Alleima AB (publ)

Hi, everyone, and welcome to the presentation of the second quarter results for Alema. My name is Emily Alm, and I am head of investor relations. I'm joined by Göran Björkman, president and CEO, and by Olof Bengtsson, CFO. So Göran and Olof will take you through the results, and then we will have a Q&A session. And you can, as always, ask questions through the conference call, and you can also write them in the field below the webcast. And the presentation can also be downloaded from aleima.com. As always, we always put safety first, and it's a top priority for us. So I trust that you know the safety routines of where you are located. So with that, I would like to hand over to you, Göran.

Thank you, Emily. So also a welcome from my side. So let's go through. the Leymah second quarter. And let me start with the highlights of the quarter. I think the second quarter was an overall good quarter, where I think our revenue growth of plus 18% organic sticks out as very strong. And with a book to bill close to 100%, we have a continued solid order backlog, which provides confidence for the near-term deliveries. Order intake on rolling 12 months was minus 4% on high comparables. Remember, quarter two last year was extremely strong from an order intake point of view. But the organic decline was also due to mixed market demand. Several customer segments continue strong, while other customer segments have a more softer development. We improved our earnings significantly, supported by high revenues, a positive product mix, and continued successful pricing, which offsetting cost inflation. Adjusted EBIT on 11.4%. It was 11.5% last year. And this is a high absolute level, which I'm pleased with. We are continuing our consistent strategy execution, where I think the breakthrough SMR order is a clear evidence of our strong position in the nuclear industry. We also completed the acquisition of Södertorps Steel, and we continue to see a strong momentum in Cantal's industrial heating and medical business. And Cantal is really leveraging from the global trends of electrification of industries. Sustainability. We are continuing to make positive impact through operations. I think during the quarter, we have increased our focus on safety performance. We have had several years with, I would say, flattish development, and we have had too many accidents that really could have been avoided. And this has made us focus even more on safety. I mean, a clearer tone from the top. We've done benchmarking with other companies. We have divisional programs to improve, and we have more internal dialogues about our safety culture. Those are some examples of activities. And, of course, I'm pleased to see a clear improvement in the second quarter compared to quarter one. But I think we need to remember that improving safety culture is a long journey, and safety should continue to be on top of our agenda. Shared recycled steel declined slightly, mainly due to product mix, where I can see that we have quite a lower share, what I would say are standard grades. Our greenhouse gas emissions are in the low range compared to peers. And despite already one of the lowest emitters in the industry, we can always improve. And the trend is positive. And for the first time ever, we are below 100,000 tons of CO2 for our scope one and two emissions. And the last KPI, the share of female managers increased by 1% unit. Which, considering our historical numbers, is a good development. And this shows that we are on the right track when it comes to improving gender diversity. So, as noted on the previous slide, I'm pleased with our operational improvements on sustainability. But as I have concluded many times, our largest impact on global sustainability is through our product offers, where we can improve customers' processes, products and applications. And global trends like electrification and the shift to fossil-free energy are trends driving our business opportunities. So let me share a couple of examples. Electrification of industries is a strong trend, and this is where Cantal is very well positioned. The momentum in electric heating is solid. Cantal has received several project orders, mainly related to some targeted product application that enable industries to make the green technology shift. And I mean areas like solar, steel, lithium-ion, battery manufacturing. We also received a breakthrough order to supply steam generated tubes for NuScale power. It's a provider of small modular reactors. So the tubes will be installed in one of the first SMR power plants. And this is really a milestone for growth in the power projects for the future. We will supply approximately 200 kilometers of steam generated tubes for NuScale's first NuScale power modules. that each is capable of generating about 77 megawatts of carbon-free electricity. I think it's really great to see that this technology is now taking steps in commercialization, where we play an important role. Market development. Looking at the market development, we saw lower demand in some customer segments, somewhat mitigated by long-term trends and underlying tailwinds from others, which plays in our favor. On a sequential basis, demand slowed further, mainly for the low-refined short-cycle business, and the underlying demand in Asia increased while it declined in North American Europe. Quarter two last year was the best quarter ever in terms of