuring program benefits of SEK 13 million, but we had a negative impact coming from currency of 50 basis points and we have already talked about the electric jaw crusher.

Manufacturing and Mining -- Manufacturing and Machining Solution. Finally, talked a bit about that dynamic with General Engineering being weak, down in the low double digits overall, stable in Automotive and strong in Aerospace. Total order intake declined by 2%. Organically, we are down 8%. Behind that number, though, cutting tools declined in the mid-single digits. So that's more the underlying performance of the cutting tool piece.

That also includes the 1% negative from working days. But if we take out the price effect, it means that the volumes in cutting tools are down around 10% in that neighborhood. So it's a significant volume decline. Software, though, increased high single digits, unfortunately, not yet big enough as part of the business to have a material positive impact.

Then we also continue to see a very negative impact from the powder business. Powder, just to explain that a bit more, is very early in the supply chain for our customers. So they usually see bullwhip effect when demand pictures change in both directions. We come from a situation last year and in Q1 of this year where customers played large orders to secure supply. Now this has reversed fully so customers are, in some cases, both overstocked and have already placed orders for future demand. So we see a very low demand picture on the powder side currently. And that's usually what we see at this phase in the cycle but that pulls down the overall SMM number. So that's why we want to highlight where the cutting tools and the Software more specifically.

The daily order intake, first part of October has been stable compared to the third quarter. I want to qualify that a bit more. The third quarter is seasonally a lower quarter because of vacation periods. So this comment is taking that into account meaning the underlying market is stable versus Q3, which in reality means that it's slightly better than Q3, if you take the seasonality into account. Of course, also Q4 has seasonality. So if you want to try to model this in, you need to take also seasonality into account for Q4, but this is as much as we can say currently about where the demand is here and now.

Given the volume drop we have in the business, we are really happy and proud about the way they have protected the margin, 20.9%, a bit down from prior year, but leverage that is, I would say, better than we had said that they should have if they perform well. So very solid margin resilience on these lower volumes. Of course, the structural savings program that we announced is now starting to come through with a very good timing. So with SEK 56 million in the quarter, that is part of helping this performance in a good way. And so even if that was not driven by volume, the timing of the effects are coming in with a very good timing. Also 30 bps dilution from FX here.

I mentioned the Postability acquisition already. I also want to highlight some new products here. Coromant launched the CoroCut2 product. These are new in-search for parting and grooving applications. It's an area where some of our main competitors, or at least specifically one of them have had a stronghold, and releasing new good products in this area is a way for us to not only defend but also hopefully gain some market share in that particular application. I will come back with conclusions and some Q&A. But first, I'll let Cecilia take you through the details.

[Cecilia Felton, executive]

Yes. Thank you, Stefan. All right. So let's take a look at the numbers in a bit more detail. And as usual, let's start with the table at the top right-hand corner. Here, you can see that organically, orders were down 7%, revenues with one -- up 1%. Structure and Currency contributed with 3% on both orders and revenue and that brings total order intake growth to minus 1%, and revenues were up 8%. Adjusted EBITDA, as Stefan mentioned, increased 7% to SEK 6.3 billion. We're very pleased to see the good margin resilience demonstrated in the quarter, and the EBITDA margin coming in at 20.1%, so within our target corridor.

Net financial items increased to SEK 760 million, and I will go through the year-over-year developments in a bit more detail in a few minutes. Tax rate, excluding items affecting comparability came in at 21.9%. Normalized tax rate was 23.9%, so in line with guidance. Net working capital in relative terms, 30.5%. And cash flow was strong in the quarter at SEK 5.8 billion corresponding to a cash conversion of 95%. Returns, 16.5%. And adjusted EPS increased slightly to SEK 3.14.

If we continue with a bridge then and starting with the organic column, you can see that revenues grew by SEK 341 million and EBITDA by SEK 242 million. And that gives a leverage of 71% for the group. And here, we are very pleased to see that the SMM leverage was minus 29%, so demonstrating very good margin resilience. And we were also pleased to see that SMR leverage was also very good at 45%. And that gives an accretion of 0.6 percentage points, so offsetting the dilution from currency of minus 0.6% and structure, as Stefan mentioned, was slightly dilutive, almost neutral to the margin, and that brings us to EBITDA margin of 20.1%.

We also see good progress in realizing the savings from the restructuring program announced last year. Here, as you know, the total targeted savings are SEK 785 million. And in this quarter, we realized SEK 79 million, and that corresponds to an annualized run rate of 40%. And here, we've previously communicated that we will reach around 50% by the end of this year and full run rate savings towards the end of next year. So we are tracking according to plan.

