Alleima AB (publ) (ALLEI) Earnings Call Transcript & Summary

Hi, everyone, and welcome to the presentation of the second quarter results for Alleima. My name is Emelie Alm, and I'm Head of Investor Relations. I'm joined by Goran Bjorkman, President and CEO; and by Olof Bengtsson, CFO. So Goran and Olof will take you through the results, and then we will have a Q&A session. And you can, as always, ask questions through the conference call, and you can also write them in the field below the webcast. And the presentation can also be downloaded from alleima.com. As always, we always put safety first, and it's a top priority for us. So I trust that you know the safety routine of where you are located. So with that, I would like to hand over to Goran.

Thank you, Emelie. So also a welcome from my side. So let's go through Alleima's second quarter. And let me start with the highlights of the quarter. I think the second quarter was an overall good quarter where I think our revenue growth of plus 18% organic sticks out that's very strong. And with a book-to-bill close to 100%, we have a continued solid order backlog, which provides confidence for the near-term deliveries. Order intake on rolling 12 months was minus 4% on high comparables. Remember quarter 2 last year was extremely strong from an order intake point of view. But the organic decline was also due to mixed market demand. Several customer segments continue strong, while other customer segments have a more softer development. We improved our earnings significantly, supported by high revenues, a positive product mix and continued successful pricing, which are offsetting cost inflation. Adjusted EBIT of 11.4%, it was 11.5% last year, and this is a high absolute level, which I'm pleased with. We are continuing our consistent strategy execution, where I think the breakthrough SMR order is a clear evidence of our strong position in the nuclear industry. We also completed the acquisition of Soderfors Steel, and we continue to see strong momentum in Kanthal's Industrial Heating and Medical business and Kanthal is really leveraging from the global trends of electrification of industries. Sustainability and we are continuing to make positive impact through operations. I think during the quarter, we have increased our focus on safety performance. We have had several years with, obviously, flattish development, and we have had too many accidents that clearly could have been avoided, and this has made us focus even more on safety. I mean, a clearer tone from the top. We've done benchmarking with other companies. We have divisional programs to improve, and we have more internal dialogues about our safety culture. Those are some examples of activities. And of course, I'm pleased to see clearer improvement in the second quarter compared to quarter 1. But I think we need to remember that improving safety culture is a long journey and safety should continue to be on top of our agenda. Share of recycled steel declined slightly, mainly due to product mix, where I can see that we have quite a lower share of what I would say are standard grades. Our greenhouse gas emissions are in the low range compared to peers. And despite already one of the lowest emitters in the industry, we can always improve, and the trend is positive. And for the first time ever, we are below 100,000 tons CO2 of our Scope 1 and Scope 2 emissions. And the last KPI, the share of female managers increased by 1% unit to 23.1% which, I would say, considering our historical numbers is a good development. And this shows that we are on the right track when it comes to improved gender diversity. So as noted on the previous slide, I'm pleased with our operational improvements on sustainability. But as I have concluded many times, our largest impact on global sustainability is through our product offers, where we can improve customers' processes, products and applications, and global trends like electrification and the shift of fossil-free energy are trends driving our business opportunities. So let me share a couple of examples. The electrification of industries is a strong trend, and this is where Kanthal is very well positioned. The momentum in electric heating is solid. Kanthal has received several project orders, mainly related to some targeted product application that enable industries to make the green technology shift. And I mean, areas like solar, steel, lithium-ion battery manufacturing. We also received a breakthrough order to supply steam-generator tubes for NuScale Power. It's a provider of small modular reactors. So the tubes will be installed in one of the first SMR power plants, and this is really a milestone for growth in the power projects for the future. We will supply approximately 200 kilometers of steam generator tubes for NuScale's first NuScale Power Modules that each is capably generating about 77 megawatts of carbon-free electricity. I think it's really great to see that this is now -- this technology is now taking steps in commercialization and we -- where we play an important role. Market development. Looking at the market development, I mean, we saw lower demand in some customer segments, somewhat mitigated by long-term trends and underlying tailwinds from others and which plays in our favor. On a sequential basis, demand slowed further mainly for the low-refined, short-cycle business and the underlying demand in Asia increased while it declined in North America and Europe. Quarter 2 last year