For the first part of this call, all participants will be in a listen-only mode. Afterwards, there will be a question and answer session. I will now be handing over to Hans Olav Meyer. Please begin your meeting.
Thank you very much. I say also welcome to everybody participating to this second quarter release comment from Atlas Copco. I'm very pleased to have here with me today, Mats Rahmström. His first, if I may say so, record oozing quarter report. He will give his personal comments in a few seconds only. Before I hand over to Mats, I would like to say that following his comments, we will go to the Q&A session. There, just like last time, I would ask everybody to restrain to one question per person, please. Then we will have time to circle back for a follow-up question later on. I appreciate very much if you can stick to that, please. Without any further ado, I hand over to Mats.
Thank you, Hans Ola. Welcome everyone. I will start on slide two, which is the Q2 in brief. As you can see, we start in principally with the heading, that we have a strong order growth and record profit for the quarter. I'm proud to see that the orders received is continuing in all our business areas, especially strong down in Vacuum and Mining, also healthy cash flow, considering the growth rate that we have had with the last quarter. I go to slide number three. There you can see in principally, the numbers listed. I will highlight to start with the graph in the corner. We could not beat the strong Q1 sequentially, you can also see that Q2 was clearly the best orders, the second-best orders received quarter we have had.
The second thing is the profit that you can see that we reported 20.6% in profitability. That's adjusted. If you take that away, you have the 21.5%. It's mainly the non-cash option cost. You also start to see a little bit of split cost from Epiroc there. I go to slide four, where you have the different regions. As you can see, we have a very good balance between our main regions, being America, Asia, and Europe, which is the first column in principally. In those three areas, we have growth in all our business areas this quarter. That's a really strong performance. I'd like to highlight also that I'm very pleased with the development in Asia and especially in China. South America, you can see positive as well. This is mainly driven by the Mining, also CP stepping up their performance.
Africa, a little bit negative, still we can see a development in mining, of course. Australia, principally the negative is mainly from the comparison from last year when we had some big automation orders in drilling. Slide 5 indicates the quarters and organic growth. We can now see that we have had four consecutive quarters with organic growth, we are pleased with that. Slide 6 gives you the sales mix. In the structural changes, you have mainly delayed more than the CSK today on Vacuum Technique. Currency is still favorable, we could get a little bit headwind in the future, Hans Olav will update you on that a little bit later, healthy organic growth.
Slide 7, you can see the split between the different business areas, being Compressor Technique, being the dominant player here, Vacuum Technique is growing quite rapidly as well. Compressor Technique, Slide 8, represents 34% of our business. If you look at the order graph, they were very strong in Q1 and even stronger in Q2, which is on record level for us. There we can also see good traction for our products in Asia and gaining ground in China as well. Very strong margin on 23.4%, which is very good for the business area. Vacuum Technique, if you looked at the expectations a little bit versus our performance, you can see this is where the biggest deviation is.
Also looking at the graph there, you see that this orders received level is actually quite high compared to where we have been in the past, still it represents an organic growth of 25%. Operating margin 25.1%, still very strong. I guess you can ask if this would be a peak, or do we see the market being flat? As we indicated before, the semi business is a little bit volatile in demand. We look at macros in the vacuum business. We see increased prices on chips, which we find strong. We see the utilization in the plants where we operate between 80%-90%, that is still in the area where they make investments. The end user market for memory and chips is increasing. Also we see that China taking a stronger position in this marketplace.
The macro long term to be in the vacuum, for us, is very positive, we have a good position as well. To make it more sustainable, we invest heavily in the product portfolio for industrial vacuum, also recurring business for services in semi and industrial. Take the next slide, which is Industrial Technique. They have strong demand still from the motor vehicle industry, and we see a high activity level there as well. One of the things that has been discussed a lot, both in media and in some reports, is the electric vehicles. For us, that is a very good thing. If you look at a car with a hybrid, of course you get two engines, that would be very positive for our development. If you take something that is pure electric, of course you will get less tightening than on the powertrain.
On the other side, you will get more from the tire business for battery and the battery tightening, and you also make sure that you have a lighter vehicle, which is very good for our newer technologies, adhesives, and self-pierce riveting. I would say that we are pretty much set up for this change, although electric vehicles is a rather small part of the total fleet. They also have a bunch of new products coming. The one on the picture is really aligned with automated lines, and this tightening equipment you are able to put on the robot, for example. We will take the opportunity on the Capital Markets Day to show you more about this interesting product portfolio. Mining and Rock, we were positive in Q1, and we said it was a lot of replacement business.
Now we also see it's replacement business, but we also see a little bit of brown field investments, where they go deeper or higher. That's the positive signals we have there. 19.8% margin, and you can see that they have a little bit of a backlog to catch up on deliveries. I think we have a good plan in place to build on our capacity. You can also, of course, see that there is a balance now that we have so much more equipment versus service, and that might have a smaller impact on bottom line. Construction Technique, we have changed the name to Power Technique, mainly to mirror the segment we would like to be in. It's an opportunity for us to be in construction, but also more into industrial applications.
We can see very good traction for our new portable compressors, also in the Chinese market, which is normally a challenge, and also a good development of our specialty rental business. You can see an increased operating margin for Power Technique as well. We have the full income statement, and I think it's suitable to hand over to you, Hans Olav.