order intake, meaning that we are meeting higher comparables. But let me go through the demand dynamics of our different segments. And let's start with the segments where we see a softer market development. This is mainly a short cycle business and mostly for the low-refine products, but also for parts of our application to business. To look at the industrial, demand was negative on a sequential basis, and it declined in all regions for the low refined products compared to last year. Consumer demand declined year on year, mainly due to strip products such as compressor valve steel and knife steel, but also appliance wiring control. However, on sequential basis, demand was more stable than on year over year. In the petrochemical segment, demand was lower, both compared to last year and also sequentially, with some destocking effects at customers and distributors, and an overall somewhat softer market in Europe and North America. Demand in Asia remains really solid. Other customer segments are strong and with a continued positive outlook. For instance, oil and gas. Investments continue to materialize. We had major orders both for the OCTG and umbilical tubes, a total value of 830 million, and many other small orders, of course. And the market outlook and project list really remain solid. In industrial heating, we noted a stable development on a really high level and received several significant project orders, mainly for the solar industry. And what we can see also is that the gas to electric conversion inquiries from different kind of customers remain on a high level in all regions. So once again, electrification is driving. Mine and construction order and take decline year on year, but that was mainly impacted by stock adjustments at some customers. I think the underlying demand remains solid and we expect to recover in the medium term. Power generation, this is mainly our nuclear business. I would say it's only our nuclear business. It remains solid and many discussion on future projects. They are progressing well with one of them materializing through this SMR order. This industry, however, is moving slowly. Transportation, strong mainly for aerospace and titanium tubing. Medical, strong positive underlying development. However, if you remember, we had a really large order in quarter four because that has an impact on the growth numbers. But we see a very strong momentum for the full product portfolio and some successful new product launches. Through that, we expect this to continue to support our growth. Hydrogen renewable energy segments, I mean, this trend is very strong, and we know to the continued momentum related to our hydrogen refueling stations, and the continued acceleration globally is expected in the longer term. However, we see some, I would say, downstream bottlenecks in part of our business, and that is the pre-coated strips for fuel cells, where some of the customers have some ramp-up problems in the short term. So in summary, we saw a mixed picture with good momentum, some of our segments and a bit softer than others. And again, I think this is, I mean, the diverse customer segment exposure is to clear strength at the Lehman. So a bit closer in order intake and revenue, we had an order intake of 5.5 billion in the quarter, which is a high absolute level. Organic intake growth of minus 4% for the rolling 12-month period, and order intake growth of minus 15% in the quarter. We're meeting higher comparables with all-time high order intake quarter two last year. Total revenue of 5.6 billion. This is a proud number, resulting in a very strong organic revenue growth of plus 18%, driven by growth in all three divisions. And look at the book to build. In the quarter, it was 98% and rolling 12 months, 106%. So above 100 for the rolling 12. So our backlog remains solid. The mixed demand picture in the different customer segments means that we are consuming backlog in some segments while continuing to build backlog in others. I think the situation overall still makes us confident about near-term deliveries. And if we look even closer into the order intake and revenue growth and the different components, metal prices now have changed to slight negative compared to the high positive impact in previous quarters. And the impact on currency is still positive, but not as high as before. And looking at the rolling 12-month, the orange lines, it's slightly negative for order intake, but positive for revenue. Backlog is solid and absolute levels are high. And Olof will dig even further into the details of that in a few minutes. Look at earnings. Adjusted EBIT increased by close to 100 million or 17% to 642 million with a margin of 11.4%. With high revenues and overall positive product mix and price increases which continue to offset cost inflation, it was contributed to the strong result. Higher revenue with a stable and high margin, it was 11.5% last year, means, of course, that leverage was on the low side. And there are several reasons for the lower leverage. We've had some temporary performance and productivity issues and some negative mixed effects in our power generation and transportation segments. In PowerGen, mainly related to some quality issues and in transportation, the problem relates to planning output issues with an overloaded plant, including some orders for automotive with low prices. We also have some under-absorption related to lower volumes