Sandvik AB's (SDVKF) CEO Bjorn Rosengren on Q3 2016 Results - Earnings Call Transcript

| About: Sandvik AB (SDVKF)

Sandvik AB (OTCPK:SDVKF) Q3 2016 Earnings Conference Call October 24, 2016 9:00 AM ET

Executives

Ann Sofie Nordh - IR

Bjorn Rosengren - CEO

Tomas Eliasson - CFO

Analysts

Daniel Schmidt - SEB

Anders Roslund - Swedbank

Klas Bergelind - Citi

Graham Phillips - Jefferies

Markus Amala - Kepler Cheuvreux

Daniel Schmidt - SEB

Lars Brorson - Barclays

Andrew Wilson - JP Morgan

Benjamin Maslen - Morgan Stanley

Alexander Virgo - Bank of America Merrill Lynch

Andreas Koski - Deutsche Bank

Sebastien Gruter - Exane BNP Paribas

Operator

Greetings to you all and welcome to the presentation of the Results of Sandvik’s Report for the Third Quarter 2016. I am Ann Sofie Nordh and I am heading the Investor Relations Department Sandvik and I will guide you through the Q&A session later on. But before that we’ll of course going to run through the presentation managed by -- introduced by our CEO, Bjorn Rosengren and our CFO Tomas Eliasson. And please go ahead.

Bjorn Rosengren

Thank you, Ann Sofie, and also from my side welcome everybody to this Q3 report. You have to excuse my voice. I lost it during the weekend. So, if I lose it during the day here I’m sure Tomas will give me a hand hope so.

Tomas Eliasson

I’ll do my best.

Bjorn Rosengren

Good. Thank you very much. Yeah for the third quarter, I’m pleased with the development of Sandvik during the quarter. Despite lower sales we managed to improve both the earnings as well as the margins. We also see -- saw a stabilizing development of our order books and we had during the quarter the highest cash flow I think a record one for the Q3.

The change in our organizational structure was taken place here 1st of July this year and the development during this period has gone very smooth. This has also been an exciting quarter in relation to new product launches and we will come back to that little bit further on.

The market stabilized during the period and both Europe and North America was flat and we saw some improvement in Asia. Two segments developed very well that was the mining segment as well as the aviation segment. But we still see challenges in the oil and gas industry even though sequentially it’s pretty flat.

On the order intake I think we seen a stabilization and actually looking at the last five quarters we can actually see that the level has really stabilized. The revenues is still going down and this quarter we had 5% negative. And on the book-to-bill ratio we were just on 1%.

The positive side I think on the report is very much related to the EBIT development, which actually improved in a top market environment with an improvement of 13% and we reached 13.3%, which is a good number for being Q3, which traditionally is a challenging quarter for the company a lot of vacations during this period. And this is mainly driven by our cost efficiency programs that's been announced earlier, but also very stringent cost control during the year and the period.

Starting up, if we look at our three business areas, Sandvik Machining Solutions I think continues to show strength. We saw the market continues to be challenging it’s as here 4% down in price volume. If you really looking at the underlying numbers here there are some effect of this 4% and one is we had a little bit shorter days during this, which effects about 1%. There is also some tough comparables in Asia and Europe on the order side. And the third effect which is a [indiscernible] is related to the Vulcan business, which had been moved into the machining solution. Where we see much more volatility in orders and this quarter it was significantly lower.

So if you leave those fees up and look at the business without them it's about 1% down. Then of course all the activities continues specially with the supply chain optimization program. We continue to work with the closing of the factories at the same time keeping a very stringent cost control of the business. And I think 21% is a good number for machining solution.

What's exciting during this period also is that we launched a number of new products during the IMPS it’s a big exhibition in Chicago. And this was actually the first intelligent tools that's been introduced to the market and we are unique with this. So I thought I show a picture little bit from the products so this.

[Audio-Video Presentation]

So this new line of product will help our customers to become more productivity. And is taking the first step into the digital tool market. And these products are very well received in the market. And we believe that this will be the future in the tooling market.

Then moving over to the Mining and Rock Technology, I think on the market side here we’re seeing the best improvements. We can see that the order intake is plus 5% compared to last year and this is mainly driven by the equipment sales. The aftermarket business is pretty flat. We had some good orders coming in during the period, both from Canada and also from Australia, which has helped the numbers in a good way.

Also in the mining business we have introduced a number of new products and this is more related to battery driven drill rigs and loader. So I also have a small film here, the one who has your sunglasses, please put them on.

[Audio-Video Presentation]

So it’s always exciting to introduce new products, but during the mining expo in Las Vegas which is a mining show which for every fourth year, this whole new range of the battery driven drill rigs and loaders were represent also very, very well received in the market. And this helps many of the mining companies to reduce their ventilation costs by not using diesel engines underground.

So that moves on. I think we have also then come to the Material Technology, the last business area. I think in Material Technology, I think we had a very stable development, we can see on the order side. We received a big order from the oil and gas industry from big leagues [ph] of $350 million, which I think came in at as a good time supporting the oil and gas industry, which has been under pressure for certain time, otherwise I think they continue to work hard, keeping the cost under control and we during the quarter had EBIT level underlying EBIT of 5% and then adding the metal surcharges I think we went up to 6.7%.