If we continue down in the P&L, then looking at net financials and starting with the interest net, which is also where we provide guidance. Here, you can see that on a year-over-year basis, it increased to SEK 374 million. That's driven by the higher interest rates. Sequentially, however, so Q2 this year into Q3, the interest net came down slightly driven by lower borrowed volumes. Then at the bottom here, you have FX and other asset classes, and that is the temporary revaluation of our hedges both for Electricity hedges and also Currency hedges on orders that we have not yet invoiced. And eventually, these will net out to 0. In this quarter, the impact was minus SEK 300 million. And last year, we had a positive impact of SEK 112 million.

Then looking at the tax rate. Reported tax rate was 22.1%, if we exclude items affecting comparability, so basically the M&A costs. it was 21.9%. So still relatively low. And this is driven by a tax refund that we received in India relating to a prior year. Excluding that, the normalized tax rate was 23.9%, so in line with guidance for the year.

If we continue then with net working capital, you can see that in relative terms, net working capital increased to 30.5%. In absolute numbers, you can see in the graph on the left, net working capital came down slightly. And we had an inventory volume reduction of SEK 400 million in the quarter, and we have now had 4 consecutive months of inventory levels slowly and gradually starting to come down.

Free operating cash flow, as you can see in the graph here, it was a strong quarter, SEK 5.8 billion, 95% cash conversion. And on a 12-month rolling basis, we are continuing to be trending upwards. We're now at 80%. And then if we look at the year-over-year development, you can see that earnings were up. We had a much more -- a much higher net working capital impact last year, whereas CapEx levels were slightly higher this year.

And net debt then and financial net debt came down sequentially to SEK 38.4 billion, driven by the strong cash flow. And as a result, financial net debt over 12 months rolling EBITDA also came down to 1.3. Capitalized leases increased slightly sequentially in the quarter whereas the pension liability was reduced somewhat driven by the discount rates. And as a consequence, net debt landed at SEK 46.2 billion.

Looking at outcome versus guidance. The currency effect came in at plus SEK 31 million. CapEx, SEK 1.3 billion. Interest net minus SEK 0.4 billion, and normalized tax rate also in line with guidance.

Looking ahead then, both at the fourth quarter and the full year. Here, we've revised our CapEx guidance, and there are 2 reasons for this. Firstly, SRP has acquired a foundry in India. And to be compliant with IFRS accounting rules that will be treated as CapEx as opposed to an acquisition. And then on top of that, we have some additional costs related to the ERP rollout. Currency, we expect at minus SEK 150 million for the fourth quarter. The interest net, we revised downward slightly. We're now guiding SEK 1.6 billion for the full year and the tax rate were left unchanged. And with that, I will hand back over to you, Stefan.

[Stefan Widing, executive]

Thank you, Cecilia. So if you conclude, we believe we have shown good execution and strong resilience in this quarter. And we believe this is one more evidence of the transformation that we have been making and are making as a company. So despite moderating volumes, we see solid leverage and a strong cash flow in this quarter. We have a margin of 20.1%, which is within our target range.

We continue to execute on our shift to growth priorities. Done a launch-term important innovations in the quarter. We have done one more acquisition that strengthens our CAM offering, and we continue to see good momentum in our strategic growth areas, such as Digital Mining, Manufacturing, Software, and Surface Drilling.

We believe that we might continue to have uncertain macroeconomic development ahead, but that we are well equipped to handle any sort of short-term headwinds that we might have ahead of us. And we believe we have shown that also in this quarter and once things turn upwards again, we believe that our strong market positions will support us in capturing the long-term structural growth that we see ahead of us. Thank you. Let's go into Q&A.

[Louise Tjeder, executive]

Thank you, Stefan and Cecilia. It's time for the Q&A session. [Operator Instructions]. So operator, please, we can take the first question.

[Operator]

[Operator Instructions] Our first question comes from the line of Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I'll have 3, but they are quick. First one, can you comment to what extent you have perhaps started to underproduce in SMM and if that has had any impact on the margin or if you do expect to do so? My second question may be on SMM, if you can comment on pricing, now that the volumes on cutting tools seem to be decelerating if you see any pressure there? And the third point, just to clarify your commentary on Mining on the orders, on the timing of large orders and the impact that it have had. Do you expect some of the large orders to flow into Q4? Or that was just more a comment regarding the past had large orders and now there is no large orders just clarifying that.

