Sandvik AB (publ)

Ladies and gentlemen, welcome to the Sandvik Interim Report Q3 2024 Conference Hall. I would like to remind you that all participants will be listed on only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. We will now be joined into the conference room.

Thank you. Thank you.

Hi everyone, a warm welcome to Sandvik's presentation of the third quarter results 2024. My name is Louise Cheddar, 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. Also from my side, welcome to our third quarter report in 2024. If we summarize the quarter, I think we see a mixed event environment and in that context, we deliver 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 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 deliver a resilient margin in the quarter, just a decrease 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 388 million. and that corresponds to a bridge effect of 309 million as we also had some savings in the same period last year. The adjusted profit for the period was 3.7 billion and finally we also delivered a strong cash flow in the quarter of 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 two significant industry trade shows in the quarter, Mine Expo, which is only held every four 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 Mine Expo, and it's 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 surely 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 continues 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 than for new equipment sales. General engineering, very correlated to PMIs, 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 at 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. You 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, 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 more of a stable development, slightly down even. And this is driven by some temporary issues related to, for example, strikes that we have seen in North America in the period. Asia was negative with aerospace in China down double digits. If you 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 28.8 billion. Revenues of 30.3 billion, which is a book to build of 95%. And from a seasonality point of view, it's not uncommon that we have a book to build of below 100% in Q3. Looking at this from a different perspective, we can see we now have had the past two 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 three quarters. So a stable overall performance, I would say, from a top line point of view, given the macroeconomic situation we are in. Then coming to the EBITDA development, it's down 7%, absolute level of 5.9 billion. This is a margin of 19.4%. Here we have lower volumes in most of the businesses, but it's partly upset them 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 big negative impact on the top line, slightly less so on the bottom line, which then overall led to an accretion on the margins. 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 Janssen project, 1.9 billion. We only booked 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 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 two major orders, one in mining and one 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 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 on very weak compares. From a segment point of view, 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 four. And this difference is, of course, driven by inorganic growth in particular that we are now consolidating the Shoshana 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 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, Sergi.

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, EBITDA came in at 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. Networking capital came down in absolute terms Relative to sales, it landed at 30.2%. And we had a strong cash flow in the quarter, 6.8 billion, corresponding to a cash conversion rate of 121%. Returns at 13.5% and adjusted EPS at 2.94 crowns. So if we continue with the EBITDA bridge then, and starting with the organic column, here you can see that revenues came down by 0.2 billion, while EBITDA declined by 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. 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 2022 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 390 million, and this is driven by the higher yield costs. 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 networking capital, you can see, as I mentioned in the bars here, that in absolute terms, networking 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, networking capital remained at 30.2%. It was a strong cash flow quarter. Cash flow came in at 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 developments. where earnings adjusted for non-cash was a little bit lower, but then capex was also lower, and then we had a positive contribution from networking 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 46 billion. And financial net debt over EBITDA came down a little bit sequentially and landed at 1.4 billion. 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 3.5 billion, interest net at 1.2, and the tax rate is right in the middle of the guided range. And looking ahead then at the fourth quarter of full year, we expect the currency effect in the Q4 to be minus 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 conclusion.

Thanks, Cecilia. Yeah, 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 Shoshana and also decided to exit to 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're 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. And when we go through these savings and so on, we always make sure that we are not reducing costs 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?

We now begin the question and answer session. Anyone who wishes to ask a question may press Star 1 on their telephone. If you wish to remove yourself from the question queue, you may press Star 2.

Operator, can we have the first question?

The first question is from John Kim with Deutsche Bank. Please go ahead.

Hi, everybody. I'm wondering if you could comment on price-cost dynamics. Hello? Hello? Hello, operator. Hello.

All right. I will start with a question from here. The financial net debt to EBITDA is now within the 1.5 times target. With a negative outlook by SAP, 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 of EBITDA below 1.5, and that is what we're steering towards. What we would like to see, though, is financial net debt of 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.