where demand is lower. But I would say the largest negative absorption impact is actually something that I view as positive. Our focus on driving operation efficiency has resulted in an all-time low inventory levels in the second quarter. And reducing inventory means lower production volume, lower absorption, and this had a negative margin effect of more than 100 basis points year over year. Reported EBIT of 350 million, including metal price effects on minus 293. This gives an almost 1 billion negative bridge effect from changed metal prices. Pre-operating cash flow is 72 million. I think this is relatively weak due to higher accounts receivable and lower accounts payable, partly offset by reduced inventory. And normally we have a stronger cash flow in the second half of the year. Let's look at the divisions a little bit more in detail, starting with Tube. Overall, I think Tube is performing well and shows a good momentum. Tube had a strong revenue growth in a somewhat softer market for certain segments then. There is a continued subdue demand for the low refined products to the industrial segment and lower order intake for application tubing to the chemical and petrochemical segment in North America and Europe, while Asia continued strong. We have a continued strong oil and gas momentum with the three major orders of total the outlook for oil and gas remained solid. Transportation showed positive development, mainly driven by aerospace. And a strong organic revenue growth of 20% and a backlog that remained solid. Adjusted EBIT margin on 11.4%, which is, I think, a high level, but slightly below last year. And I would say the comments I made on margin development are the same as for Lehman Total, with the high revenues, price increases, which more than compensate the cost inflation, but also the temporary performance and productivity issues in power gen and transportation segments are fully related to tube. And I also say that the largest negative impact on absorption due to inventory reduction is within two. But I think inventory management and operational efficiency resulted in an impressive reduction of inventory. Within strategy execution, we conclude that we closed acquisitions for steel. And that we did on May the 2nd and now starts to work to qualify products mainly for aerospace and medical in small size bars. Let's move to Cantal. Cantal, a very good quarter. I mean, the continued strong development, the strong momentum. I think clearly benefiting both from the electrification and the medical trends. We see a stable development on high levels in industrial heating, with significant orders and a continuous momentum in the medical segment. Order intake in medical is, however, below last year, as I was already commenting, due to timing of orders. And this is, of course, related to the large medical order we booked in quarter four last year. Year-on-year order intake declined somewhat in the consumer segment, but sequentially flat. Organic revenue growth of 15% with a broad-based positive development across the divisions or regions. And yet another quarter of record high revenues in medical. Just that EBIT margin grew with more than 40% to a strong margin of 19.3%. Increased revenues, strong product mix across the division and a continued price increases. Compensating inflation supports a strong profit improvement. And of course, the share of a medical increase significantly, and this drives the margins in the right direction for Cantal. I think Cantal is a very nice and well-run business. And although we might not see the same high margin every quarter, but it's clearly improving over time. I'm going to take a look at the graph to the right. I think it's an impressive development for Cantal. Of course, to meet the growing demand for electrification across our segments, such as solar, lithium-ion battery manufacturing and downstream steel production, we are expanding the current premises in Waldorf, Germany, roughly 2,500 square meters of manufacturing area at that site. So, STRIP. STRIP saw a continued soft market demand. with an order intake decline year-on-year and quarter-over-quarter in all regions for the consumer segment. Customers are signaling about high stock levels, and we believe that this will be corrected in the short to mid-term and then return with the demand that will return. Demand was slightly higher than last year within the medical segment for the strip division. Organic revenue growth of 1% driven by razor blades for the consumer and precision strip for medical segment. And, of course, also the pre-coated strip steel for hydrogen and renewable energy segment, which had a good momentum ever coming from low levels. Adjusted EBITD margin on 10.0%. Continued under-absorption effects from lower production volumes. Negative revenue mix as we have less share of compressive L-steel in the revenue. and mitigating activities to adjust capacity and reduce cost are ongoing and this is mainly related to manning reductions as i mean i believe that we might still have a couple of tough quarters ahead of us from the for the strip division part of the strategy is to find new applications for uh in the medical segment and happy to say that we received Precision strips steal orders for two new medical applications. Orders are small but in interesting areas, and they are in the areas of cardio and identifying cancer. Then I'll leave for you, Olof.