Then I give the word to you Tomas and give us a little bit more in-depth when it comes to the numbers.

Tomas Eliasson

Yeah, okay thank you, Bjorn and good afternoon. Let’s jump straight into the financial overview. And as you heard the order intake was flat this quarter and it was actually a black zero it’s plus 0.2% and this is the first time in the couple of years that we had an order intake which is not declining.

Revenues were down minus 5%, of course given the negative or the decline in the order intake in previous quarters. The EBIT came in at 13.3% compared to 11.2%, an EBIT margin which we are very happy with. So increase both in margin and in numbers up 13% in numbers. Working capital improved year-over-year and cash flow was record high.

Just a quick note on the return on capital employed, return on capital employed numbers that we report are rolling 12 months numbers, we must change going forward, we’ll see. But this quarter we had quite an improvement in return on capital employed, we just took at the quarter by itself earnings is up, the capital base is down.

Okay, so let’s take a look at the bridge. 5% down on the top-line, meant decline of SEK143 million organically, savings programs plus SEK190 million. So the net of those two was plus SEK50 million. Currency plus SEK62 million and change in the metal price effects and the bridge effect was SEK180 million. So that’s the journey from SEK2.3 billion to SEK2.6 billion or from 11.2% to 13.3%.

So let’s take a look at the accretion and dilution in the bridge starting with the organic part, which means just a pure volume and the savings programs. Minus 5% means SEK906 million on the top line, but the EBIT went up SEK50 million. And we had really good performance in all business areas especially in SMS. SMS was really outstanding this time [indiscernible]. Currency was SEK52 million, minus SEK78 million on the bottom plus SEK52 million on the EBIT line.

Now we had guidance of minus SEK60 million for this quarter and that guidance was the transaction and the translation. And the real transaction and translation for the quarter came in at close to that minus SEK72 million. The rest bridge effect on revaluation and revaluation we don't know much about [indiscernible] about that really. So the net-net anyway is SEK52 million.

Metal price effect pretty big as a bridge effect this quarter is very big, we had a big negative effect a year ago and this quarter we had a positive effect. So SEK186 million. Now the important thing is that of course its 210 bps plus, and even if you take out the currency effect here and the metal price effect if you would like to we still have 80 bps of organic improvements was strong.

Net working capital on the left hand side you can see we had an improvement year-over-year both in percentages and in mining. And on the right on hand is the new business areas for the first time. SMRT, Mining and Rock Technology came down to below 30% for the first time in many years. SMS is doing fine and SMT the orange one looks a bit odd, but it’s perfectly fine, because what you really see here is a lack of customer advances, we had quite a few of those a year ago we don't have any this year. The inventory situation is completely under control.

On the cash flow side, Q3 is what was good. I think Q3 in those three ‘14, ‘15 and ‘16. But this year in 2016 Q3 was even better with SEK4.3 billion in pre-operating cash flow. And of course if you have an improved earnings you have released from working capital and if you have an effective CapEx is what you get net of cash flow.

The net debt came down with 7% compared to a year ago. The financial net debt which is the great part of the call here on the bar it came down even more with 14% and then what happened was that the discount rates for us and for everybody else came down, which impacted the pension liabilities, the pension obligation improved -- not improved increased I should say.

But as you know the pension accounting is just theoretical thing about future pension obligations is discounted to today's value. And this goes up and down with a couple of billion for every percentage unit the discount rates goes up and down. So this will go down eventually when the discount rates comes down. Important thing is that the financial net debt is continues to come down. Net gearing ended at 0.95% so we’re back to pre-dividend levels from Q1 despite the fact that we had record high net pension liabilities.

To finish off with some outcome and guidance, currency effects was plus SEK62 million. We guided minus 100, yeah I said minus SEK50 million guidance was minus SEK100 million. Metal price effect came in at plus SEK51 million we guided plus SEK30 million so pretty close. And for the fourth quarter, we guide a positive currency effect of SEK200 million transaction translation and we guide SEK50 million for metal price effect.

If you look at the full year numbers, CapEx we keep the guidance of SEK4.1 billion or less. If you look at the run rate we are north of SEK4.1 billion right now we are lower than that. So we might or we will most likely end up on something below for, but we keep the guidance as such.

Net financial items though we have taken down from SEK1.7 billion to SEK1.9 billion to something between SEK1.6 billion and SEK1.7 billion. And the tax rates looks steady between 26% and 28%.

And with that I'll hand over to you again Bjorn.

Bjorn Rosengren

Thank you so much. So summarize a little bit, the market continue in the most segments that we are operating to be challenging even if we’ve seen an improvement in mining sector. We still believe that this will continue and we need to continue to focus on efficiency improvements and stringent cost control even in the coming quarters.

The process in moving Sandvik over to a decentralized structure continues and we are continuously moving resources from centrally out into the operations to build up accountability and entrepreneurial spirit that we would like to see in Sandvik. And I think it’s moving very well according to our plans.