[Cecilia Felton, executive]

Should I start with the first SMM question in terms of under-absorption. So inventory volumes came down in the group. All business areas contributed. SMR had the largest contribution, but there was also some in the SMM business. In terms of under-absorption coming from this, it's a very limited impact, we would say. And I think that's visible also in the leverage, which is minus 29% for SMM, it was minus 39% for SMS. So it's handled to all the other actions that we are taking to address lower volumes.

[Stefan Widing, executive]

Yes. I know historically, Sandvik or we just talk about absorption, under-absorption, maybe more. The way we try to handle this now is to try to avoid getting into a position where we have to pull the brakes hard on the production and inventory side because then you might indeed see under-absorption. Now SMM is managing it through a normal inventory management, so to say. So we hope to not have to talk about it if I phrase it like that. It should be handled in a better way. .

On pricing, no, I mean, we see our sort of pricing and pricing among in the industry in general has been fairly similar which means that we don't really see -- of course, there is always pressure on price. There's always a customer that wants to negotiate and trying to push down. But we are confident that we can hold on to the pricing we have and there will also be a price revision beginning of next year because indeed, inflation has not gone to 0. So that's something we will continue to manage.

But next year, it will more of a normal kind of pricing revision than maybe the exceptions we have had in the past. But we intend to continue to be holding on to pricing in relation to the value that we are bringing to our customers. On Mining, what I wouldn't do in terms of timing of orders take everything you thought we would have in Q3 and put it in Q4, it's obviously more complicated than that. What we're saying is that in some quarters now, if we are stable at the high level, in some quarters, we will have a -- might have a positive surprise. In one quarter, we might have a negative surprise. Overall, we believe the market is stable. And then exactly how they land, if suddenly you get a super good quarter or not, that's just speculative, so to say.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So the comment here on October, we obviously had that tough compare from the preordering last year had that the price increases in the third quarter. When you say flat October, is the comp already much easier in October? I'm trying to gauge the year-over-year effect from your comment. And then on the destocking, you talk about, what's your assessment here on how long you think this can continue for? I'll start there.

[Stefan Widing, executive]

When we talk about the beginning of October, it's not a comment that is in relation to last year. It's more of a, let's say, daily order intake, daily pace point of view with a sort of sequential view so to the extent that...

[Klas Bergelind, analyst]

Year-over-year comp?

[Stefan Widing, executive]

Yes. but so what it means is, indeed, last year, we were supported in Q3 a bit by preordering since we had price increases in some divisions, October 1. And which also meant that we had a slightly negative impact then in Q4, especially in the beginning. And so that compare will, of course, reverse a bit now in Q4, so it should be slightly supportive, but it is not factored into the comment on a stable start of October.

[Klas Bergelind, analyst]

Is there a technicality on [indiscernible] model it, but...

[Stefan Widing, executive]

Yes. Yes. How long will the destocking continue. Yes, that's a very good question. I wish I had an answer to that. I think we can put it into different buckets. One is our direct customers destocking, which is done with our distributors. I've said always that that's fairly limited because obviously, we have a big portion of direct sales and our distributors aren't stocking that much.

But in Q3, we have noted in Europe, in particular, in Germany, we have a slightly higher share of distributor sales that it did have a bit of a negative impact. That should be very short lived, so to say, because, again, they don't have that much -- they don't carry that much inventory.

So I don't know it was only a quarterly impact or it will be one more quarter, but at least it shouldn't leave for that long. The more difficult question, I think, is the broader destocking in the overall supply chain, our customers' customers that we have very low visibility to. You probably have a better insight than me in various industry segments where that might be. But yes, so I don't have an answer to that.

[Klas Bergelind, analyst]

Okay. My second one is on Asia and China in SMS. So to what extent have you seen any improvement into October? You obviously said that October is slightly better for the whole division when we take into account seasonality, slightly better and it's only 2 weeks. I appreciate this is not a trend at all. But have we seen anything in China that would sort of point of stabilization?

[Stefan Widing, executive]

Yes. It's a tricky question because the prebuy effects that we talked about, they were the largest in China last year because we have quite a lot of distributor sales there, which means that September of last year had strange dynamics from that effect. So we did see a more positive development in September in China, but I cannot really say how much of that is underlying versus these more artificial effects. So if the glasses have full, yes, it was more positive towards the end of the quarter. But I don't draw any conclusions from that yet. I would like to see a full quarter with a more positive China before I think we can start to be positive for. That's my view. It's too much uncertainty.