was the best quarter ever in terms of order intake, meaning that we are meeting higher comparables. But let me go through the dynamics of our different segments. And let's start with the segments where we see a softer market development. This is mainly our short-cycle business and mostly for the low-refined products, but also for parts of our application Tube business. To look at the Industrial, demand was negative on a sequential basis, and it declined in all regions for the low-refined products compared to last year. Consumer demand declined year-on-year mainly due to Strip products, such as compressor valve steel and knives steel, but also appliance wire in Kanthal. However, on a sequential basis, the demand was, I would say, more stable than on the year-over-year. In the Petrochemicals segment demand was lower both compared to last year and also sequentially with some destocking effects at customers and distributors and an overall somewhat softer market in Europe and North America. Demand in Asia remains really solid. Other customer segments are strong and with a continued positive outlook. For instance Oil and Gas. I mean investments continue to materialize. We had major orders both for the OCTG and umbilical tubes, and a total value of SEK 830 million. And many other small orders, of course. And the market outlook and project list really remains solid. In Industrial Heating, we noted a stable development on a really high level, and we received several significant project orders mainly for the solar industry. And what we can see also is that the gas to electric conversion inquiries from different kind of customers remain on a high level in all regions. So once again, electrification is driving. Mining and construction. Order intake declined year-on-year, but that was mainly impacted by stock adjustments at some customers. And I think the underlying demand remains solid, and we expect to recover in the medium term. Power generation, this is mainly our nuclear business. I would say it's only our nuclear business. It remains solid and many discussion on future projects. They are progressing well with one of them materializing through this SMR order. This industry, however, is moving slowly. Transportation, strong, mainly for aerospace in titanium tubing. Medical, strong positive underlying development. However, if you remember, we had a large -- a really large order in quarter 4 because that has an impact on the growth numbers. But we see a very strong momentum for the full product portfolio and some successful new product launches through that. We expect this to continue to support our growth. Hydrogen and Renewable Energy segments. I mean, this trend is very strong, and we noted the continued momentum related to our hydrogen refueling stations and the continued acceleration globally is expected in the longer term. However, we see some, I would say, downstream bottlenecks in part of our business, and that is the pre-coated strip steel for fuel cells where some of the customers have some ramp-up problems in the short term. So in summary, we saw a mixed picture with good momentum. Some of our segments and a bit softer in other. And again, I think this is -- I mean, the diverse customer segment exposure is to clear strength at Alleima. It's a little bit closer in order intake and revenue. We had an order intake of [ SEK 5.5 billion ] in the quarter, which is a high absolute level. Organic intake growth of minus 4% for the rolling 12-month period and order intake growth of minus 15% in the quarter. We're meeting higher comparables with all-time-high order intake quarter 2 last year. Total revenue of SEK 5.6 billion. This is a proud number resulting in a very strong organic revenue growth of plus 18%, driven by growth in all 3 divisions. Look, the book-to-bill in the quarter was 98% and rolling 12 months, 106%, is above 100% for the rolling 12. So our backlog remains solid. The mixed demand picture in the different customer segments means that we are consuming backlog in some segments while continuing to build backlog in others. I think the situation overall still makes us confident about near-term deliveries. And if we look even closer into the order intake and revenue growth and the different components, metal prices now have changed to slight negative compared to the high positive impact in previous quarters. And the impact on currency is still positive but not as high as before. And looking at the rolling 12 months, the orange lines, it's slightly negative for order intake but positive for revenue. Backlog is solid and absolute levels are high and Olof will dig even further into the details of that in a few minutes. Look at earnings. Adjusted EBIT increased by close to SEK 100 million or 17% to SEK 642 million with a margin of 11.4%. With high revenues and overall positive product mix and price increases, which continue to offset cost inflation, it was contributed to the strong result. High revenue with a stable and high margin, it was 11.5% last year, means, of course, that leverage was on the low side. And there are several reasons for the lower leverage. We've had some temporary performance and productivity issues and some negative mix effects in our power generation and Transportation segments. In power gen, mainly related to some quality issues. And in Transportation, the problem relates to planning, output issues with an overloaded plant, including some orders for automotive with low prices. We also have some