As a last thing I like to mentioned that we are very happy that once again we have been included in the Dow Jones Sustainability Index, and that we will continue to drive the sustainability focus in Sandvik also going forward.

But that I think we end our and maybe we move over to question and answers.

Question-and-Answer Session

Ann Sofie Nordh

Yes let’s do that let’s start to see if we have any questions here in the room, Stockholm. Yes please we have questions here at the front.

Daniel Schmidt

Thank you this is Daniel Schmidt from SEB, can you give us a sense here Tomas, could you shed some more light on SMRT in terms of organic order intake [indiscernible] a segment. Can you say anything about aftermarket with Sandvik AB and then also construction and [indiscernible] on top of that?

Tomas Eliasson

Sure, absolutely. I think it’s important when you are see improvements in the mining market. The development of the metal prices have then gone up during the last, let’s say three quarters slowly, and this has mainly come to gold prices, silver prices and also zinc. While we've seen much tougher conditions regarding copper, iron ore and coal. So that’s the part. So that’s the part so we have seen mainly and improved this on the equipment side especially on the underground where we’ve seen the best improvements.

We -- so the construction side, it’s pretty flat compared with this previous quarter, no big development, and on the [indiscernible] business you compare year-on-year, it is down, but if you look at potentially it's pretty flat. We’ve seen oil price stabilizing around $50 and we’ve seen number of drill rigs going up. If you look from one year back, it’s actually down about 30% and then I think around 15% down sequentially. But we haven’t really seen those yet in the numbers from [indiscernible] is today included in the mining rock tools on that side. So aftermarket, that includes tools as well as the service and spare part, that has been pretty flat during -- compared to last year and sequentially.

Daniel Schmidt

Okay. If you look at the rail the last year and also the start of this has been heavily, heavily in red, as I can see at least, and now you’ve seen this trend in North America with the rig coming up quite a lot since the end of May. What do you think is needed in terms of help from the market for you guys to be back in flat figures on that particular segment in SMRT?

Bjorn Rosengren

We’re trying to avoid talking so much about the performance, I mean the EBIT level of each business, but it’s correct. I have been pretty transparent we have been losing money. That of course includes also in the [indiscernible]. So that’s probably otherwise I would say it’s [indiscernible] somewhere. We have indications that things are looking a little bit brighter, but I think we’ll have to wait to the next month and a quarter to see its effect. But it’s correct there are more rigs operating at the moment and that should actually bring some demand also for our products. From an EBITDA margin point of view is just below zero. So I mean so it’s not leading from a cash point of view.

Daniel Schmidt

Thank you.

Ann Sofie Nordh

And we have another question from the room here in Stockholm please.

Anders Roslund

Yes Anders Roslund, Swedbank. Could you elaborate on the machining solutions development in the various regions? How you could see during the quarter and what you see now in October?

Bjorn Rosengren

Right. I mean if you look year-on-year North America continue to be the challenging market, there is actually no big change from what we have communicated before. So I would say Europe previous flat somewhat have been in the Chinese region and then we are actually down in North America with 6%, so it’s quite substantial. So that’s no really a big change in that that continues to be tough and if you look at the different segments that we operate the aviation is doing very well. On the automotive side which has been flattening out to a probably a little bit down for us during this period and we do not really see that it is destocking it’s more a caution among the automotive industry on the order side there.

Then if we’re looking at -- it’s only two weeks now since on the -- two--three weeks on the quarter, but there are no big deviations from the average from previous quarter. So I think that’s moving on in the same pace as we’ve seen earlier. But no, no big changes.

Ann Sofie Nordh

Can I just clarify that we haven’t seen any change from the average of September given the seasonality in the quarter; I think it’s a valid point to make.

Anders Roslund

Okay. Just one follow-up on SMS again. You said the margin were 1% higher than last year due to that you had destocking, do you produce at the same level of sales?

Bjorn Rosengren

I mean, if you actually look at the business last year, I mean the result was I mean lower than you normally have during the quarter. So I think we had 18.1% so there I think during third quarter last year they had a big destocking which affected, on this year there is actually no change, we’re running it at the same but not affecting actually any improvement of the EBIT or the decrease of the EBIT due to destocking. So it’s a more a bridge effect from last year.

Anders Roslund

Okay, thank you.

Ann Sofie Nordh

Thank you, I know we have lots of questions from the conference call. So operator, would you please let the first question through.

Operator

Certainly. The first question comes from the line of Klas Bergelind, from Citi. Please go ahead your line is now open.

Klas Bergelind

Yes, Hi, Bjorn and Tomasit’s Klas fromCiti. Firstly on the margin in mining and rock technology. If we talk us on the mining side, if we try and split out between equipment and aftermarket. The margin in equipment improved last quarter. Was it at the similar level this quarter or have it improved further and roughly to what level please? And if you could say, how the margin developed in by rail and construction in the quarter?

Bjorn Rosengren

Yeah I don’t think we normally give any details on equipment. We’ve transparent in a way to say that equipment margins are lower. What we’ve mentioned on specially during quarter that we had I think one order which was related to lower margin, but I think the equipment margins is pretty stable, no really changes on that side. On the aftermarket also the margins are pretty stable no big changes, which is very much also related to the volumes that we have seen there. So no big changes there either.

