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Sandvik AB
Earnings Call Analysis
Q3-2024 Analysis
Sandvik AB
In the third quarter of 2024, Sandvik reported a challenging yet stable performance against a mixed macroeconomic backdrop. Total order intake remained flat year-over-year, reflecting a cautious business climate. However, there was a slight organic growth of 2%, primarily driven by solid demand in the company's mining and software sectors. Despite these positive signs, the cutting tools segment experienced a dip due to weaker market conditions.
Sandvik's total revenues fell by 4%, underscored by a decline of 1% in organic revenue. At fixed exchange rates, organic revenue growth was a modest 1%. Notably, currency fluctuations negatively affected both orders and revenues, accounting for approximately a 5% impact on the top line. This highlights the importance of monitoring foreign exchange movements for investors looking to gauge future earnings and revenue potential.
The company's adjusted EBITA showed a slight decrease of 7%, yet the EBITA margin remained resilient at 19.4%. Sandvik has implemented effective cost-saving measures, achieving SEK 388 million in total savings during the quarter, which contributed to a bridge effect of SEK 309 million. These savings, part of ongoing restructuring programs, demonstrate Sandvik’s commitment to enhancing operational efficiency.
A critical highlight from the quarter was Sandvik's robust cash flow generation, amounting to SEK 6.8 billion. This figure corresponded to a remarkable cash conversion rate of 121%. Such strong free operating cash flow and efficient working capital management reassure investors about the company’s liquidity and its capability to fund growth initiatives without additional debt.
During the quarter, Sandvik made significant strategic moves, including the acquisition of Universal Field Robots, an Australian firm specializing in mine automation. This acquisition strengthens Sandvik's offering in the automation domain, positioning it favorably within the burgeoning mining sector. Additionally, new innovations showcased at major trade shows, such as MINExpo, emphasize Sandvik’s commitment to enhancing sustainability and operational efficiency in mining through advanced technologies.
Looking ahead, Sandvik maintained a stable outlook for the remainder of the fiscal year. Management expects continued impacts from currency fluctuations, projecting a Q4 impact of minus SEK 250 million. However, they have left full-year guidance for CapEx, interest, and tax rates unchanged, signaling confidence in achieving set financial targets despite macroeconomic headwinds.
In summary, Sandvik's Q3 performance reflects resilience in a mixed demand environment. The strategic direction towards innovation and cost savings, combined with a solid cash position, provides a promising foundation for future growth. Investors should pay close attention to ongoing developments in the mining and software sectors as well as the effective management of currency and cost pressures.
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Ladies and gentlemen, welcome to the Sandvik Interim Report Q3 2024 Conference Call [Operator Instructions] The conference is being recorded. [Operator Instructions]
Hi, everyone. A warm welcome to Sandvik's presentation of the Third Quarter Results 2024. My name is Louise Tjeder, Head of Investor Relations. Beside me, I have our CEO, Stefan Widing; and CFO, Cecilia Felton. We will, as we usually do, start with the presentation. Stefan and Cecilia will take you through the highlights of the third quarter. And after that, we will have time for your questions.
So without further ado, over to you, Stefan.
Thank you, Louise. And also from my side, welcome to our third quarter report in 2024. If we summarize the quarter, I think we see a mixed demand environment. And in that context, we delivered a stable top line this quarter. We see solid momentum in our mining and software businesses, while the cutting tools have been negatively impacted by a weak macro environment.
Total order intake is flat year-on-year and organic growth was 2%. Total revenues declined by 4%, of that organic was a negative 1%. And at fixed exchange rate, the organic revenue growth was 1%. This also shows that we had quite an impact from currency in the quarter with both orders and revenues impacted around 5% on the top line.
We delivered a resilient margin in the quarter. Adjusted EBITA decreased by 7%, corresponding to a margin of 19.4%. We have savings coming through from the restructuring programs in a good way. Total savings in the quarter was SEK 388 million, and that corresponds to a bridge effect of SEK 309 million, as we also had some savings in the same period last year.
The adjusted profit for the period was SEK 3.7 billion. And finally, we also delivered a strong cash flow in the quarter of SEK 6.8 billion. In the light of this, we continue to focus on executing on our strategic priorities. We saw several major order wins in mining and infrastructure, both in SMR and SRP in the quarter. We have been participating in 2 significant industry trade shows in the quarter. MINExpo, which is only held every 4 years and IMTS on the industrial side, which is held every second year. And on those trade shows we have showcased some new and exciting innovations.
We also announced the acquisition of Universal Field Robots, which is an Australian company strengthening our mine automation offering further. If we go a bit deeper into one of the innovations we launched in the quarter, this was showcased at MINExpo, and this is a trolley solution for underground trucks. What is unique with this solution is that it's built on our BEVs, meaning it's the same machines where you can swap the regular BEV battery for a battery with a trolley solution, making the flexibility for our customers big in this context.