Thank you, Göran. Olof here. Let's dig into some numbers then. Go to the first slide, the financial summary slide. And if we start in the upper right corner with the bridge on order intake and revenues, we see an organic development of minus 15 on order intake. But please remember that this quarter we are comparing to a very, very strong quarter last year, 6.4 billions in order intake. Revenues, a strong 18% increase organically, invoicing from a solid backlog. Structure-wise, it's the small acquisitions we've made, contributing a percentage point, and then still a good currency tailwind. And then alloys, the alloy surcharge, which I think is, so to say, the biggest change compared to previous quarters and also year over year, where we now have a negative effect on the alloy surcharges coming from the lower metal prices in the quarter, mainly the nickel, which has been on a level just above $20,000 per ton compared to previous quarters, where we have seen much higher nickel prices. Then going into the big table, we see an adjusted EBIT, adjusted for the metal price effects of increasing 17% or 95 millions in absolute terms. And further down, looking at the reported EBIT, there we see quite a lot, a fairly big swing, obviously coming from the metal price effects then. And this is This is what it is, so this is normal. We will see swings in the income statement on the reported EBIT from the metal price changes. And certain periods will have positive effect and another negative effect. And please remember, when it comes to the metal price effect that we're calculating, that this is then for the sales, where we have an alloy surcharge clause, and there is a timeline between us – buying the metal and then selling the metal. So that is what we calculate when adjusting for this. Net financial items coming out at minus 39 millions versus minus 171 last year. The big swings here are mainly coming from valuation of financial instruments that we use for hedging of various exposures that we have in our operations. And we are gradually introducing hedge accounting in our books to avoid these swings. However, there are still some instruments that we need to value in this way. But underlying the finance net is fairly low. I think the interest net is a positive 8 million SIC in the quarter. Further on, the tax rate, the normalized tax rate is 24.2 for the first half. I think it's better to look at longer periods instead of focusing on a single quarter. So the normalized tax rate is in line with our guidance. And adjusted EPS, earnings per share, on a fully diluted basis, comes out at 179 versus 0.91 CIT per share last year. That's a good healthy increase of 97%. And that comes from the improved adjusted EBIT performance and also from the lower finance net. Go for the next slide. That is the bridge on adjusted EBIT, so splitting up the increase of 95 millions in various parts. First, we have the organic development of plus 83, coming down from a strong revenue development, the price increases that are more than compensating for the higher inflation, and also a good mixed development. Other positive elements include the electricity grants that we have received in Sweden. That's a total of 58 millions in the quarter. And on the other side, we have the temporary performance issues that Göran mentioned in the power gen and transportation segments. And we also have, as Göran also talked about, the under-absorption effects from reducing our inventories and the lower product production volumes. But in total, a healthy increase in the number, but the operating leverage is 10%, which we think is a bit on the low side than explained by the different factors I just mentioned. And if, and I say if, we adjusted for these factors just mentioned, we would have a leverage of between 20 to 25% in in the quarter. Currency, we had a positive effect of 18 net of hedges. And M&A, the acquisitions just had a slight positive contribution in the quarter. However, we have M&A-related costs, mainly from our most recent acquisition that we announced during the quarter. That comes out at minus 6 million. So that is the sum coming up to the 642 million in adjusted EBIT for the quarter. Then going on and looking at parts of the balance sheet. Networking capital increased both year over year and sequentially. And the sequential increase comes mainly then from the fact that we had, as you saw, a fairly strong invoicing in the quarter. And the average days of sales outstanding of approximately 50 days. A lot of the payments for this strong coming in Q3. So that is one factor impacting. Also, it's actually lower accounts payable. We have settled some invoices for raw material purchases made during the first quarter, when metal prices were higher. They will settle at the end of the quarter. That means that we have an impact on our cash flows. Both these negative factors have been offset by a more positive development on our inventories. The divisions have managed the inventories very well. and decreased both in tons and in value. Of course, the value has been helped by the governmental prices as well. So capital employed, excluding cash, increased sequentially and year over year, and that comes from the higher working capital, just explained, and also, of course, from acquisitions, and also some currency effects when translating the foreign balance sheets into the Swedish krona. Rose, excluding cash, decreased to 11.1% from 17.8%. That comes mainly from the lower metal prices. We have the metal prices in the calculation of the returns. Going then to cash flow, free operating cash flow, a bit low, we think, 72 million versus 81, same period last year. Looking at the table up there, we have a lower EBITDA coming mainly then from the lower metal prices. And non-cash items mainly relates to provision changes in the result. There's a lot of cash flow impacting. Then we have a fairly big swing then on the changes in working capital compared to last year when the prices were higher, but so was EBITDA. Now EBITDA is lower, but the change in working capital is much lower. CapEx back more on a normal level compared to last year. amortization of lease liabilities, no big changes, and then the free operating cash flow comes out at 72 millions. And Q2 is normally not a very strong cash flow quarter, as we normally are building inventories for the summer stock. This year is a bit different, with the lower inventories that we've just talked about, but obviously offset by the higher receivable tables. Then on to the capital structure. We continue to be well below our financial target on capital structure. Debt to equity to be below 0.3 times. That's the target. And we're coming out at 0.03 times. And if you were to measure net debt to adjusted EBITDA, we would come out at a low 0.16 times. And looking at the components then, because we have moved from... a net cash position in Q1 of 256 millions to a net debt of 448 million this quarter. And there are some reasons behind that. And one reason is a higher pension liability. And that comes mainly from the fact that the long-term discounts rates are actually a little bit lower, slightly lower. That means that the liability increases when you discount it. And then we have paid a dividend in the quarter, 1.40 per share. That comes up at 351 million in cash outflow. And then we have some acquisition payments, mainly the acquisition of Cirkelfors. That also has impacted the quarter. So that's how the net debt comes out. And of course, if you look forward, with expected better cash flows, we will advertise on this debt. Going to the next slide then, looking at how well our guidance for Q2 came out. Starting with CapEx, we guided for 800 million on a full year basis, which is a guidance that we will still keep. I'll show you soon. We came out at 150 million in the quarter. And I think that we will be more active in the second half of the year, because this is obviously below the guidance. Currency, we guided for positive 100 millions in Q2, and we came out at 78. Net of hedges and so on, we came out at 18 pips. The metal price effect, we guided for 200 millions negative, and we came out at 293 negative. So the lower metal prices than expected. And then the tax rate, I would say, for the first half of 2023, well in line with the guidance we gave. looking ahead then Q3 we're keeping our guidance for the capex 800 million full year and then currency we're basing this on end of June rates and we think that the currency rates will give an impact of positive impact of 50 million on the operating EBIT for to result for Q3 metal price effects Based on end of June again, we think that we will have a negative impact of approximately 300 millions in the quarter. Tax rate, as I just mentioned, I think we keep our guidance for the 22 to 26%. I'd like to hand back to Joran for an outlook.