under absorption related to lower volumes, where the demand is lower. But I would say the largest negative absorption impact is actually something I view as positive. Our focus on driving operational efficiency has resulted in an all-time low inventory levels in the second quarter. And reducing inventory means lower production volume, lower absorption, and this had a negative margin effect of more than 100 basis points year-over-year. Reported EBIT of SEK 350 million, including metal price effect of minus SEK 293 million. This gives an almost SEK 1 billion negative bridge effect from changed metal prices. Free operating cash flow is SEK 72 million. I think this is relatively weak due to higher accounts receivable and lower accounts payable, partly offset by reduced inventory. And normally, we have a stronger cash flow in the second half of the year. Let's look at the divisions a little bit more in detail, starting with Tube. Overall, I think Tube is performing well and shows a good momentum. Tube has a strong revenue growth in a somewhat softer market for certain segments then. There is a continued subdued demand for the low-refined products to the Industrial segment. And lower order intake for application tubing to the chemical and petrochemical segment in North America and Europe, while Asia continued strong. We have a continued strong Oil and Gas momentum with the 3 major orders of total SEK 830 million and the outlook for Oil and Gas remains solid. Transportation showed positive development mainly driven by aerospace. And a strong organic revenue growth of 20% and the backlog that remains solid. Adjusted EBIT margin of 11.4%, which is, I think, a high level, but slightly below last year. And I would say the comments I made on margin development are the same as for Alleima in total with high revenues price increases, which more than compensated for cost inflation but also the temporary performance and productivity issues in Power Gen and Transportation segments are fully related to Tube. And I also say that the largest negative impact on absorption due to inventory reduction is within Tube. But I think inventory management and operational efficiency resulted in an impressive reduction of inventory. Within strategy execution, we conclude that we closed acquisition of Soderfors Steel. And that we did on May 2 and now start the work to qualify products mainly for Aerospace and Medical in small-sized bars. Let's move to Kanthal. Kanthal a very good quarter. I mean the continued strong development and strong momentum, I think, clearly benefiting both from the electrification and the medical trends. We see a stable development on high levels in Industrial Heating with significant orders and a continuous momentum in the Medical segment. Order intake in Medical is, however, below last year, as I already commented due to timing of orders. And this is, of course, related to the large Medical order we booked in quarter 4 last year. Year-on-year order intake declined somewhat in the Consumer segment, but sequentially flat. Organic revenue growth of 15% with a broad-based positive development across the divisions, all regions and yet another quarter of record higher revenues in Medical. Adjusted EBIT margin grew with more than [ 40% ] to a strong margin of 19.3%, increased revenues, strong product mix across the division and continued price increases compensating inflation supports a strong profit improvement. And of course, the share of Medical increase significantly, and this drives the margins in the right direction for Kanthal. I think Kanthal is a very nice and well-run business. And although we might not see the same high margin every quarter, but it's clearly improving over time. I mean take a look at the graph to the right, I think it's an impressive development for Kanthal. To meet the growing demand for electrification across our segments such as solar, lithium-ion battery manufacturing and downstream steel production, we are expanding the current premises in Walldorf, Germany, roughly 2,500 square meters of manufacturing area at that site. So Strip saw a continued soft market demand with an order intake declined year-on-year and quarter-over-quarter in all regions for the Consumer segment. Customers are signaling about high stock levels and we believe that this will be corrected in the short and midterm and then return -- with a demand that will return. Demand was slightly higher than last year within the Medical segment for the Strip division. Organic revenue growth of 1% driven by razor blades for the consumer and precision strip from Medical segment. And of course, also the pre-coated strip steel for Hydrogen and Renewable Energy segment, which had a good momentum, however, coming from low levels. Adjusted EBIT margin of 10.0%, continued under absorption effects from lower production volumes, negative revenue mix as we have less share on compressor value steel in the revenue and mitigating activities to adjust capacity and reduced costs are ongoing, and this is mainly related to manning reductions. As -- I mean I believe that we might still have a couple of tough quarters ahead of us for the Strip division. Part of the strategy is to find new applications for -- in the Medical segment and happy to say that we received precision strip steel orders for 2 new medical applications. Orders are small, but in interesting areas, and they are in the areas of cardio and identifying cancer. Then I'll leave to you, Olof.