What is also unique with this solution is that the trolley solution can fully provide the energy needed to operate the machine, which means that you always have the flexibility of a fully charged battery when you leave the trolley solution. This is also important for us in terms of flexibility when it comes to supplying our customers with what they desire during this transition. So we now have diesel machines, diesel electric machines, BEVs and trolley electric, if that is what you prefer.
Going into the overall market development, starting with the regions. Europe declined by 6%. From a cutting tool perspective, Europe was down high single digits. North America, up 2%, cutting tools down mid-single digits. Asia down 6%, and here, China cutting tools was down mid-single digits as well. Then we have Africa, Middle East, Australia and South America, mainly driven by our mining business that were all up in the quarter.
If we take a segment view, we continue to see a stable demand in the Mining business, especially strong in the aftermarket, which continued to grow double digits. We do continue also to see a little bit of caution on new equipment sales as we see some customers preferring to prolong the life of their existing machines versus buying new machines. This, of course, helps our aftermarket business, but also is slightly negative then for new equipment sales.
General Engineering, very correlated to PMI, which, of course, has been quite negative in the quarter, and unfortunately, sequentially trending downwards versus where they were in Q2. Here, we have Europe at 45%, North America is 47% and also China below 50%. Overall, General Engineering was down high single digits, primarily impacted by weak Europe, down in the low double digits. North America and China were slightly better, both down low single digits.
Infrastructure has continued to be weak. Just like last quarter, we do see some more stability in North America. We can also note that we had some major orders on the Infrastructure side this quarter, which helped, for example, our rock processing business. Automotive, which is maybe the biggest disappointment, I would say, in the quarter, overall down in the low, I would maybe say, low double digits, particularly driven by Europe, down in the low double digits. North America, more stable, down in the mid-single digits, while also China was weak, down in the high single digits.
Aerospace stable in the quarter, underlying positive momentum in aerospace. We see that in Europe, which was up high single digits. In North America, we have noted more of a stable development, slightly down even. And this is driven by some temporary issues related to, for example, strikes in -- that we have seen in North America in the period. Asia was negative with Aerospace in China down double digits. If we look at the other segments where we have some of our more positive growth segments, it was stable to slightly down in the quarter. Europe down mid-single digits, while North America was up mid-single digits. Asia stable, with China up low single digits for the other segments.
Summarizing this, we had an order intake in the quarter of SEK 28.8 billion, revenues of SEK 30.3 billion, which is a book-to-bill of 95%. And from a seasonality point of view, it's not uncommon that we have a book-to-bill of below 100% in Q3.
Looking at this from a different perspective, we can see we now have had the past 2 quarters with positive organic order growth after some negative quarters in the past. We can also see that the organic revenue decline has been reduced sequentially now in the past 3 quarters. So stable overall performance, I would say, from a top line point of view, given the macroeconomic situation we are in.
Then coming to the EBITA development, it's down 7%, absolute level of SEK 5.9 billion. This is a margin of 19.4%. Here, we have lower volumes in most of the businesses, but it's partly offset then by both the restructuring programs, but also general savings and contingency measures that we have in the businesses.
And as mentioned in the last quarter, we are offsetting cost inflation fully by our own pricing, but it's a slight dilutive effect in this quarter as well because of bridge effects where we were accretive in the same period last year. And then we also had a little bit of currency accretion of 30 basis points, where as mentioned, we had a quite a big negative impact on the top line, slightly less so on the bottom line, which then overall led to an accretion on the margin.
Going into the business areas, Mining and Rock Solutions. Already mentioned, continued solid demand driven by the high metal prices, converting them to high demands for parts and services, double-digit growth overall in the aftermarket business. We had a very important new major order with BHP in the quarter for the Jansen project, SEK 1.9 billion. We only booked SEK 500 million of that in the quarter. This is the second big order we get for that project.
And if you know about this project, it's a massive investment, and this means that we are now firmly embedded into that project for a long time into the future. Total order intake at fixed exchange rate grew by 7%, and the organic growth was 8%. The margin came in at 20.6%, mainly impacted negatively then by lower equipment volumes while also we had some dilution from the cost inflation with the dynamics I mentioned previously.
Savings came in at SEK 81 million. And also we had an accretive impact from currency of 80 basis points. I mentioned already the acquisition of Universal Field Robots and the new trolley solution. Another important innovation in the quarter was that we now have moved our battery electric drill rigs also to the same battery technology that we have in our loaders and trucks, based on LFP battery chemistry. This increases the performance of the drill rigs and also means that we have the same technology and solution with a modular approach across our different equipments, which is important for us.