Thanks, Olof. Some short comments on the outlook for the third quarter. I mean, market demand was mixed during the quarter, and in parts of our business, it is softer. On the other hand, some underlying trends are very strong, like energy, fossil-free energy, electrification, medical, aerospace, and they are expected to continue to mitigate the impact of uncertainty in the macroeconomic environment throughout this year. Without strong backlog, we are confident in the near-term deliveries. We remain, however, cautious regarding the impact from cost inflation and under-absorption of costs from lower production volumes in certain areas. Product mix is expected to be similar to the one in the second quarter. Orders, revenue, and adjusted margin in the third quarter are normally lower than the second quarter based on seasonal trends due to the summer shutdowns. And cash flow, as Olof just said, is normally higher in the second half of the year compared with the first half of the year. So let me make a sort of summary of what we have said. I think overall, I am pleased with the performance in the quarter. We are executing on our strategy, and I think we are clearly heading in the right direction. And as I said, I think our revenue growth of 18% of Granite sticks out as very strong. And with the book to bail on close to 100%, we have a continued strong order backlog, and this provides confidence for the near-term deliveries. We saw a low demand in some customer segments, however mitigated by long-term trends and underlying tailwinds that plays in our favor. Global trends like electrification and the shift to fossil-free energy, high investments in the energy sector, and the strong medical market development are clearly supporting the Alema business. Strong profit improvement and high margin despite some operational issues. And we continue our consistent strategy execution where the breakthrough SMR order is one clear evidence of a strong position in that industry. We complete the acquisition for steel and we continue to see strong momentum in Cantal's industrial heating based on the electrification and also their medical business. But also continue to focus on operation and commercial excellence where improved inventory management and operation efficiency drove down our inventory volumes to an all-time low. That is something I'm very pleased with. Thank you.