On by rail I think I mentioned that part, if you look at year-over-year, yes it is down but sequentially it’s pretty flat and also much. Construction, no big changes at the -- I would say.

Klas Bergelind

Okay, great. My second…

Bjorn Rosengren

You can actually see that, I mean we reached 10.5%, but that is of course included in 5% lower market, 5% decrease compared to last year.

Klas Bergelind

The reason we ask is because last quarter you said that the equipment margin in mining improved quarter-on-quarters, so I was just curious whether the equipment margin actually improvement yet again, or but it’s stable.

Bjorn Rosengren

Yeah, I think it’s pretty stable, no big changes on that. I mean, when you get more equipment orders of course you have a better margins on the aftermarket. So if you have bigger sales of equipment that dilutes some of the total market of course now that's how it goes.

Now when we merged together both the mining and construction part of it, I think our aftermarket is approximately 55% or actually 70% when we were talking just on the mining side. So there is a little bit less because you know there is somewhat lower aftermarket in the construction business.

Klas Bergelind

Yeah. My second question is on exploration which is now improving pricing on rock tools have been an ongoing issue. Is pricing also improving this quarter and if you could tell us about the aftermarket where you now say it's largely stable versus stable last quarter? How did aftermarket in mining develop year-over-year and quarter-on-quarter?

Bjorn Rosengren

I think on the -- as we say aftermarket in generally it is stable. There is somewhat negative on the drill steel or the consumables, which is of course also related to the barrel [ph] business.

Klas Bergelind

And on pricing on rock tools?

Bjorn Rosengren

Pricing rock tools is pretty stable.

Klas Bergelind

So that is an improvement versus last quarter.

Bjorn Rosengren

Yeah I mean we’ve seen as we mentioned earlier we've had a little bit down during some quarters but not big changes, it's somewhat down but not much.

Klas Bergelind

Alright, perfect. My final one is North America quickly, you indicate stable demand quarter-on-quarter this has been a biggest concern for you as of late next to direct oil and gas. What do you see North America as the quarter progressed if you at general engineering, automotive, mining, et cetera if you look at how the quarter progressed for each segment in North America?

Bjorn Rosengren

Yeah if you look at overall, we said we have stable in North America, but that's also related we had a big order in the mining segment up in Canada, which help the numbers up.

If you look at North America in general I think it's more down and I think if you look at the SMS business you're actually down 6%. So North America is still worrying part I think if you look at the market segments that we're operating.

Aviation as I mentioned before continues to be very strong. Automotive is a little bit flat even though our sales was little bit down during that part. General engineering is if you look sequentially it is pretty flat, also if you compared to last year so it has had more flattened out I would say on that part, mining is up. I hope I got all the segments we have to check if I missed someone.

Klas Bergelind

No that's perfect, thank you.

Bjorn Rosengren

Thank you.

Ann Sofie Nordh

Thank you, Klas. Operator can we have the next question please?

Operator

Certainly. The next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open

Graham Phillips

Yes, good afternoon Tomas and Bjorn, Graham Phillips from Jefferies. If I could just focus backing on SMS please, when we look at the North American development minus 6% and you sight automotive but I believe auto production was up about 3%. So can you talk a little bit about the competitive issues going on there both against your competitors Kennametal in the new CEO in the business there and he has indicated that he's prepared to use pricing to regain share, which they've lost a lot of in the last decade or so. But also what happened technology wise in terms of substitute materials competing materials to the cutting tool business?

Tomas Eliasson

Yeah I mean there could be a lot of things here that being affected. How we see the automotive industry it is pretty flat during this period. Even though our sales have been little bit less. We do not see that as a market share decrease or something part more and more cautiousness in the buying procedure from the automotive industry. Because it is weakening off a little bit from the improvement that was previous. And then we all know that when the automotive goes into other materials going into battery driven and so on that effects of course our business negatively. But I don't think this short-term you cannot actually see those effects. So I think that's more related of the buying behavior at the moment.

Graham Phillips

Okay. And then perhaps a little bit about Asia because again I think there have been expectation of some good growth in Asia for machining solutions, but we've seen orders slipping there further, what are the dynamics in the Asian machining solutions market that again that causing some underperformance there?

Bjorn Rosengren

I think when it comes to Asia the positive side there the automotive business continues to be very strong as well as the aviation side. The negative part is actually related to the oil and gas industry, rest of it is very flat.

Graham Phillips

Okay. But just also on the competitive issues in the U.S. I mean are you seeing Kennametal a bit more aggressive they obviously changed their distribution method as well to use more independent. So there will be more of their product coming on the shelves of the distributors.

Bjorn Rosengren

I think the whole cutting steel market is the competitive market and there is a lot of that especially when volumes are not going up at the time. So of course there is a lot of player a lot want to have piece of the market. We feel that our market share is stable, we do not see actually any decrease in prices rather somewhat positive on the pricing side for SMS.

Graham Phillips

And again I didn't get to see the video because I'm on the phone here. But the digital tool market, how big should that be in terms of new products, what percentage of sales do you envisage that contribution to the division?