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-and-loaded deliveries, and according to this analyst, it was a bit weaker than his or her expectations. Could you elaborate a little bit on this?

Yeah, sure. That's correct. 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?

Yes, can you hear me?

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.

price-cost dynamics into next year? Any comments that can help?

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 booths?

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 down terms 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.

I can just also give some comments on the aerospace segment. Some comments on the current quarter and maybe ahead.

Yeah, 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 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 outlook for equipment and major orders? Also, what the price component in the 11% aftermarket growth is?

The last question that 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 diluted from a year-over-year point of view. Metal prices are at very high levels. If we look at our own basket, 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 from an aftermarket point of view. And that's both parts and services, but also on the consumable 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 modeling 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 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? Can you hear me?

Yes, we hear you loud and clear.

Perfect. So the first question from the phone is from John Kim with Deutsche Bank. Please go ahead.

Hello?

Hello?

Can you hear me? Hello? Hello? Hello? Yeah, hello. Okay, sorry about that. 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 four- to three-week impact in your aerospace business heading 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. uh what 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 the supply chain and the production is still running uh but the dynamics around the strike is a little bit different since then they actually stop production um so i cannot give you a specific uh you know impact in that regard but uh I think the best guess would be to simply look at for how long the strike has been ongoing and do that proportionally. Okay, thank you.

Thank you.

Thank you. The next question is from William Andrew with J.P. Morgan. Please go ahead.

Hi, good afternoon. Thanks for taking the call. I want to ask two on the S&N side. Can you remind us a little bit in terms of the powder dynamic for the Q4? I appreciate the last two quarters, I think, have 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? And just trying to kind of understand the building blocks for the Q4 developments.

Yeah, powder in Q4, I have to... 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 sector. 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 a quarter?

So I wouldn't say we saw that much impact actually in Q3 from the pre-buys in Q2. So, and I cannot 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, it's a little bit difficult to answer. I would assume, you know, no negative impact from the pre-bias in Q3. And yeah, and it's probably the same in Q4.

Thank you, Stefan, very helpful.

Thanks.

The next question is from Kruber Magnus with Nordea. Please go ahead.

Hi, Stefan, Cecilia, Luis, Magnus here from Nordea, a couple from me as well. Could you talk a little bit about the universal field robot acquisition? Do you see any need for any upfront investment here to gain traction and volumes in this business over the coming quarters, please? Thank you.

No, I wouldn't say that, not in that sense. What we're 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 where there are other larger OEMs, we can integrate with those solutions at the 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're doing as an investment now is that we are integrating the universal field robot 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 AutoMind. But there is no sort of specific larger investment needed for that to happen. That is not part of the general product development roadmap.

Perfect. Thank you so much. And I just want to make a clarification on the SMR demand dynamics you call out specifically, some hesitation here on the equipment side. Is that sort of on par with what you have seen in prior quarters? 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, the equipment has been a little bit down versus the peaks, but that is the same dynamics, I would say. So no incremental changes. difference, so to say. Excellent. Thank you so much.

Thanks. The next question is for Berglind Klaas with Citi. Please go ahead.

Thank you. Hi, Stefan and Cecilia. Klaas at Citi. So my first one is on price cost in SMR and looking at the operating leverage here. Organic revenues up 15 million, but EBIT is falling 243 million. And I get that This is on small volumes, and the equipment effect from volume is particularly hard. But just on price-cost, do you foresee a 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? Thank you.

Yes, as you said, Claes, 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 effect also in Q4, but it should start to normalize towards the end of the year.

Okay. 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 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? Thank you.

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, UK 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 wouldn't say it has spread further, but I think the situation in those countries were not as good as we had, or worse than we had hoped for in Q3. You had a second question that I forgot.

No, it was really whether it was September.