Thank you, Jaron, and thank you, Olof. So it's now time to start the Q&A session. And again, you can write your questions in the webcast or you can ask them on the call. So operator, please go ahead.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. You will see your turn to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands as well as asking a question. Anyone who has a question may press star and 1 at this time. Our first question comes from the line of Victor Trosten with Danske Bank. Please go ahead.

Thank you, Operator, and good afternoon, Göran and team. Maybe first, I got a bit surprised, but if I may ask about the leverage, Olof, that you mentioned. You said that leverage would have been 20-25% in the quarter if you had had a couple of impacts. Could you please help us sort of understanding the magnitude of

on each of them um what was it mainly you know reduction of inventories and you know temporary efficiency losses in in tubes or uh yeah i mean uh the the the adjustments i made was uh on the upside so to say the the received electricity grants it was 38 millions As Johan just mentioned, the underabsorption effects in the inventory, that is 100 bps year over year. And then the rest is the underperformance in the transportation and power gen units that we talked about. So those were the adjustments I made to arrive at 20 to 25 percent average adjusted performance. Because, I mean, it's an if adjustment, but that's what I meant by that.

And how isolated are these two, let's say, you know, Q2? You know, I take it that you sort of flag for, you know, continued low leverage in the coming quarters. But, I mean, if you would assume, you know, 20-25% leverage in this quarter, you would be at, you know, 740 million leverage.

uh in ubit or 13 margin but but how should we you know think about leveraging the coming quarters down i could try to at least elaborate and think out loud victor uh we don't give really forecast but i mean if we look ahead uh because you're rough in a way as asking about margins going forward i think i mean Our order book is good. It's both big and with a good mix. And mix is, even if you say it's sequentially rather similar as quarter two, it's better than last year. We had the temporary effects, as you said, in quarter two, and still margins were, I think, healthy. And those effects will not disappear, but they would be lower over time. I think it would be faster to recover the power gen. It will take some more quarters to fully fix the issues in transportation. I mean, we cannot reduce the same inventory again. If we could reduce some more, I would be happy to do that. But I think that impact is probably lower going forward. So how should I summarize this? I would say, I mean, I don't see any reason to be too worried about margin development going forward. And the leverage numbers that Olof, I mean, the underlying, if it wouldn't have been, are normally numbers that we should be at. That's the best answer I can give you. But, of course, remember, quarter three is normally not as good. You know that.

No. Yeah, exactly. That we know of. But OK, yeah, that's understood. So at first in the report, I got it like, you know, 10% leverage is something we should, you know, continue to think about. But it sounds like, you know, headwinds are easing in the coming quarter. So that is clear. Then speaking about margins.

Yep. But a leverage below the margin, that's bad. And that's not at all what we're in for.

No, I'm happy you're saying that. And then speaking about margins in Kampal, you know, continue to print new highs in margins. I think you helped us quite good during the call to understand, you know, the underlying forces. What would you say, Aram, would, you know, take the margins down further? from here i guess that you know with seasonal custom we would be around you know 18 percent uh ubit margin in cantal if it you know what would take that down would you say that's an interesting way to put the question victor i soon see no reason why it should go down at the same time i mean it

It's a really strong increase from last year. And let's elaborate on that one as well, then, without answering the question. The medical business is growing faster than the average. And even if the average is good, the medical is quite better than the average. That should indicate even better. I would say part of the business, which we call heating materials, I mean, we are kind of surprised they were so good. So maybe that was more better than normal. So it's a difficult question quarter by quarter. But look at the trend on Cantal. I see no reason why it should not continue. It's a good product mix. It's a good product mix. It's in strong position. It's a well-run business. It's a nice part of Alema.

Yeah, and I guess it's fair to say that Cantal is more stable versus other end markets. So if you let me push you a bit, Göran, just if we say that Cantal is around 18% business model, how do we square that with your financial targets? I mean, if Cantal has 8% margin, it would imply that, you know, O2 basically has 5-6% margin to come down to 9%. So, you know, I'm just trying to get the equation together.

Yeah, that I mean, I've been pushed on this question before. Are your profit targets too low? Let's go through a downturn and see where we end up. And if we're better than we had, we should raise the bar, of course. And the math you did, that is not the expectation we have of the rest of the business. So from that point of view, you're right, of course.