Going into rock processing, we see a stable demand in Mining here as well, but continued weak demand in Infrastructure. Total order intake at fixed exchange rates grew by 1% and the same number if we look at it organically. Here, we did receive 2 major orders, I could say 1 in Mining and 1 in Infrastructure. So underlying, excluding the major orders, the development was slightly more negative than driven by the weak Infrastructure business.
Good development, though, on the margin side with an increase to 15.2%. Here, the lower volumes have been offset by savings and structural measures as well as, in general, the lower cost levels we have versus prior year based on investments we did last year. Savings of SEK 53 million and an accretive impact from currency of 10 basis points.
Manufacturing and Machining Solutions, here, we continue to see solid momentum in our software business with mid-single-digit growth. While then the cutting tools declined mid-single digits, and powder solutions improved by double digits. However, on powder solutions, we should note that that's some very weak compares.
From a segment point of view, I already commented that the main negative drivers were Automotive and General Engineering. Total order intake at fixed exchange rate grew by 1%, but the organic outcome was minus 4%. And this difference is, of course, driven by inorganic growth, in particular that we are now consolidating the Suzhou Ahno acquisition that we did out of China.
If you look at the start of October, we see a daily order intake, that's been stable compared to the third quarter, taking normal seasonality into account. So the sentiment is the same, but of course, Q4 in general is with normal seasonality a little bit stronger than Q3 from that point of view. The margin, 19.8%. Here, I would say it's a good performance by the business to manage the volume declines we are seeing in a very resilient way. We have a negative impact from volume still, even though the savings program of, in total, SEK 175 million in the quarter is going quite a long way to mitigate that.
Here, we also have a neutral impact from cost inflation because of good execution on price increases in the quarter. Exchange rate also had a dilutive impact here of 10 basis points. I mentioned our participation at IMTS. We have actually been absent from that trade show for the past years because we haven't seen the benefit. This time, Sandvik Coromant, which is our largest cutting tool division, were back at IMTS with a different concept, where instead of showcasing new cutting tools, they were going with a more solution-based approach, solving our customers' problem, which has been very appreciated at the show.
We also have our software businesses participating and launching several new innovations. For example, integrations between several of our software solutions, such as Metrologic and DCS. I will come back with the conclusions and the Q&A. But for now, first, I hand over to you, Cece.
Thank you, Stefan. All right. So let's take a look at the numbers in a bit more detail then. And as usual, let's start with the growth bridge. Here on the right, you can see that organically, orders were up 2%, while revenues declined by 1%. Structure contributed with 2% on orders and 1% on revenues while currency had a negative impact of 5% and 4%.
So all in all, order intake was flat year-over-year, while revenues declined by 4%. As Stefan mentioned, EBITA came in at SEK 5.9 billion, corresponding to a margin of 19.4%. Net financial items came down year-over-year, and I'll show you a detailed table in a few minutes on that. Tax rate, excluding items affecting comparability and also on a normalized basis was 24.1%, so in line with guidance.
Net working capital came down in absolute terms. Relative to sales, it landed at 30.2%. And we had a strong cash flow in the quarter, SEK 6.8 billion, corresponding to a cash conversion rate of 121%. Returns at 13.5% and adjusted EPS at SEK 2.94. So if we continue with the EBITA bridge then and starting with the organic column, here, you can see that revenues came down by SEK 0.2 billion, while EBITA declined by SEK 0.3 billion, and this then gives a leverage of minus 160%.
As you can see here in the table, this leverage is calculated on fairly small numbers. But also impacted, as Stefan mentioned, by the fact that price versus inflation is dilutive on a year-over-year basis. And this is the result from pricing being slightly ahead of inflation in Q3 last year, whether it's neutral this year. So it's a negative year-over-year bridge impact.
Currency was accretive by 0.3 percentage points, and structure slightly dilutive. And that brings us from a margin of 20.1% last year to 19.4% this year. The restructuring programs are progressing well. As you can see here, we have now realized 88% of the annualized run rate savings for the '22 program. So there, we are running even a little bit ahead of our initial plans. And for this year's program, we have now realized 69%.
If we continue down the P&L, looking at the net financials and starting with the interest net at the top. Here you can see a slight increase to SEK 390 million, and this is driven by the higher yield cost. And then at the bottom, you can see that last year, we had a significant impact in FX and other asset classes. And as you may remember, this came from temporary revaluation on currency hedges on orders not yet invoiced. But as you know, from 1st of January, these temporary revaluations are now booked in equity instead.
The reported tax rate was high in the quarter, 26.4%. But excluding items affecting comparability and also on a normalized basis, it was 24.1%, so in line with guidance. And if we continue looking at the balance sheet, starting with net working capital. You can see, as I mentioned, in the bars here that in absolute terms, net working capital came down sequentially. And this was mainly driven by accounts receivables, but also an impact from currency and a slight reduction in inventory volumes. In relative terms, net working capital remained at 30.2%.