Thank you, Goran. Olof Bengtsson and let's dig into some numbers then go to the first slide, the financial summary slide. And if we start in the upper right corner with the bridge on order intake and revenues. We see an organic development of minus 15% on order intake. But please remember that we -- this quarter, we are comparing to a very, very strong quarter last year. With SEK 6.4 billion in order intake. Revenues, a strong 18% increase organically, invoicing from a solid backlog. Structure-wise, it's the small acquisitions we've made, contributing percentage point and then still a good currency tailwind. And then alloys, the alloy surcharge, which I think is, so to say, the biggest change compared to previous quarters and also year-over-year, where we now have a negative effect on the alloy surcharges coming from the lower metal prices in the quarter, mainly the nickel, which has been on a level just above $20,000 per ton compared to previous quarters where we have seen much higher metal prices. Then going into the big table, we see an adjusted EBIT adjusted for the metal price effects of increasing 17% or SEK 95 million in absolute terms. And further down, looking at the reported EBIT, then we see quite a lot -- a fairly big swing, obviously, coming from the metal price effects then. And this is what it is. So this is normal. We will see swings in the income statement on the reported EBIT from the metal price changes. In certain periods, we will have a positive effect and in other negative effect. And please remember, when it comes to the metal price effect that we're calculating that this is then for the sales where we have an alloy surcharge clause and there is a time lag between us buying the metal and then selling the metal. So that is what we calculate when adjusting for this. Net financial items coming out at minus SEK 39 million versus minus SEK 171 million last year. The big swings here are mainly coming from valuation of financial instruments that we use for hedging of various exposures that we have in our operations. And we are gradually introducing hedge accounting in our books to avoid these swings. However, there are still some instruments that we need to value in this way. But underlying the finance that is fairly low. I think the interest net is a positive SEK 8 million in the quarter. Further on, the tax rate, the normalized tax rate is 24.2% for the first half. I think it's better to look at longer periods instead of focusing on a single quarter. But -- so the normalized tax rate is in line with our guidance. And adjusted EPS earnings per share on a fully diluted basis comes out at SEK 1.79 versus SEK 0.91 per share last year. That's a good healthy increase of 97%. And that comes from the improved adjusted EBIT performance and also from the lower finance debt. Go to the next slide, that is the bridge on adjusted EBIT. So splitting up the increase of SEK 95 million in various parts. First we have the organic development of plus SEK 83 million coming down from a strong revenue development, the price increases that are more than compensating for the higher inflation and also a good mix development. Other positive elements include the electricity grants that we have received in Sweden. That's a total of SEK 38 million in the quarter. And on the other side, we had the temporary performance issues that Goran mentioned in the Power Gen and Transportation segments. And we also have, as Goran also talked about, the under absorption effects from reducing our inventories and the lower production volumes. But -- in total, a healthy increase in the number, but the operating leverage is 10%, which we think is a bit on the low side, then explained by the different factors I just mentioned. And if -- and I say if we have adjusted for this -- these factors just mentioned, we would have a leverage of between 20% to 25% in the quarter. Currency, we had a positive effect of SEK 18 million net of hedges. And M&A, the acquisitions just had a slight positive contribution in the quarter. However, we have M&A-related costs, mainly from our most recent acquisition that we announced during the quarter that comes out at minus SEK 6 million. So that is the sum some coming up to the SEK 642 million in adjusted EBIT for the quarter. Then going on and looking at parts of the balance sheet. Net working capital increased both year-over-year and sequentially. And the sequential increase comes mainly then from the fact that we had as you saw a fairly strong invoicing in the quarter and the average days of sales outstanding of approximately 50 days for the payments for this strong unit come in, in Q3. So that is 1 factor impacting also is actually lower accounts payable. We have settled some invoices for raw material purchases made during the first quarter when metal prices were higher, they will settle at the end of the quarter, that means that we have an impact on our cash flows. This -- both these negative factors have been offset by a more positive development on our inventories. The divisions have managed the inventories very well and decreased both in tons and in value. Of course, the value has been helped by lower metal prices as well. So capital employed excluding cash increased sequentially and year-over-year, and that comes from the higher working capital just explained and also, of course, from the acquisitions and also some currency effects when translating the foreign balance sheets into the Swedish Krona. ROCE excluding cash decreased to 11.1% from 17.8%. That comes mainly then from the lower metal prices. We have the metal prices in the calculation of the returns. Going then to cash flow. Free operating cash flow a bit low we think SEK 72 million versus SEK 81 million same period last year. Looking at the table up there, we have a lower EBITDA coming mainly then from the lower metal prices. Noncash items mainly relates to provision changes in the result, but it's not cash flow impacting. Then we have a fairly big swing then on the changes in working capital compared to last year when metal prices were higher, but so was EBITDA. Now EBITDA is lower, but the change in working capital is much lower. CapEx more -- back more on a normal level compared to last year. The amortization of lease liabilities, no big changes, and then the free operating cash flow comes out at SEK 72 million. And Q2 is normally not a very strong cash flow quarter as we normally are building inventories for the summer stop. This year is a bit different with the lower inventories that we've just talked about, but obviously offset by the higher receivables and payables. Then on to the capital structure. We continue to be well below our financial target on capital structure, debt-to-equity to be below 0.3x that's the target, and we are coming out at 0.03x. And if you were to measure net debt to adjusted EBITDA, we would come out at a low 0.16x. And looking at the components then, of course, we have moved from net cash position in Q1 of SEK 256 million to a net debt of SEK 448 million this quarter, and there are some reasons behind that. And one reason is higher pension liability and that comes mainly from the fact that the long-term discount rates are actually a little bit lower, slightly lower. That means that the liability increase when you discount it. And then we have paid a dividend in the quarter SEK 1.40 per share. That comes up at SEK 351 million in cash outflow. And then we have some acquisition payments, mainly then the acquisition of Soderfors. That also has impacted the quarter. So that's how the net debt comes out. And of course, if we look forward, we, of course, with expected better cash flows, we, of course, will amortize on this debt. Going to the next slide then, looking at how well our guidance for Q2 came out, starting with CapEx. We guided for SEK 800 million on a full year basis, which is a guidance that we will still keep I'll show you soon. We came out at SEK 150 million in the quarter. And I think that we will be more active in the second half of the year. Because this is obviously below the guidance. Currency, we guided for a positive SEK 100 million in Q2, and we came out at SEK 78 million net of hedges and so on we came out at [ SEK 18 million ]. The metal price effect we guided for SEK 200 million negative and we came out at SEK 293 million negative. So the lower metal prices than expected. And then the tax rate, I would say, for the first half of 2023 were in line with the guidance we gave. And looking ahead then, Q3, we're keeping our guidance for the CapEx, SEK 800 million full year. And then currency, we're basing this on end of June rates. We think that the currency rates will give an impact of -- positive impact of SEK 50 million on the operating EBIT for [ operating ] result for Q3. Metal price effects based on end of June, again, we think that we will have a negative impact of approximately SEK 300 million in the quarter. Tax rate, as I just mentioned, I think we keep our guidance [ 24% to 26% ]. I'd like to hand back to Goran for any outlook.