Okay, that's clear. And maybe if I may, just one final question that I'm a bit interested in. You said that you reduce inventory volumes. Still, networking capital is around 7.8 billion. I mean, it's a record high figure. Historically, you release working capital during the second half. Just how should we think about working capital going forward? Obviously, it depends on business cycle, but how much can you sort of release given where metal prices sit currently?

I guess I would like to refrain from giving you a number, but clearly, if you look at the various items in the working capital, I mean, inventories at eight billion, that will clearly be a release when metal, first of all, of course, from the better inventory management in the divisions where each of them have a plan, of course, that we're following closely. Metal prices, yeah. that there will be an effect. Hard to tell exactly where that will end up. Receivables, yes, we are constantly working on that. We have a DSO of 50 days. It can probably improve. Accounts payable, difficult to say. Of course, accounts payable will compensate a little bit for the lower inventories, but I mean, we have, of course, our internal targets, which are lower than what you see right now. I mean, we have 33%, I think, if you compare it to revenues. And the target we have is a bit lower than that. But hard to give you a number on that one.

And to fill in on that one, I mean, it takes some time to flush through the system with lower metal prices. And if metal prices continue like this, it will go down. On the other hand, you need to work with the things that you can influence. And one thing you can influence is to improve your inventory management. And I think so far, this is the best I've ever seen from the performance point of view.

But second half is better than first half normally when it comes to working capital.

Okay, now that's clear. Thank you very much. I'll step back. Thank you. Thank you.

Thank you. The next question comes from the line of Patrick Mann with Bank of America. Please go ahead.

Hello, good day, Joran and Ola and Emilie. Thank you very much for the call. I just want to ask a little bit more on the inventory. I'm just trying to understand here. So obviously the volumes went down a lot, and the inventory management means you've got low volumes of inventory. But then you also said that led to some lower production volumes, some underabsorption of costs, and I think it cost you 100 basis points of margin in this quarter. How do you think about investing in inventory for that additional margin or sales? Or is it because end demand in some areas is weak, so that's why there's been underabsorption? Or could you have produced more? And then I suppose related to that, given metal prices are moving down, you probably don't want to buy inventory where you think you're going to get a negative metal price effect. Would that also play a role? The main thing is trying to understand lower inventory on one hand, it's positive from your working capital management, but on the other hand, it did cost you some margin under absorption of costs and lower production. Just help me understand how you think about that and how we should think about that.

Let's see if I can try to answer your question. You need to help me, Olof. When we do the math on inventory reduction and how that uh impacted absorption uh of course that can be parts of the business where the sort of market development needed less needed less uh inventory that could be part of the equation but i would say looking into exactly how we have improved inventory management most of this comes from more efficiency uh i'm gonna say that that is the majority of the absorption problem. Then of course when it comes to inventory management we don't if you look at the purchasing side buying metals that does not relate to to sales that relates to more to order intake and production plans so of course with slightly lower production plans we slightly need some less raw materials and then remember that uh this time of the year uh we stopped the steel bond for for uh three four weeks uh and that's had of course a negative effect on the accounts paper because we we we paid the old purchasing voices but we didn't have new ones uh i'm not sure i answered everything but i tried to answer at least

Thank you. And then maybe one follow-up question. So it sounded like Asian demand was stronger than Europe and North America in most cases, but I'm just wondering with compressor valve steel, it seems to be quite a negative mix impact and still seems to be quite weak. I thought that was mainly China or mainly Asia. Is that the right way to think about it? Or maybe what are the issues there and what's the outlook?

I mean, thanks. That was an important question. I mean, I think if I compare a couple of businesses, if I take Tube, Tube are in China, mainly for China, or in Asia, mainly for Asia. So that is the Asian market, very much connected to investments in chemical, petrochemical, et cetera. And that is stronger than what we see in Europe and North America. In the Strip case, our customers' customers have put a lot of their supply in China for compressors. And then, of course, the compressors go into refrigerators, freezers, air conditioners, etc. That's probably more a global market, but our customers are in China mainly. And based due to the lower demand in In that customer segment, we have a reduction of sales in China due to that, and that is mainly related to the strip division, if that explains it.

Okay, that's much clearer. Thank you. I appreciate the color. Thank you.

The next question comes from the line of Igor Tubic with Carnegie. Please go ahead.