It was a strong cash flow quarter. Free operating cash flow came in at SEK 6.8 billion, as I said, corresponding to a cash conversion of 121%. And if you look at the table here, you can see the year-over-year development, where earnings adjusted for noncash was a little bit lower, but then CapEx was also lower, and then we had a positive contribution from net working capital.
And in the graph, you can see that on a 12-month rolling basis, cash conversion is now at 91%. Financial net debt came down, sequentially driven by the positive cash flow. Capitalized leases declined somewhat whereas the pension liability increased due to lower discount rates. And all in all, net debt landed at SEK 46 billion. And financial net debt over EBITDA came down a little bit sequentially and landed at 1.4.
Looking then at outcome versus guidance. You can see here that currency came in a bit lower compared to what we guided end of Q2. And for the other items where we have provided full year guidance, you can see that year-to-date, CapEx is at SEK 3.5 billion, interest net at SEK 1.2 billion (sic) [ negative SEK 1.2 billion ] and the tax rate is right in the middle of the guided range.
And looking ahead then at the fourth quarter and full year, we expect the currency effect in Q4 to be minus SEK 250 million. And for the other items here, we have left the guidance unchanged. And with that, I will hand back over to you, Stefan, for summary and conclusions.
Thanks, Cecilia. Yes. So to conclude the quarter, we believe we have delivered a solid performance in what is a challenging macro environment. We have stable orders and revenues. We see good execution on our cost reduction programs and deliver a resilient margin. We also have strong cash flow conversion and a strong cash flow in absolute terms.
We continue to execute on our strategy. We see solid momentum in our software business. We have strengthened our automation offering further with the acquisition of UFR. And we also continue with our portfolio optimization in SMM. We have expanded into the higher-growth Chinese market with Suzhou Ahno and also decided to exit 2 non-strategic businesses in that BA.
Going forward, we remain focused on execution. There is continued uncertainty in both macroeconomic environment and geopolitics. We'll focus on cost efficiency and being agile as things develop. And we are also ready to act when things happen, both if there are new hindrances coming our way or if things start to turn around and there are opportunities to catch. That's an important thing to say with all the focus we have now on cost efficiency that when we go through these savings and so on, we always make sure that we are not reducing cost on things that we think are important for our long-term future.
Thank you for listening, and let's go into the Q&A.
Yes. Thank you, Stefan. Thank you, Cecilia. Yes, let's go into the Q&A. So operator, please, can we have the first question?
[Operator Instructions]
Operator, can we have the first question?
The first question is from John Kim with Deutsche Bank.
I'm wondering if you could comment on price cost dynamics?
Hello, operator?
All Right, we will start with a question from here. The financial net debt to EBITDA is now within the 1.5x target. With a negative outlook by S&P, can you discuss how committed you are to maintaining the A- rating? Or would you be happy if the rating were BBB+.
I think here, we have our balance sheet target of having a financial net debt over EBITDA below 1.5, and that is what we're steering towards. What we would like to see though is financial net debt over EBITDA to come down a little bit ahead also to give us a little bit more maneuver room for also making mid-sized acquisitions.
And in general, this also means that when we make acquisitions going forward, these will be financed by our own cash flow as opposed to taking on any additional debt.
The conference is being recorded.
Thank you, Cecilia. Do we have any questions online, operator?
Okay, I will actually ask a question that I received this morning from an analyst and that was in terms of expectations of equipment deliveries. You were talking in the beginning of the year about back-end loaded deliveries. According to this analyst, it was a bit weaker than his or her expectations. Could you elaborate a little bit on this?
Yes, sure. No, that's correct. And I mean, we have seen both in Q2 and Q3, an uptick in deliveries, which is above what we saw last year in terms of the step change from Q1. But that said, as we mentioned here, the dynamics, we have seen a little bit more caution on new equipment. But instead a strong demand for aftermarket as some customers are a little bit cautious and rather prolong the lifetime of the existing equipment they have rather than placing new equipment orders. And of course, most of the deliveries we have at this point are orders we already had at hand in the first quarter, but not all of them. So some of this can also shift over from equipment a little bit to aftermarket orders.
All right. Do we have a question online? No questions online. Okay, then we do it from here. Can you please comment about how China in cutting tools has behaved since the announcement of China's stimulus. And how shall we think about demand here going forward?
I don't think we can say that we have seen any specific or direct impact since the stimulus was announced. It's still fairly recent. So I think it's a little bit too early to say.
[Audio Gap] price cost dynamics into next year. Any comment that can help if there is a little. Yes, we stop there.
I can start. So with price versus inflation, we continue to work with our value-based pricing model. And so far, we have managed to mitigate the inflationary pressure with price.
How confident are you in maintaining pricing power in light of the weak demand environment for cutting tools?