[Klas Bergelind, analyst]

Very quick final one on Mining looks to be stable still. We saw the Finish press commenting on your layoffs, but I just wonder if you could confirm if so as part of the previous cost announcement in 115 people? Or do you respond to any incremental demand weakness somewhere?

[Stefan Widing, executive]

Yes. What you saw in the press in Finland, that was related to the structural program we have talked about here that was executed in Tampere, and that had primarily to do with the shift of skill sets because we're moving significant part of the production from diesel equipment to electric and also from what, let's call classical equipment to intelligent equipment and different skill sets, and it's a reskilling primarily.

Then there was a part of that, that is also a little bit of furlough, which is more temporary. But we have talked about the inventory here as well. So regardless of end user demand, we are trying to take down inventories, which might low slightly, lead to slightly lower production rates in some factories as well to manage the inventory levels. Other than that, again, we believe the demand situation is stable at a good level.

[Operator]

The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

It's around an aftermarket on, I guess, SMR but SRP as well obviously down in the quarter and kind of explain the reasons why. But you also alluded to sort of a return to, I think, was around sort of normal growth rate? And I think we've wrestled a little bit with this over sort of the last couple of years where the growth rates have been very, very strong. And if we look at kind of strategically what you've been doing in the shape of the market, what sort of level do you think sort of normal is?

I mean, is it the kind of mid- to high single digits. And if you can give us a little bit of idea of kind of pricing assumptions within that? Because I imagine that's been a help over the last couple of years. And my second question, it's kind of related. Just to clarify, I think you made a comment around metals prices making a difference in terms of the growth rate in the Q3. Can you just -- maybe everybody else knows, but just to clarify exactly what the impact of that was because it's something I remember mentioning previously, specifically on SMR.

[Stefan Widing, executive]

Yes. Thanks. I can start with that one, the last question. So in ground support, in particular, which is a sizable business. It's one of our biggest divisions today. The raw material -- I mean, it's basically steel. So in cost of goods sold, raw material content is a very, very high portion. So they have in their contract rise and fall clauses. That is based on the price of steel basically. It's a very similar like what we had in SMT in the past when you follow that. .

So it means that now when steel prices have come down, they also lowered their prices accordingly. So it has no real margin impact, but it shows us on the organic growth line. So that had a negative impact in the quarter. I don't have the -- maybe we could come back to that specifically. It had a double-digit impact on ground support itself.

So I would imagine this may be around -- yes, we will come back 2% to 4% on aftermarket numbers. So that's that. And that's a very sort of a temporary as you just go through the price revision there.

Then I also mentioned yes, that we had a very high comparison after markets in general with 20% growth last year. What is normalized? I think your guess is quite good, I think mid- to high single digits. I think it's difficult to be more specific than that. It used to be in the high single digits.

Now we come off a period with very high growth rates. So that's why I may be a bit more cautious, simply because I think we, ourselves think this is we are at a very high level. So we don't want to assume that this will just continue sort of in perpetuity. So I think mid- to high single digit is a good estimate. And part of the uncertainty is pricing, as you mentioned. I think we typically assume quite normal pricing here, which is sort of inflationary compensation type pricing. That's what I would assume.

[Andrew Wilson, analyst]

Just to clarify, just on the first question around the impact of the metals prices. Is that going to be a one quarter impact? Or is that going to cycle through the next few quarters, assuming that steel price remains where it is kind of onetime reset?

[Stefan Widing, executive]

It's not a one -- we actually had some of this impact also in Q2, but we're sort of sliding into it. So it's not a one quarter impact. It's something we will have to enjoy. I haven't actually looked at how the steel prices have moved in that way. So I cannot give a prediction, but it's something we have to go through.

[Operator]

Our next question comes from Magnus Kruber from Nordea.

[Magnus Kruber, analyst]

A couple of questions from me and following on to Andrew's question there. Could you help us a little bit on how much tailwind we might have had from that metal price effect over the past 4 quarters or so it could help us a little bit how to think about it going forward?

[Stefan Widing, executive]

I'm sure we can, but I think I have to refer to IR to come back to you on that.

[Magnus Kruber, analyst]

And SMS, you have already given some comments around how the end markets grew there, but could we as go through with them for clarity? Organic growth rates.