Bjorn Rosengren

Yeah I think this is at a very early stage. So quite unique that presenting tools that come can actually communicate and in the future will help the customers. I think it's going to take a number of years before we see any significant big sales of this. But it gives a lot of opportunities in our work to connect the machine builders with the tools with the digital opportunities and help our customers to become more productive.

So the interest was huge during the exhibition, but if you look at that part of the market is still of course very small. I think you need to wait a number of years to see what is. We will continue to launch new products within this area and eventually it will become an important market.

Graham Phillips

Okay, thanks Bjorn.

Ann Sofie Nordh

Thank you. And operator again can we have the next question please?

Operator

Certainly, the next question comes from Markus Amala from Kepler Cheuvreux. Please go ahead. Your line is now open.

Markus Amala

Hi, Markus Amala, Kepler Cheuvreux. I'd like to start with just clarification of the asset to Klas’ question on North America just to -- if you look at the underlying demand and you say that is more down than anything and that you mentioned minus 6%. If we look sequentially we look just demand and I know that you said you were sliding a bit in second quarter versus first quarter. And do you keep sliding in terms of demand or is it fairly stable sequentially, if you could just clarify that for start?

Bjorn Rosengren


I think we see that stable, I mean sequentially it is stable. And what we are mentioning of course then it's one year back then it's down. But sequentially we see that's pretty stable.

Markus Amala

Okay, perfect. And then on the mining equipment side, can I just ask the type of orders you're getting on the equipment side, is it mainly replacement or are you seeing some new projects, et cetera coming in as well, if you could just talk a little bit about that?

Bjorn Rosengren

No, I think it’s a combination of that. But of course, all equipment in the mining business is -- can sometimes be seen as ware parts, because they have a certain life time it could five years it could be even be up to 10 years sometimes. But as all of the equipment becomes as more expansive they are to maintain then and keep the level a strong competitive one.

That means that you need to continue to replace products. And I mean if you look at last year we still had pretty good orders on equipment. I was quite surprised that we got that much orders during that period. Now it has accelerated a little bit and we received some really good orders from Australia as I mentioned, but also from Canada mainly in relation to underground mining.

Markus Amala

And do you have any idea of the average age of your fleet out there you'd like to share.

Bjorn Rosengren

We have -- I mean as you know we have a lot of data about the equipment. I don't know them here at the moment. But sure, we know all the equipment that are out there, how they are operating, how much consumables both they are consuming and so on. So that data is available. And we'll -- give a chance to see if we can put something together, I would see if Ann could get something then you can get information later on.

But I think the fleet it varies a lot, I think we said last time that we have around 8,000 operating units at the moment out there and of course going back, three-four years ago, three years ago, the demand was enormous, was very good and then it has cooled off a little bit the last three years and now it’s stabilized and come back a little bit, but that’s how the mining market goes.

Ann Sofie Nordh

Thank you, thank you Marcus, going to have to let the next question through please from the conference call.

Markus Amala

Thank you.

Operator

Certainly. The next question comes from the line of Lars Brorson from Barclays. Please go ahead, your line is now open.

Lars Brorson

Hi thanks. Just two quick ones for me please, one for Bjorn and one for Tomas. Bjorn, just on your SMS business, I am actually most interested in Europe, you are down 4% in the quarter, you talk about tough comps, I am not quite sure I understand you were down 5% last year for SMS over all. We don’t have apples-to-apples comparisons for Europe, but it looks like quite a weak quarter for Europe. Can you talk about whether you see any meaningful monthly variances what did you see in September? And I think there was a comment earlier was it from Ann Sofie that talked about October trading, can you just verify that and particularly what you’ve seen in Europe quarter-to-date, that’ll helpful? Thanks.

Bjorn Rosengren

I think on the Europe side, if recall right what I’ve said, I think it’s pretty flat there, we are not actually down in the volumes in Europe, it’s pretty stable. What I said that the 4% we talked about little bit that was the total SMS and there was the 3% which were affected by shorter working days, tough comparables as well as from the Wolfram business, which was significantly lower during the quarter. Otherwise I think we said more or less that stable there and a little bit improvement in China.

Lars Brorson

Okay I can’t quite make it that, but regardless just on the bulk order in Germany, how big was that, what’s was the size of the impact of that?

Bjorn Rosengren

Bulk orders from last year you mean.

Lars Brorson

Yes.

Bjorn Rosengren

That was about 1%.

Lars Brorson

Okay, fine thank. Just a quick one for Tomas, if I can. Just the group cost Tomas 154 in the quarter that was a bit lower than I think most had expected. Why was that, does that come back in Q4 and is there any change to an annualize level around $900 million for that line in your P&L?

Tomas Eliasson

It was a bit low, yes but I mean lower actually with the level et cetera. So yes it came in pretty good at 154. For the fourth quarter we keep the guidance on 250. So no change on the annual run rate at all.

Lars Brorson

Thanks guys.

Ann Sofie Nordh

Thank you. Can we have the next question please operator?