Thanks, Olof. So let's some short comments on the outlook for the third quarter. I mean market demand was mixed during the quarter and in parts of our business, it is softer. On the other hand, some underlying trends are very strong, like energy, fossil-free energy, electrification, medical, aerospace, and they are expected to continue to mitigate the impact of uncertainties in the macroeconomic environment throughout this year. With our strong backlog, we are confident in the near-term deliveries. We remain, however, cautious regarding the impact from cost inflation and under absorption of cost from lower production volumes in certain areas. Product mix is expected to be similar to the one in the second quarter. Orders, revenue and adjusted margin in the third quarter are normally lower than the second quarter based on seasonal trends due to the summer shutdowns. And cash flow, as Olof just said, is normally higher in the second half of the year compared with the first half of the year. So let me make the short summary of what we have said. I think overall, I'm pleased with the performance in the quarter. We are executing on our strategy. I think we are clearly heading in the right direction. And as I said, I think our revenue growth of 18% organic, sticks out as very strong. And with the book-to-bill on close to 100%, we have a continued strong order backlog, and this provides confidence for the near-term deliveries. We saw lower demand in some customer segments, however, mitigated by long-term trends and underlying tailwinds that plays in our favor. Global trends like electrification and the shift to fossil-free energy, high investments in the energy sector and the strong medical market development are clearly supporting the Alleima business. Strong profit improvement and high margin despite some operational issues, and we continue our consistent strategic execution where the breakthrough SMR order is one clear evidence of a strong position in that industry. We completed the acquisition Soderfors Steel, and we continue to see strong momentum in Kanthal's Industrial Heating based on electrification and also their medical Business, but also continued focus on operation and commercial excellence, where we improved inventory management and operational efficiency drove down our inventory volumes to all-time low. That is something I'm very pleased with. Thank you.