I mean this is something that the SMS brands have been working with for a long time, decades. I think they have proven in both up and downturns in the past that they can manage pricing in a very disciplined way with a value-based approach. We see it now. We see it this quarter that despite the tough environment, they maintain good pricing discipline. And this is something we expect to continue also next year and going forward.
Can you just also give some comments on the Aerospace segment in cutting tools, what -- yes, some comments on the current quarter and maybe ahead.
Yes. I mean we continue to see good momentum and good demand. And I think Europe is reflective of that, up high single digits in the quarter. We have seen a similar development in North America. But this quarter, there has been some specific dynamics related to, for example, strikes that have impacted the quarter. I saw now there's probably an agreement coming through this week that will resolve that situation. And the outlook for next year, I think, is positive.
Thank you. You mentioned cautiousness on new equipment in Mining. Can you talk about the outlook for equipment and major orders, also what the price component in the 11% aftermarket growth is?
Yes. The last question there, I don't think we can comment on specifically other than to say, as we have said that we are offsetting cost inflation even though it's slightly dilutive from a year-over-year point of view. Metal prices are at very high levels. If we look at our own basket of -- which is sort of proportional to our business, it's at an all-time high level, driven by gold, copper and other commodities. This is what's driving good activities with our customers and also the high activity then from an aftermarket point of view. And that's both parts and services, but also on the consumables side.
This will eventually translate into also stronger new equipment orders. And that goes both major orders and more, let's say, flow orders. But again, based on what I believe is a little bit caution based on uncertainties overall in the macro and geopolitical environment. We see some customers that prefer to push a little bit the new equipment and rather prolong running the existing equipment.
This is overall not a bad thing for us, but the dynamics becomes a little bit similar to when you move from a perpetual license to SaaS model in software. The upfront immediate revenue might become a bit lower since you don't realize a new equipment sale. But overall, over time, the revenue is the same or better when -- with this dynamic. So I mean this is up to our customers really to how they want to play this.
Okay. Thank you. So we covered a few questions. And operator, do we have any questions? Is it working now?
Yes, can you hear me?
Yes, we hear you loud and clear.
The first question from the phone is from John Kim with Deutsche Bank.
I was wondering if you could talk a little bit more about the aerospace. I know that you have an agreement coming or expected in North America. But should we think about that as a 4- to 3-week impact in your aerospace business hitting into Q4? Or is the backlog going to cover that.
I think it's difficult to say in terms of the exact impact and timing because I don't know exactly how they are planning production and so on. What I can say, I mean, in previous, for example, when there's been quality issues and so on, we haven't really seen that impact because, in general, supply chain and the production is still running. But the dynamics around the strike is a little bit different since then they actually stopped production.
So I cannot give you a specific impact in that regard. But I think the best guess would be to simply look at for how long the strike has been ongoing and do that proportionally.
The next question is from Andrew Wilson with JPMorgan.
I wanted to ask two on the SMM side. Can you remind us a little bit in terms of the powder dynamic for the Q4? I appreciate the last 2 quarters, I think you've had relatively easy comps. So just trying to kind of recall how we should think about powder in the Q4. And then I guess, should we expect any change to what's been actually pretty sustained strength on the software side for the Q4? Just trying to kind of understand the building blocks for the Q4 development.
Yes. Powder in Q4, I have to refer a little bit to Louise. I think it was pretty neutral in Q4 last year, but I think we have to get back to you on that. In general, I would say, from an order point of view, though, Q4 is a low quarter for powder. It starts -- by far, the most important quarter is Q1. So regardless of the year-over-year comp in Q4, I think it will have a relatively small impact since overall, it's a low quarter. But let's come back to you on that.
On software, we have not seen any sentiment change in the sense that there's been good momentum. Also on the software side, they see impact from automotive. So solutions towards the automotive space is weaker. But other than that, it's been a good demand picture, both in North America, in general, aerospace and other segments as well.
Can I just squeeze one more just on the China picture. I think from memory, the Q2 benefited from a pre-buy. And I presume the Q3, therefore, was impacted negatively. It would be great if you could just try and help us in terms of what you think the impact of that was? And then maybe sort of China underlying if that's not too hard. And then I guess also just thinking about will Q4 similarly have a bit of a headwind from this pre-buy? Or do you think that kind of flushes out within the quarter?
So I wouldn't say we saw that much impact actually in Q3 from the pre-buys in Q2. So -- and I cannot really say why, but we haven't really seen that. It's been stable, so to say, in relation to what we could have expected. So therefore, also the dynamics into Q4 is a little bit difficult to answer. I would assume no negative impacts from the pre-buys in Q3. And yes, then it's probably the same in Q4.
The next question is from Magnus Kruber with Nordea.