Operator

Okay. The next question comes from the line of Andrew Wilson from JP Morgan. Please go ahead, your line is now open.

Andrew Wilson

Hi, good afternoon everyone. Just a couple of quick questions on SMS again I am afraid. Pricing I think earlier you mentioned that pricing was still positive in SMS, can you just clarify that was right? And can you talk about it by region please?

Tomas Eliasson

Yeah, I don’t have actually per region, but pricing overall is slightly positive.

Andrew Wilson

Okay. Just in the level to what we saw last year or better than that?

Tomas Eliasson

That’s compared to last year.

Andrew Wilson

Okay, fine. And just on the aerospace, you referenced a number of times aerospace is being relatively strong, which sort of feel a little bit odd to it some of the news that are coming from that segment. Can you just talk about whether that’s the market share or whether you might expect that to slow down in the Q4?

Bjorn Rosengren

Yeah, I mean, we’ve had a pretty strong aviation business for quite some quarters and that was also during Q3. So strong good development there and that’s both related to North America as well Europe as well as China on the part. And the question was the other -- please repeat the last part of the question.

Andrew Wilson

Yeah, just how do you, how you might see the aerospace demand developing in the Q4 given the news flow in the sector how that necessarily being particularly positive?

Bjorn Rosengren

I don’t think we’ve given any guidance on the development in the...

Ann Sofie Nordh

Not for an outlook comment.

Bjorn Rosengren

No we don’t have an outlook from that really.

Andrew Wilson

Okay, no problem. Thank you.

Bjorn Rosengren

We don’t see any big changes, I think it’s what I mentioned is things moves on in pretty much similar as we have seen in average at the previous quarter.

Andrew Wilson

Okay, perfect. Thank you.

Bjorn Rosengren

Thanks.

Ann Sofie Nordh

Thank you. Can we have a next question put through please?

Operator

The next question comes from Ben Maslen from Morgan Stanley. Please go ahead, your line is now open.

Benjamin Maslen

Yeah, good afternoon Bjorn, Tomas, Ann Sofie. Three if I can, firstly just on SMT, where you won a larger order, we haven’t seen many over recent quarters, so how does the pipeline look from here for winning further large orders both on oil and gas and the nuclear side? That’s the first one? Thank you.

Bjorn Rosengren

Yeah, we were very happy that we received the order, I think if you look at the order book we have today it’s in line with what we had even a year ago. So we continue to get these orders for umbilical, which we are very happy for. You all know that I mention last time during the Capital Market Day we were a little bit nerves how will this develop because of the challenges in oil and gas industry. Then during I think last quarter call I came out more positive that the pipeline looks good, looks reasonable and there is no change on that, it looks pretty good. Then of course you need to get the orders, the projects have to materialize, but I think the pipeline is looks healthy.

Benjamin Maslen

And this is a follow-up I think you said before the backlog on it, on it umbilical side lasted into next year, I mean how far into…

Bjorn Rosengren

I mean the average backlog I think is around six months and I think it’s what we have about today also.

Benjamin Maslen

Great, thank you. Just on mining I mean you mentioned large orders one in Canada, I think one in Australia now mining systems has gone what is the large mining order for Sandvik are you trying to signal that perhaps the Q3 demand is unsustainable because of these one-offs or you have got other large orders in the pipeline that can come through and maintain this order rate? Thank you.

Bjorn Rosengren

I think when you look at the equipment orders they are all normally pretty big, there is not so big changes you don’t normally get one here one there it gets 5, 10 maybe up to 20 units. So there no really change in the pattern to how we get the orders. Of course the life is being a little bit more challenging on these little bit bigger orders and when they’re coming in that’s a more normal pattern to how orders are being placed. And I think we have a good pipeline there also, but it’s like everywhere else it’s competition and you need to close them and the project have to materialized. But it’s pretty healthy.

Benjamin Maslen

Got it, thank you. And then just finally on SMS, I know visibility is low on the business, but just to clarify if you look at the Q3 comparison obviously you had a less working days and tough comps from Wolfram. When you look into Q4, how does it look from a day’s prospective? And then is there anything we should be aware of from Q4 last year that would make that a practically difficult or you see comp, I am asking does that 2% drag drop out in Q4? Thank you.

Bjorn Rosengren

I think I mentioned already a couple of times that we don’t see any major change in this quarter. Things are moving on pretty much in line with previous. So there is no big deviation that we need to communicate I think at this time. It’s correct, I mentioned those three reason, while I think the one is we’re down 4%, I mean you can take it as what it is in the end it is 4% down if you compare those, but I think the underlying is a little bit better. I don’t know if I missed anything that you are asked here or.

Benjamin Maslen

No, no, that’s everything. Thank, Bjorn.

Bjorn Rosengren

Good. Thanks.

Ann Sofie Nordh

Thank you then. Can we have the next question please?

Operator

The next question is from the line of Alexander Virgo from Bank of America Merrill Lynch. Please go ahead, your line is now open.