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

[Operator Instructions] Our first question comes from the line of Viktor Trollsten with Danske Bank.

Maybe first, I got a bit surprised. But if I ask about the leverage, Olof, that you mentioned, you said that leverage would have been 20%, 25% in the quarter if you had a couple of impacts, could you please help us sort of understanding the magnitude on each of them. Was it mainly reduction of inventories and temporary efficiency losses in Tubes or...

Yes. I mean, the adjustments I made was on the upside, so to say, the received electricity grants, it was SEK 38 million. As Goran just mentioned, the under absorption effects in the inventory, that is 100 bps year-over-year. And then the rest is the underperformance in the Transportation and Power Gen units that we talked about. So those were the adjustments I made to arrive at 20% to 25% average adjusted, of course, I mean it's -- if adjustment, that's what I meant by that.

And how isolated are this to, let's say, Q2? I take it that you sort of flagged for continued low leverage in the coming quarters. But I mean, if we would assume 20%, 25% leverage in this quarter, you would be at SEK 740 million in EBIT or 13% margin. But how should we think about leverage in the coming quarters then?

I can try to at least elaborate and think out loud, Viktor, we don't give really forecast. But I mean, if we look ahead because you're rough in a way, asking about margins going forward. I think -- I mean, our order book is good. It's both big and with a good mix. And mix is -- even if we say sequentially rather similar as quarter 2, it's better than last year. We had the temporary effects, as we said, in quarter 2 and still margins were, I think, healthy. And those effects will not disappear, but they would be lower over time, I think it would be faster to recover the Power Gen, it will take some more quarters to fully fix the issues in Transportation. I mean we cannot save this -- or reduce the same inventory again. If we could reduce some more, I would be happy to do that, but I think that impact is probably lower going forward. So how should I summarize this, that I would say -- I mean, I don't see any reason to be too worried about margin development going forward. But -- and the leverage numbers that Olof, I mean, the underlying -- if it wouldn't have been our normally numbers that we should be at. That's the best answer I can give you. But of course, remember, quarter 3 is normally not as good. You know that.

No. yes, exactly that we know. But okay, yes, that's understood. Just -- so at first, in the report, I got it like 10% leverage is something we should continue to think about, but it sounds like headwinds are easing in the coming quarters. So that is clear. Then thinking about margins.

With a leverage below the margin, that's bad, and that's -- it's not at all what we're waiting for.

No, that -- I'm happy you're saying that. And then speaking about margins in Kanthal, continue to print new highs in margins. I think you helped us quite good during the call to understand the underlying forces. What would you say, Goran, would take the margins down from here? I guess, that with seasonal pattern, we would do around 18% EBIT margin in Kanthal. If it -- what would take that down, would you say?

That's an interesting way to put the question, Viktor. I see no reason why it should go down at the same time, but it's a really strong increase from last year. And let's elaborate on that one as well then without answering the question. Their Medical business is growing faster than the average. And even if the average is good, the Medical is quite better than the average. So that should indicate even better. I would say part of the business which we call heating materials, I mean, we are kind of surprised they were so good. So maybe that was sort of more better than normal. So it's a difficult question quarter-by-quarter, but look at the trend on Kanthal, I see no reason why it should not continue.

A good product mix.

It's a good product mix. It's a well. It's a strong position. It's a well-run business, it's a nice part of Alleima.

Yes. And I guess it's fair to say that Kanthal is more stable versus other end markets. So if you let me push you a bit, Goran, just if we sell that Kanthal is around 18% business model. How do we square that with your financial target? I mean if Kanthal has 18% margin, it would imply that [indiscernible] basically has 5% -- 6% margin to come down to 9%. So I'm just trying to get the equation together?

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

Okay. No, that's clear. And maybe if I may, just one final question that I'm a bit interested in. You said that your reduced inventory volumes still in a net working capital is around SEK 7.8 billion. I mean it's a record high figure. Historically, you release working capital during the second half. Just how should we think about working capital going forward? Obviously, it depends on business cycle, but how much can you sort of release given where metal prices sit currently?