[Stefan Widing, executive]

Absolutely. My favorite. Let's go through the aeros, yes. No, but let's take them one by one. If we start with aerospace, which was the most positive one, overall, high single-digit growth, so also volume growth. North America, the most positive with, I would say, solid double-digit growth. Europe, mid-single-digit growth, and then China, low single-digit decline. .

Europe is growing a little bit less than North America. It's a dynamic where Europe started to accelerate earlier and North America has been lagging and it's in relation mainly to the main customers in those 2 regions and how they have been going from COVID. So that's the dynamic there.

Then looking at automotive, flattish development overall, strong North America, low double-digit growth. Europe, low single-digit growth, so slight volume decline. Here, we might come -- here, I would maybe refer back to some of the weakness we saw in distributors and so on also in Germany.

China, weaker. High single-digit decline in Automotive. General Engineering, the biggest segment then is also the weakest one, low double-digit decline overall. North America fared the best, with low single-digit declines only in the [indiscernible]. Europe and China, low double-digit declines. So significant volume declines in General Engineering.

Energy, finally, the smallest one. Down overall, but some very specific dynamics, as I said, the large order in North America last year meant that the decline was in high double digits this quarter, while Europe was up in the low double digits. China was also slightly down. So that's the most important, I think.

[Magnus Kruber, analyst]

And just one final one. Could you talk a little bit about the dynamics you see on the demand on the equipment side within SMR between larger miners and emerging new ones, please?

[Stefan Widing, executive]

Yes, I don't have -- what we can say this is if we look at the CapEx guidance and projections, the major miners have a slightly more positive outlook. Well, the small, medium-sized miners have still a growth, but it's more low single-digit CapEx growth where the major miners have maybe mid- to high single digits growth projections. .

We believe this is what we -- our understanding is this is mainly driven by financing where the smaller miners have more difficulties with the financing costs because of the higher interest rates. They are maybe a little bit more careful with CapEx investments in this environment.

[Operator]

Our next question comes from Sebastian Kuenne from RBC Capital.

[Sebastian Kuenne, analyst]

I have a follow-up on the momentum in Mining CapEx. I get the impression that the electric Mining equipment business has lost some momentum. Maybe you can give some more color on that one?

And then secondly, Schenck seems to have developed much stronger than anyone anticipated. Could you give us an indication of the current margin contribution and pricing momentum for Schenck?

And finally, a question on net working capital. I'm a bit surprised that it's still higher than 30% of revenues given that the new equipment orders are coming down so much. Are there any specific measures that you currently take to reduce net working capital? And what is your target in the next 12 months?

[Stefan Widing, executive]

I'll take the first 2. On Mining CapEx on electric equipment. Well, for us, order intake related to electric equipment for load and haul in Q3 was in the high teens, which we think is a very, very solid number, takes the trajectory that we have in this year means we should be definitely a good step up from last year, where we were around the low double digits. .

I do agree, maybe but I think it's more project timing related that in some -- we have had a couple of bigger deals coming through and now there's not been sort of bigger deals coming through. But again, I think it's more timing related. They are not that common yet, the larger electrification equipment orders. So you can have a quarter or 2 quarters where there's basically no product rewarded at all in the market while then suddenly you have 2 coming in.

So I wouldn't draw the conclusion that the momentum is slowing down, even though it's been a little bit less sort of communicated lately. But again, 18% high-teens share of load and haul orders in the quarter. On Schenck, yes, I will say, indeed, very strong development. For this year, they are -- I mean we don't have the final quarter yet. But let's say they are more margin neutral to SRP because of integration costs.

But the underlying margin is margin accretive to SRP definitely. So once we are through this year and we start to see and they also have a bit weaker Q1 because of seasonality in Australia with summer in Australia in January. But once we're through this, I think we will definitely see that they are accretive to SRP. So that's very -- I think, very positive. It will strengthen that business or are strengthening that business in a very good way. Yes. And then net working capital.

[Cecilia Felton, executive]

In terms of net working capital, we have an informal target of 25%. And it's [indiscernible] in inventory, receivables and payables look good across the group. And with inventory, in the beginning of last year, it was mainly driven by supply chain challenges. Now especially within the SMR business, it's challenging in terms of outbound logistics. So shipping the Mining equipment, mostly from Finland to our Mining markets in Australia, South America et cetera.

So we are working hard with bringing inventory levels down. We mentioned in Q2 that as an example, we've charted our own RoRo vessel to help address the shortage of RoRo vessels that we see. On top of that, we also have several projects ongoing internally to work with our inventory levels in a more efficient way, both looking through our ways of working, and also implementing new IT systems. So it's both external challenges and then also trying to do what we can to work even more effectively with inventory from an internal perspective.