Alexander Virgo

Hi, thanks very much gentleman. So quick couple of clarification ones please. Tomas would you mind just going back over the reason why your FX was positive on EBIT contribution? I think you mention your underlying or under the translation transaction numbers actually pretty close to the original guidance, but the line was a bit crackly when you gave the reason for it being a positive 60. Secondly, I think you talk about a lower central cost number earlier on but this if I look at the operating income and the P&L that was also positive compared to headwind last year, so if you could just explain why that or the swing was there and whether we can expect that going forward as well that would be really helpful? Thank you.

Tomas Eliasson

Okay. So, should I take first FX Bjorn?

Bjorn Rosengren

Yes, please all right.

Tomas Eliasson

Okay. The FX we guide only for transaction and translation effect, because that’s the only thing that you can predict with some kind of certainty, what the revaluation effect is I mean you never know depends on whether your payables or your receivable are paid a lot at the day you close the quarter. So, the transaction and translation FX it’s in the quarter were minus SEK70 million, SEK72 million. However, in the bridge effect between the revaluation now in the Q3, 2016 and end of Q3, 2015 we have a big positive number, which takes it all the way up to plus SEK62 million that's the story behind the FX.

Alexander Virgo

Okay, great thanks. And just was that in SMS mostly presumably or is that across the group?

Tomas Eliasson

Yeah mostly SMS. The transactional and translational negative to minus SEK72 million, it's very much the story about exports or mining exports to countries where we don't produce where we just sell where we just take companies. So it was very much South Africa and Kazakhstan this time on the negative transaction side. But the other revaluation yes you are absolutely right SMS.

Then the other question was it central cost or was it other operating income?

Alexander Virgo

No, it’s the other operating income so if I think last year you had a negative 115 this year was plus 89 just wondered what the swing was?

Tomas Eliasson

Yeah well now it will become a little bit more complicated. But it's actually currency again. Because as you have three currency effects, you have the transaction effect, you have the translation effect and you have the revaluation effect.

The transaction effect and the translation effect that's all over the place that's on every line in the income statement whereas it appears wherever the currency flow is. The revaluation effect is accounted for in other operating income, so that's what you see there. It was a big negative a year ago and somewhat slight positive this year so that's the difference.

In the end the total FX effect was plus $62 million nothing more than that, nothing less. So what you see on the other operating income it's like a one legged booking you're seeing the debit but not the credit.

Alexander Virgo

Okay, understood thanks very much. And the final one if I could please, you had a little bit of an acceleration of savings is there any -- can you give us any indication of what that might be for Q4? And if I might just ask if I looked at the Q2 report for mining and construction savings and the annualized impact on the new SMRT looks like a smaller but maybe I'm just missing something in the consolidation there. Can you explain that?

Bjorn Rosengren

No, I don't think we guide on…

Ann Sofie Nordh

We don’t guide for say for future savings I think in Q4, sorry. We’ll come back to that once the quarter is completed.

Alexander Virgo

Okay, thank you.

Ann Sofie Nordh

Right. Can we have the next question please operator?

Operator

Thank you. The next question comes from the Andreas Koski from Deutsche Bank. Please go ahead, your line is now open.

Andreas Koski

Yes thank you, it’s Andreas Koski from Deutsche Bank. So two questions on SMS, I want to ask Ben’s question in a different space. So you had 3 percentage points negative impact on organic growth on working days more from bulk orders. So what kind of comparisons do you meet in the fourth quarter if we assume demand remains flat quarter-on-quarter what would the year-over-year impact be on SMS?

Tomas Eliasson

No, I don't think I get that.

Ann Sofie Nordh

No, we wouldn't guide to that into the year, into the fourth quarter I'm afraid.

Andreas Koski

Okay. But if you look at BOL [ph] from bulk orders, you didn't have any bulk orders in the fourth quarter or did you and what BOL from how did they do in the fourth quarter last year?

Ann Sofie Nordh

We don't have any specific after that to mention here for the fourth quarter for now.

Andreas Koski

Okay. And then on the 3D printing, because we are now seeing things moving in this area. So it would be great if you could update us on what kind of risk and opportunities you see for SMS?

Bjorn Rosengren

Yeah, I mean 3D printing is an area which we have been working with a lot, during the last years we had 3D printing center up in Sandvik we are learning everything what's possible to do about that. It's true that using 3D printing would be less cutting but at the same time using 3D printing does not mean no cutting. Because when you get the component, which need to be grinded or finished in the grinded way. So there are certain amount of grinding and cutting also in these theses.

Probably I mean this is going to be huge in every part, of course it will be affecting us. I think today, it is being used in certain niches and that's how we use it also and that's what we learned in a certain part. And then I think it's still so minor that it does not really affect the market yet.

How that would be in the future that's too early to say to be honest. But sure we are working with it and we think it's a way to use for certain components, which are more difficult to make and then you have very small quantities of it. In the end it's always going to be which is the most efficient way to manufacture the components. So I don't have any really inside on that part more.

Andreas Koski

But may I ask how many people do you have now working in the development or research within 3D printing?

Bjorn Rosengren

I don't know exactly. We have a team I think we have three machines and we are not only doing components for ourselves we are also doing for others. It's becoming the talk of the town that we have a good knowledge in this, this means that customers are coming to us and asking if we can solve certain difficult issues for them. So we are working both with the design and manufacturing, but of course it's still on a very, very small numbers.