A couple from me as well. Could you talk a little bit about the Universal Field Robots acquisition? Do you see any need for any upfront investment here to gain traction on volumes in this business over the coming quarters, please?
Thank you. No, I wouldn't say though, not in that sense. What we are doing, just to explain the rationale here since we have gotten some questions on it as well. We stick firmly to our strategy within automation, where we believe that productivity and safety are the main reasons for why our customers are investing in automation. And they get the best productivity from our AutoMine solution.
Then in certain environments, with our other larger OEMs, we can integrate with those solutions at a higher, more traffic management layer. But there are equipment in the mines, booms and other third-party equipment, where there is simply no automation solution. And customers want us to incorporate those solutions as well into AutoMine.
And then UFR has a very flexible and, let's say, modern technology solutions where they can do that very easily and quickly. So what we are doing as an investment now is that we are integrating the Universal Field Robots solution into the AutoMine solution. And when that is done, we can use the UFR capabilities to quickly integrate other third-party equipment, but in the context of AutoMine. But there is no sort of specific larger investment needed for that to happen. That is not part of the general product development road map.
Perfect. And I just want to make a clarification on the SMR demand dynamics you called out specifically some hesitation here on the equipment side. Is that sort of on par with what we have seen in prior quarters? Or is there anything that's been sequentially softer here that you have seen?
No. I would say it was similar as we saw in Q2 and in prior quarters. I mean, equipment has been a little bit down versus the peaks, but that is the same dynamics, I would say. So no incremental difference, so to say.
The next question is from Klas Bergelind with Citi.
My first one is on price cost in SMR and looking at the operating leverage here. Organic revenue is up SEK 15 million, but EBITA has fallen SEK 243 million. And I get that this is on small volumes and equipment effect from volume is particularly hard. But just on price cost, do you foresee it worsening here in the coming quarter when you look at sort of the bridge effect from over-earning effectively last year and that is now normalizing? Or is this sort of bridge effect as worse as it gets when we back out the equipment volume effect?
Yes. As you said, Klas, when you look at SMR margin developments year-over-year and also the leverage for the quarter, that's impacted by a negative bridge effect from price versus inflation due to the fact that we were running a little bit ahead on pricing versus inflation last year. We're still expecting to see some of that effects also in Q4, but it should start to normalize towards the end of the year.
Okay. And then my second one is for you, Stefan, on the short-cycle side. I want to zoom in a bit on the General Engineering segment in Europe. We obviously -- we already saw this development in Germany and Italy, I think with double-digit declines earlier in the quarters during the year. But if you could help us with the quarter-on-quarter development in Europe on General Engineering. And to what extent this development got particularly worse in September and if it was spreading outside the core.
If I start with the geographical point of view, it's the same problem area, so to say. Germany, in particular, just given to its size, and the high exposure to automotive in Germany, but also Italy has been impacted. Both of them are down double digits in the quarter as well.
If you look at some other regions, U.K. PMIs are a little bit better. France, not very good PMIs. I think they're around 45, but it's a much higher aerospace mix for us in France. So it's the same problem areas, no doubt. I don't -- I wouldn't say it has spread further, but I think the situation in those countries were -- yes, not as good as we had -- worse than we had hoped for in Q3. You had a second question that I forgot.
No, no, it was really whether it was September, I mean adjusted seasonality, September...
No, I would say all 3 months in the quarter were at a lower level than we had hoped for. And then you might ask, well, you said that it started stable in July, and it did, but it deteriorated in July. And then August and September were -- I mean, there is seasonality between the months, as you know. But from a sentiment point of view, it did not get any worse or better in September from a sentiment point of view, even if September, of course, is a much higher month than August and July.
Very quick one on China. Would you agree it's mainly autos and aero for Machining Solutions that were the main delta with General Engineering sort of perhaps a little bit impacted by the hangover from the earlier pre-buy? I know you said to Andrew that, that it wasn't a big pre-buy effect. But to me, at least, it felt like auto and aero in China was sort of the bigger delta rather than General Engineering, whether you agree with that?
Yes. Yes, I agree with that. I mean General Engineering was down low single digits. But the other segment, which is in a way a subset of General Engineering, was up low single digits. So if you add those together, I guess those are fairly flattish, and then you have auto and aerospace being down.
The next question is from Daniela Costa with Goldman Sachs.
I have two as well, but I'll ask them one at a time. The first one is regarding basically portfolio in the noncore. I guess you did these 2 divestments and it had been a while since you -- I guess Alleima was the last big thing. Can you give us a bit of context of sort of what are these 2 isolated things? Are you doing more of a review of the portfolio? Are there other noncore areas? How are you assessing the portfolio overall?
Yes. I would say it's a continuous work that we're doing. We have 23 divisions now, and we should continually ask ourselves, are they all the right fit for us to own, but also at levels below divisional level as these 2 were, are there things we should divest. And I wouldn't say we are doing a portfolio review or anything like that, but it's a continued work that we're doing and at this point, decided then to do these 2 divestments.