Thank you, and thank you for the presentation. I have two questions. First, I would like to ask about the tube division. I can see that the margins have declined year over year, and I just wonder, because the industrial segment is declining, so to say, are the oil and gas margins also declining then, or what's the reasoning behind the lower margin in tubes?

I'm trying to answer that. I think the explanation we tried to give on group level when it comes to poor leverage mainly relates to two. So that is one part of the answer. Oil and gas, I would say, in average, yes, the margins in oil and gas is lower, but there is some good reasons for that as well. Umbilicals are still a very profitable business, slightly lower than before, and that is mainly related to that we produce most of that or all of that in Czech Republic. and the currency impact has made it a little bit more costly to produce in the Czech Republic. But the largest impact on the oil and gas market is that we have grown the OECD business a lot, and that is not a high-margin business. It's a very important contribution part for the large flows into it. So that is also one reason.

Okay, thank you. And continuing on the oil and gas, I know that you have previously said that you are fully booked for deliveries this year in terms of capacity. How far away would you say that you are from full capacity for 2024 deliveries?

Yeah, then I need to speed it up. If we take umbilicals that most of you normally are more interested in, we are booking now in the second quarter in 2024. We also have seen, I should not be too sure about this, of course, but we've also seen I mean, in quarter one, some competitors booked orders that did not happen in quarter two. So I think they have also filled up their systems. So now we're booking in quarter two in 2024 for Ambilicus. That's the case. In OCTG, it's even... Better or worse, you decide, but the backlog is even longer. And there it starts to be a stretch for us if we can book more because the growth in OCD is so large and our backlog is so strong. So we have lost some flexibility in booking more orders in that part of the business.

Okay, thank you. That was all from me.

For any further questions, please press star and one on your telephone. Star followed by one.

We have one question from the webcast. How big has the destocking among distributors, et cetera, in certain areas been to?

Difficult to say. Actually, I mean... We don't really have that number. I'm not sure I could share it, but it's normally when market gets softer, that is the first thing you see, because then distributors get worried. So I think at this point, I think that is the largest impact, but that will be flushed out within a quarter or two. But I really can't put numbers on it.

Thank you.

We have a follow-up question on the telephone coming from the line of Victor Trosten, Danske Bank. Please go ahead.

Yes, thank you, operator. Just a follow-up on my side. If you could help us a bit with the seasonal pattern into Q3. I guess we all know that Q3 is by far the smallest quarter. But just when I look on the historical figures that we have, It looks like, you know, orders historically tend to come down, you know, 6-8% quarter-over-quarter. Sales, you know, let's say 14-15%. Could you just, you know, help us a bit on those figures? And I guess what I'm after is, you know, whether book-to-bill could, you know, turn, you know, above one again in Q3. Yeah.

Good and difficult question, Victor. Where orders are lower in Q3 is mainly related to Europe, because Europe is also slower in the European summit period. On the other hand, and I think one learning is that you should not I think for everyone is not look at order intake in an individual quarter too much. We look at rolling. And if you remember, and of course you remember, quarter three last year was not very high on order intake. And I think the biggest surprise we had quarter three last year was the lack of orders in oil and gas. So I think quarter three last year was weak, and that at least gives some indication that maybe book-to-bill could be positive, but I think we need to go through quarter three until we conclude that. But I understand where you're coming from, and I think your thinking is not wrong.

Yeah, okay. No, exactly. No, it's helpful. Thank you very much.

We have another follow-up question on the telephone from Mr. Patrick Nunn, Bank of America. Please go ahead, sir.

Thanks. I just wanted to know how you're thinking about M&A for the rest of the year. I mean, obviously, with the macro uncertainty, there may be more opportunities that come up. And are you seeing opportunities in certain sectors? And if so, where?

Thanks. We have a pipeline. Maybe we are still beginning because we don't look at opportunities based on business cycles. Maybe we should. It's sort of the areas where we're looking for structural growth and part of a strategy like, for instance, medical. And I think our view on where we want to make acquisition has not changed. But I cannot sort of give more in from the pipeline right now. Okay, thank you.

There are no more questions on the telephone at the moment.

Thank you. So with that, I think the time is running out. So thank you for all your questions and also thank you for joining the call. And we would like to wish you all a great summer. Goodbye.

Thank you. Bye-bye. Bye-bye.