Andreas Koski

Yeah I understand that, but always interesting to follow the development.

Bjorn Rosengren

I think it's an exciting area. And both for us in the manufacturing the possibility to be making tools in a complicated tools I would say. So we would probably be using it in certain amount of our production we might even extend that business and see what we can do it because we have a lot of material knowledge we have a lot of cutting knowledge and we'll see how we can use that in the future. We should definitely participate in this development.

Andreas Koski

May I also ask what is Sandvik Machining Solutions’ automotive exposure in North America is it the same as for SMS overall, 25%, 30% of revenues or is it a bigger number or a lower number there?

Bjorn Rosengren

No, it's about right.

Andreas Koski

Okay. And lastly do you disclose the order intake mix for Sandvik mining and rock technology when it comes to aftermarket and equipment?

Ann Sofie Nordh

Not for the order intake we don't. But if you look at in terms of revenue 67% of sales was from the aftermarket.

Andreas Koski

Okay, perfect. Thank you very much.

Ann Sofie Nordh

Thank you. Can we have the next question please?

Operator

Thank you. The next question comes from the line of Sebastien Gruter from Exane. Please go ahead, your line is now open.

Sebastien Gruter

Hi, good afternoon. First question on SMS and seasonality just to and the margins working capital has gone up in the quarter, you mentioned some FX revaluation impact, positive impact. How should we think about the margin in Q4, should we have the same seasonality as usual could we see a lower seasonality?

And the second question is about your 2018 target beyond, I just I mean it's been six months since you [indiscernible]. Just wondered if you feel more confident, which businesses outperforming are lagging compared to your expectations? Thank you.

Bjorn Rosengren

And to start up with SMS, I don't think we had on the FX it was -- I think it was very low on the FX side, but I think what we see we said there is do we have a bridge on that?

Yeah, okay sorry on the FX let’s see on the SMS side, we can see the difference between the previous one. We have on the savings is SEK1.2 billion, we have on the FX 0.9 and then you have this related to previous year destocking, which was 0.8. So if you add that up I think you will get from 18.5 to 21. That's about what it is.

Sebastien Gruter

Yeah I'm thinking about the seasonality usually because 3 is a weak margin for machining solutions, we’ve seen working capital has gone up in Q3 usually it goes down. I am just wondering about should we have the same seasonality on margins as we usually do for SMS, margins would be more or less stable going into Q4? Because you don’t have this over under prediction issue.

Bjorn Rosengren

You know I think what’s important with SMS that they are continuing to improve their performance and their productivity in the company they have the different efficiency projects that we have announced, but they are also working with improving the F&A costs and other efficiency within the business area. So we do expect from one of our operation that there should be a continuous improvement, that should be a little bit that all the time and that’s also what we expect from machining solution going forward and that includes Q4 of course.

Sebastien Gruter

Okay, thank you.

Bjorn Rosengren

Otherwise, I think when you look at SMS, I think they are driving the efficiency within the business area very professionally, they are working with backend science, with the production units. As you know we had during the last 10 years decreased actually number of inserts that have been sold into the market that means that you need to continuously to adopt your production facilities your backend, which they have done in a professional way, but they are of course also focusing on all other costs not at least the S&A costs which we know is high but that’s also part of the way they go to market.

So I think the way they operate they stay very focused on their front end make sure that they can help the customer to become more productive, they work with the cost side on the back side to make sure that adopt, and I think they are improving all the time.

And even though the market has been challenging they have been able to lower the net working capital during this period and deliver excellent cash flow from the operations. So from my perspective I think they’re doing a great job and I am sure that is going to -- they are really focused and I think this will continue to improve.

Tomas Eliasson

And despite a decline in top-line, I mean the working capital keeps improving quarter-after-quarter.

Sebastien Gruter

And to 2018 target what are you seeing now compared to six months ago when you release them?

Bjorn Rosengren

2018 targets, I think we have committed ourselves to them and I think this report underlines I think that we are moving in high speed in the right direction. So in that point I think from my perspective looking at Sandvik, as I mentioned, I am very happy with the development efficiency. Look at Sandvik today I mean we are today compared to one year ago 1,000 to 2,300 people less. We are 470 people less than last quarter and we continue to make sure that our different operations are being efficient, but also our center [ph] cost. And that’s the process of moving that out. So I feel very committed and also rest of the operating entities have committed themselves to deliver what we have promised and we will do that.

Sebastien Gruter

Okay, thank you.

Ann Sofie Nordh

Thank you. Time flies when you are having fun. Can we just finish off with one quick question please?

Operator

Thank you. The next question comes from [indiscernible] from Handelsbanken. Please go ahead, your line is now open.

Ann Sofie Nordh

I think that’s fine.

Bjorn Rosengren

He left.

Ann Sofie Nordh

Yes, I think that’s the sign. That’s it for today. There may be some more questions out there on the conference call, please feel free to contact us at Investor Relations and we’ll be happy to help you. Thank you, all.

Bjorn Rosengren

Thank you.

Tomas Eliasson

Thank you.

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