This was a trigger, you could say, from the Capital Markets Day in November, where we changed a little bit the strategy in manufacturing solutions to focus primarily on software. And also of the powder solutions to focus primarily on powder. So the BEAMIT divestment that we did now, which we only had a minority stake in, they were an additive services provider, which we felt was noncore.
And the other one was the Engineer-to-Order part of DWFritz, which we also felt was noncore. So I would say we are -- I mean we will continue to review this, and there might be other things in the future of this kind of nature.
Got it. And then the second one more just in terms of the restructuring savings. I think Cecilia mentioned that you were slightly ahead of your plan, but obviously, you mentioned macro uncertainties. Can you accelerate the pace of the whole plan? And if so, which would be the areas where you could do that over the near term?
I think what we've said is for the '22 Program, we will realize at least 90% of the savings by year-end. For the program this year, the aim is to realize 80% of the expected run rate savings. We're a little bit ahead of that now. As you could see, we're already at 88% for the '22 Program. So I don't think we can accelerate these specific initiatives. But I would also say on top of these restructuring programs that we have announced, there are also a lot of activities ongoing as part of normal operations in terms of contingency measures and smaller restructuring projects ongoing across the group.
The next question is from Edward Hussey with UBS.
I've got two. Just on -- the first one, just on -- so I think within the margin within SMR, you talked about weaker equipment revenues basically being a driving force behind weaker margins. Does that mean that sort of backlog -- you sort of work through the backlog now and things are a bit more normalized there? Or was there sort of something specific that meant deliveries in the equipment business were weaker.
I think from a backlog point of view, I think they are fairly normal at this level in terms of delivery times. So yes, I think that's okay. When we talk about a little bit weaker equipment deliveries in relation to prior sort of expectations, if you will, is more related to what I said that we see some customers, rather than replacing equipment and placing an order for new, they rather extend the lifetime of what they have.
So that's a dynamic that we do see. And that can have an impact on deliveries also if it was stock orders or stock units that they otherwise would have bought.
Okay. And then just going back to SMM. And I know you've already commented on price versus cost. But I guess just thinking about it for the next couple of quarters, I mean, from what I can gather, you sort of put up prices by about 4% to 5% at the end of Q1. I'm just wondering, is the price cost dynamic going to get worse for the next couple of quarters?
And then also, if we think that pricing and costs go back to a normalized level next year. And let's say you put it up 1% to 2% versus cost increase of 1% to 2% next year. Would that also lead to a headwind from a margin perspective or given that it was -- given this dynamic is neutral this year, and then it would be neutral next year, it actually just be -- it wouldn't be a headwind next year.
For SMM, price versus inflation was neutral in the quarter. And so here, up to date, we've been able to mitigate the inflationary pressure with pricing. And what we can say here is that we will continue to work on -- with our value-based pricing model as we've done in the past.
Yes. But I guess, I mean, you say it's basically a dilutive effect year-on-year because it was accretive last year. I'm just wondering Q4 and Q1 next year in SMM, you say that as well? Or if that's not the case?
Not in this quarter. That was the case for SMM in the second quarter. It's only the case for -- it's a case for SMR in this quarter. And we will see some of that impact in Q4 where we were a little bit ahead last year, and then it will normalize towards the end of the year. That's what we are expecting.
The next question is from Max Yates with Morgan Stanley.
Just my first question is on rock processing. And I think you called out the sort of large order in the U.S. on the sort of infrastructure side. I guess that's kind of contrary to maybe what we heard from Volvo in their construction business. So if you could just give us a little color, what you're seeing in North America where the inventory situation is at the dealers. That would be a helpful starting point.
Yes. So if I said U.S., then I said the wrong thing. No, we had some larger orders, but they were not in the U.S., to be clear. They were more in the Asia, Middle East, Africa regions.
Then in general, in terms of the inventory level, unfortunately, we have to say that we don't see that much improvements on the destocking among dealers. They are stable, and we see orders coming through, but we don't see a big improvement on the destocking, which -- which we had hoped for at this point in time, to be honest. So yes, that's why also we say that the Infrastructure continues to be weak.
Okay. And just a follow-up then on mining and rock kind of margins we're obviously, at first 9 months, we're now at kind of around the 20% level. We've obviously come from being kind of nearly 21% last year. Could you just give us a feel for kind of what you feel is normalized margin maybe in a sort of mid-cycle equipment environment, normalized price cost.
I think people used to talk about maybe you could close the gap with kind of where Epiroc was in the 22%, 23% level. Is that too optimistic for your business? Should we be thinking about kind of more in that 20% to 21% level is the right level in a normal pricing backdrop? How should we think about the mid-cycle margin for this business?