I guess, I would like to refrain from giving you a number. But clearly, if you look at the various items in the working capital, I mean, inventory is at SEK 8 billion. That will clearly be a release when metal -- first of all, of course, from some of the better inventory management in the divisions where each of them have a plan, of course, that we are following closely. Metal prices, yes, there will be an effect, hard to tell exactly where that will end up. Receivables, yes, we are constantly working on that. We have a DSO of 50 days. It can probably improve. Accounts payable difficult to say, of course, the accounts payable will compensate a little bit for the lower inventories. But -- I mean we have, of course, our internal targets, which are lower than what you see right now. I mean we have 33%, I think, if you compare it to revenues and the target we have is a bit lower than that, but hard to give you a number on that one.

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

Second half is better than first half normally when it comes to working capital. So...

The next question comes from the line of Patrick Mann with Bank of America.

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

Let's see if it can try to answer your question, you need to help me Olof. When we do the math on inventory reduction and how that's impacted absorption. Of course, that can be parts of the business where the sort of market development needed less inventory. That could be part of the equation. But I would say, looking into exactly how we have improved inventory management, most of this comes from more efficiency. I'm going to say that is the majority of the absorption problem. Then of course, when it comes to inventory management, we don't -- if you look at the purchasing side, buying metals that does not relate to sales, that relates to -- more to order intake and production plans. Of course, with slightly lower production plans, we slightly need some less raw materials. And then remember that this time of the year, we stopped the steel plant for 3, 4 weeks. And that had, of course, a negative effect on accounts payable, because we paid the old purchase invoices, but we didn't sort of have new ones. I'm not sure I answered everything, but I tried to answer at least.

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

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

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

I have two questions. First, I would like to ask about the Tube division. I can see that the margins have declined year-over-year. And I just wonder, because the Industrial segment is declining, so to say, is the Oil and Gas -- are the Oil and Gas margins also declining then? Or what's the reason behind the lower margin in Tube?

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

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

Yes, then I need to split it up. If we take umbilicals that most we are normal or more interested in, we are booking now in the second quarter in 2024. We also have seen -- I should not be too sure about this, of course, but we've also seen -- I mean, in quarter 1 some competitors booked orders that did not happen in quarter 2. So I think they have also filled up their systems. So now we're booking in quarter 2 in 2024 for umbilicals That's the case. In OCTG, it's even better or worse, you decide, but the backlog is even longer. And there, it starts to be a stretch for us if we can book more because the growth in OCTG is so large and our backlog is so strong. So we have lost some flexibility in booking more orders in that part of the business.

[Operator Instructions]

We have one question from the webcast. Goran, how big has the destocking among distributors, et cetera, in certain areas in Tube?

Difficult to say. Actually, I mean, we don't really have that number. I'm not sure I could share it, but it's normal when market gets softer, that is the first thing you see because then distributors get worried. So I think -- at this point, I think that is the largest impact. And I think -- but that will be flushed out within a quarter or 2. But I really can't put numbers on it.

Thank you.

We have a follow-up question on telephone coming from the line of Viktor Trollsten Danske Bank.

Just a follow-up on my side. If you could help us a bit with the seasonal pattern into Q3. I guess, we all know that Q3 is by far the smallest quarter. But just when I look on the historical figures that we have, it looks like orders historically tend to come down 6% quarter-over-quarter [ as sales ] let's say, [ 14%, 15% ]. Could you just help us a bit on those figures. And, I guess, what I'm asked here is whether book-to-bill could turn above 1 again in Q3?

Good and difficult question, Viktor where orders are lower in Q3 is mainly related to Europe because Europe is also sort of slower in the sort of European summer period. On the other hand, and I think one learning is that you should not -- learning, I think, for everyone is not look at order intake in an individual quarter too much. You look at rolling. And if you remember -- and of course, you remember, quarter 3 last year, was not very high on order intake and a few. And I think the biggest surprise we had quarterly last year was the lack of orders in Oil and Gas. So I think quarter 3 last year was weak, and that at least gives some indication that may be book-to-bill could be positive, but I think we need to go through quarter 3 until we conclude that. But I understand where you're coming from, and I think your thinking is not wrong.

Yes. Okay. No, exactly. I'm just -- no, it's helpful.

We have another follow-up question on the telephone from Mr. Patrick Mann, Bank of America.

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

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

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

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

Thank you. Bye-bye.

Bye-bye.