[Stefan Widing, executive]

I think what we can say is that the very disruptive supply chains we have seen in the past years has also revealed some weaknesses in our processes and systems and that we are also addressing.

[Sebastian Kuenne, analyst]

Yes, that would be my follow-up. So that's basically machinery that's Finish that sits on the ports in Finland or in Australia? Or how do we have to visualize that?

[Cecilia Felton, executive]

Yes, it could be both. So it can be Finish equipment sitting waiting for RoRo vessels to be shipped out to the end markets. We've also had challenges in Australia, for instance, with lack of customs personnel to do the clearance through customs to bring our goods into Australia as an example. So it's these type of dynamics that we are facing.

[Stefan Widing, executive]

And to add to that also in our own workshops in the -- out in the regions once they get a RoRo ship with machines, then the next bottleneck is also our own people to do the customizations for the customers out in the workshops, which is partly because of lack of skilled people really in some of these regions. So it's a multifaceted issue that we're trying to work through as hard as we can.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

Just you've talked a lot today about inventory and sort of the reduction that you're seeing in Europe in SMM.I just wanted to check, the one area we haven't really talked about kind of inventory coming down is across your Mining aftermarket business. And to what degree of confidence can you have that this isn't an issue that may play out over the next couple of quarters with your Mining customers? And is that something sort of we can have confidence on given conversations you've had or visibility that you have on this. So just any thoughts there would be helpful.

[Stefan Widing, executive]

Yes. Yes, I would tie that answer to the previous question we had, because I think on the Mining side, there is an overstocking but it sits in our books because typically, our customers, they expect us to deliver spare parts very quickly and to do that the present close to the mine sites. They don't typically carry very much inventory. They don't have spare engines or hydraulic systems. They expect us to deliver that quickly. And this has been part of the issue where the high demand coupled with difficult supply chains have caused ourselves, our own organization in order to satisfy the customers to overstock close to them out in the regions.

So the good thing with that is, of course, that we haven't sold it. So I don't think we are not really concerned that our customers are sitting on inventory, so it will impact our revenues. That is our problem instead to get rid of that inventory gradually. So we actually sell it. We also have quite a few VMI, Vendor Managed Inventories. So we own the inventory sitting in the customer site, which also gives us very good control and understanding of the inventory levels. So I cannot rule out that there is not a customer somewhere that have bought a few too many spare parts, but we don't think it's a general issue in the same way.

[Max Yates, analyst]

Okay. And just as a follow-up, could I just to be kind of really clear around kind of what ground support is where you're seeing the alloy metal impact? I mean, are we talking about the consumables that go on sort of some of the surface drill bits? Or just to be really clear about what part of aftermarket we're talking about that.

[Stefan Widing, executive]

It's the bars, steel bars that go into the mountain of the rock to support it after the blast. So like every meter you drill, you will have to do like a fan of ground support bars that you put up in -- you drill and then you put them up into the rock, and it can be, everything from simple ones, it can be self-drilling ones or self-expanding ones, very advanced ones. And also, there can also be with chemicals and glue. So all kinds of stuff. But what they all have in common is that it's 100% steel.

[Max Yates, analyst]

Is this the DSI Mining business? Or is this something that you were big in already?

[Stefan Widing, executive]

This is DSI plus the business we had in this space prior to acquiring DSI.

[Max Yates, analyst]

And sorry, if I can just have one really quick follow-up. Just because what you're talking about here, I guess, is the steel price coming down, you naturally have to pass it on the way up and on the way down. Just on things like the consumables, I also assume consumables are quite high steel content products. So is this a dynamic that you're also seeing on your consumables? And if not, why would that be different from, say, the ground support business?

[Stefan Widing, executive]

You're talking about the rock tools, the drill bits and the -- yes, there is, to some extent, on the bars that you use when you drill. On the actual drill bit, yes, they are made out of steel. You could have that effect. But the more on the drill bits, it's much more of a value-based selling with more technology content you have the actual bits made up cemented carbide. We have our own technology. So we can't -- the pricing there is more separated from the raw material content. So you don't at all see it at the same as much as we do on the ground support side.

[Louise Tjeder, executive]

All right. So it's time to close this Q&A session. But of course, if you have any other questions, please contact Investor Relations at any time. And with this, we say thank you for calling in, and have a good rest of the day.