I can take that to begin with. I mean, we haven't announced or talked about any specific margin corridors per business area. So I can -- we don't want to be too specific on this. In general, though, if we look from a like-for-like point of view, I think we are on par with our closest peer on this. So it, of course, depends on what composition you have in the portfolio. But if we look like-for-like, we are already at those levels if you compare to their equipment and service segment.
Okay. And just the final one would be on the sort of Manufacturing and Machining business. I mean, I guess, if I was being sort of a bit more sort of negative on this. You've talked a lot about the kind of improvements you've made in the business, the improvements in the manufacturing methods, the flexibility in the business. But I guess if I look at year-to-date, your decremental margins in this business with quite a few -- with quite a lot of cost savings having gone through, they're still 60%.
So I'm just wondering, is there anything else kind of this quarter included? Have you had a big underproduction impact this year? Has it been the speed of kind of certain end markets and certain regions that have made it difficult to kind of balance the capacity utilization. I guess how is sort of -- what's your perspective on how the resilience and the operational leverage and how this business has performed year-to-date?
I can start, if you want to. I think if you look at the SMM leverage this quarter and especially in the Machining Solutions part, therefore -- last year, volumes were down 10%. And then we had a good leverage of around 40%.
Then this year, volumes are down an additional 7%. And there, we haven't -- there's a limit as to how much cost flexibility we've built into the cost base. And that's why you see the slightly lower leverage in the quarter. We think that a margin just below 20% is good margin resilience for the SMM business.
The next question is from James Moore with Redburn Atlantic.
Yes. Perhaps I can start with SMM. Your European softness, Stefan, we're seeing this with everybody. Could you give your view on what your customers are telling you and why you think this is really happening.
My question is really whether you think there's more Chinese export related, in the sense that China wants more self-sufficiency. So Europe's biggest customer on the export side of Germany and Italy have been hit by that versus the lack of the cheap gas discount and the fact that gas prices in Europe are much closer to, say, Japan and U.S. gas prices relatively than they were for a decade. Maybe if we could go one at a time, let's start with that.
Yes. If we -- that's a big question, though. I would say, if we look at the segments, I think maybe that can guide us a little bit. I mean the main weakness, again, we see in Automotive and General Engineering. And the weakness is especially strong in the regions and countries that are, let's say, heavy industrial-type regions with a high portion of export business.
I think we are seeing -- I mean it's -- in general, it's a slower economy in Europe, of course, also lower consumption driven by, first, high inflation, cost inflation, and then as a follow on, high interest rates, which has reduced consumer spending in general especially on, let's say, products.
I think -- so that's, I think, is one reason. And you have high energy prices in some of these countries as well. So just a general slow economy driven by those, let's say, macro numbers. Then I think there is also an export component. As you say. I think China has been weak in general. And then on top of that, there is a regionalization in general, I think, for especially also industrial goods, that probably makes it more difficult for also European companies then to export into China.
So I think it's both of these. Then to the -- how much is this a dynamic and not, I cannot say, but I definitely think it's part of the dynamic.
So just a technical couple, if I could, the powder business. Just given the comp, are we up 50%? Or we are just up to 10% to 20% normal double-digit or extreme double digit? And the software margin, I think you wanted it to head to 20%. How is that progressing this year?
Yes. On the powder, we're just seeing double digits. And yes, I don't know if you want to add something to that, please?
No. I think double digits maybe we can say that we had a bit stronger double digits in the first half year, but low double digits.
Yes. On the software margins, as you say, we have a target next year for the Manufacturing Solutions business to be at 22%. I think if you look where we are now, it's heading in that direction.
Great. And last one, if I could. With the margin down 70 bps in SMR, can I just clarify something that I asked earlier, would you say that equipment margins fell more than that and aftermarket margins fell less than that year-on-year. And if that is the case, and you look around the business units and the equipment side of SMR, can you say whether there's any specific unit or units that are underperforming? I'm talking excluding demand effects here, where you see a specific topic that you could fix and some specific upside on any units.
I would say that -- I mean, we don't give the specific margins on aftermarket and equipment, but it's on the -- the main reason for the margin drop is lower volumes, and that we've seen mainly on the equipment side. And then we have the price versus inflationary impact that I mentioned before.
Great. Just to follow up on that, any particular units that have got more margin upside in the next couple of years within equipment?
I cannot give any such specific comments or guidance. It's generally the lower volumes on the equipment side, which is then, for us, has resulted in higher aftermarket sales.
Thank you. I think we have to conclude the webcast now. Thank you, Stefan and Cecilia. And I apologize for the glitch in the beginning of the Q&A session. I hope you had the chance to ask your questions. Otherwise, of course, you can contact us after the webcast. Thank you all for calling in, and we wish you a good rest of the day.