No, I would say all three months in the quarter were at the 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 early pre-buy. I know you said to Andrew that it wasn't a big pre-buy effect, but to me at least it felt like auto narrow in China was sort of the bigger delta rather than general engineering. Would you agree with that?

Yeah, 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.

Thank you.

Thanks. The next question is from Daniela Costa with Goldman Sachs. Please go ahead.

Hi, good afternoon. I have two as well, but I'll ask them one at a time. The first one is regarding basically portfolio and the non-core. I guess you did these two divestments and it had been a while since you, I guess, the last big thing. Can you give us a bit of context of sort of what are these two isolated things? Are you doing more of a review of the portfolio? Are there other non-core areas? How are you assessing the portfolio overall?

Yeah, 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 two were, are the things we... 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 two 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 BME divestment that we did now, which we only had a minority stake in, they were an additive services provider, which we felt was non-core. And the other one was the engineer-to-order part of DW Fritz, which we also felt was non-core. So I would say we will continue to review this, and there might be other things in the future of this kind of nature.

Got it. Thank you. 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 2022 programme we will realise at least 90% of the savings by year end. For the programme this year the aim is to realise 80% of the expected run rate savings. We're a little bit ahead of that now as you can see. We're already at 88% for the 2022 programme. 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. Got it. Thank you very much.

The next question is from Edward Hussey with UBS. Please go ahead.

Hi there, thanks for taking my question. 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 backlogs, you've sort of worked through the backlog now and things are a bit more normalized there? Or was there 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 yeah, I think that that's okay. When we talk about a little bit weaker equipment deliveries in relation to prior sort of expectations, if you will, it's 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, thank you very much. 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, it From what I can gather, you sort of put up prices by about 45% 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 normalised level next year, and let's say you put it up 1% to 2% versus costs increase of 1% to 2% next year, would that also lead to a headwind from a margin perspective, or given 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. Thank you.

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 with our value-based pricing model as we've done in the past.

Yeah, 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 if Q4 and Q1 next year. No, in SMM, did you say that as well? Or is that not the case?

Not in this quarter. That was the case for SMM in the second quarter. It's the case for SMR in this quarter. 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're expecting.

Okay. Thank you very much.

The next question is from Yeatmax with Morgan Stanley. Please go ahead.

Thank you. Just my first question is on rock processing. And I think you called out the sort of larger 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 of kind of what you're seeing in North America, where the inventory situation is at the dealer's, That would be a helpful starting point. Thank you.

Yeah, so if I said US, then I said the wrong thing. We had some larger orders, but they were not in the US, 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 improvement 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 we had hoped for at this point in time, to be honest. That's why also we say that the infrastructure continues to be weak.

Okay. And just to follow up then, on mining and rock kind of margins, we're obviously first nine 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 this 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 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 area. 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 kind of improvements in the manufacturing methods, the flexibility in the business. But I guess if I look at year to date, your kind of decremental margins in this business, 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, 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, there for 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.

Yep, no, that's fair. Okay, thank you very much.

The next question is from James Moore with Redburn Atlantic. Please go ahead.

Yeah, thanks for taking my questions. Perhaps I could start with SMM. You're European software, 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 this is more chinese export related in the sense that china wants more self-sufficiency so europe's biggest customer on the exports out 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 and maybe we could go one at a time let's start with that yeah if we that's a big question though um uh

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, in general, it's a lower 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 products. I think that's one reason. And you have high energy prices in some of these countries as well. So Just a general slow economy driven by those 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, you know, how much is this a dynamic? I cannot say, but I definitely think it's part of the dynamic.

Thanks. Just a technical couple, if I could. The powder business, just given the comp, are we up 50% or are we 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's that progressing this year?

Yeah, on the powder, we're just saying double digits. And I don't know, do 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.

Yeah. 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 bits in SMR, can I just clarify something you 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 we don't give the specific margins on aftermarket and equipment, but 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 I've 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.

Great. Thanks very much.

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.