Thank you, Mats. Well, Mats already touched upon the operating profit performance, let me just go further down the income statement. We had a couple of specials, if I say so, in the financial items, actually both this year and last year, Q2 in 2016. The negative in this one, which was one-off, is an adjustment of the expected interest charge for this now infamous Belgian tax dispute that we talked about a lot last year. What we have done is, we have received then the updated methodology from authorities, how to calculate the interest due for 2011, 2012, 2013, 2014, et cetera, which becomes part of the package. We have updated that, which was in Swedish krona, SEK 125 million effect. With that, we have fully provided for the capital that has been challenged, the capital cost, and also the interest charges.
As you have seen, probably it also affected a little bit the cash flow, which I can come back to later. We also had a cost related to the Epiroc split in the interest, and that was a compensation to certain bondholders of public bonds issued by Atlas Copco. Without those, we are still in that region of SEK 200 million-SEK 230 million, depending a little bit on what quarter. I also think that is the type of level one should expect for the next coming quarters to have an idea of the normalized level. We go further down, we come to the tax expense. It's a big number this year, but it's actually a slightly lower effective income tax cost.
I would say here as well, we have been around between 27%-28% in effective tax rate ever since we got this new treatment of the Belgian situation. I think that, again, going forward in the nearest quarters, I think 28% is probably something that is to be expected if nothing specific happens. We turn to slide 14, we can look a little bit deeper into the operating profit bridge. For the group, you can summarize it and say the best effect came from volume, price, and mix and others, or so to speak, the organic improvement gave the biggest contribution to the profit improvement, but also currency was a significant positive in the quarter. You see there that in absolute value, which is one thing, we have calculated that it's about SEK 500 million positive effect compared to the same period last year.
Going forward, as Mats alluded to, we see a little bit of a different situation, partly because we had a recovery of the dollar gradually last year in Q3, and we have a gradual decrease in the last couple of months and also in the last couple of weeks. When we estimate and look forward, if everything stays as it is today, I would assume a slightly negative comparison on this in the same way that Q2 had a positive year-on-year effect. It's difficult to predict exactly how much it will be, but it will certainly not be -SEK 500, but it will be slightly negative. That's my assumption.
We go further, you see also that the specials on the non-cash valuation of options has a cost that is higher than the same period last year, and also acquisitions and other one-time items that the Epiroc split of SEK 70 million, for example, is also diluting the margin somewhat. We take, again, I just repeat, if we take the one-time items and the Sharevest LTI program and adjust for those, then we come up to a 21.5% operating margin. The next slide has it a little bit more by business area, or it has it by business area. I'd like to comment right away that the way that this is done is, of course, that the currencies and other special items, one-time character, is isolated from the organic development.
Of course, when you see Compressor Technique and Vacuum Technique, the so-called flow-through of revenue increase seems extraordinarily high, and I would agree. It should not be seen as a normalized flow-through rate, and many of you know that from before, that a single quarter can certainly give very high or very low percentage numbers, and I don't think one should read too much into it. When it comes to Vacuum Technique, of course, we have seen in the last couple of quarters, and it was accentuated now in Q2 that the increase of revenue on a still more or less the same type of capacity installed that we have had for a few quarters gives a very strong effect on the bottom line.
As Mats also pointed out, we have an order intake that has been extremely high and revenues are trying to catch up, which means that we are doing as we speak, and we're going to do more capacity adjustments to cope with that. Some of it is coming on stream as we speak, some of it will come on stream a little bit later in this year, and so on and so forth. It shows a little bit of a dramatic number, but I urge you not to make any projections based on those flow-through numbers there. The group number is at 39%, of course, a little bit more normal in a recovery period like we have right now. Turn to the balance sheet on Slide 16, and I think it's not very dramatic developments from December 31st to June now.
A little bit more has happened since a year ago, if we look at December to June, in very short summary, we are accumulating more cash, and that makes a difference. Then there are some effects from currency translation in there, but I don't think there is so much more to comment right away. If I turn to the cash flow on Slide 17. A very strong cash flow. Some of you might recall that we've had operating cash flow even at SEK 6 billion one quarter, but I would put this number that we now report, almost SEK 5 billion, in relation to the fact that we are growing heavily right now, and that normally consumes working capital. Whereas in this quarter, you can see that we actually released a little bit of net working capital, which I think is a very good achievement.
You can also appreciate that we have a couple of special items in funding of pension debt, in currency hedges of loans, which has no profit and loss impact, and it's really more financial effects that it has nothing to do with the operational generation of cash flow. The same, of course, goes for the fact that we have now paid all of the due taxes for the Belgian dispute. If you put that together with last year's number, you see that we are close to SEK 3 billion that we have paid to a special account, but of course, the appeal goes on, and that can go on for many years. A good strong cash flow to back up the improved revenues and operating profit.
With that, I think we reach the final slide, which talks a little bit what to expect going forward, and I hand it back to Mats.
Okay. We said that it will remain on current high level, and I think that mirrors a little bit what we see at least, and that's a very strong Q1, followed by a very strong Q2. We still see an high activity level among our customers, of course, in mining. I think you can recognize that from the numbers as well. I comment a little bit on vacuum as well. It will probably be a little bit volatile, but in general, the trend looks very good for that as well. Industrial Technique, I think the car industry is on a high level, and we see still a good base for quotes coming in that way, and we are developing our Power Technique business in a solid way, I would say.
Great. Thank you, Mats. We come to the Q&A session, and I would then only repeat my wish from 20 minutes ago. Please restrain to one question per person in the first round, and then we'll see how much we can cope with at the end of the call. I leave it over to the operator to repeat the procedures for the questions, please.
Thank you. Ladies and gentlemen, if you wish to ask an audio question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. That is 01 to register for a question. Our first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Mats and also Ola. It's Klas from Citi. My question is on Vacuum Technique. Sales came in below my expectations. To what extent is this driven by bottlenecks in production? If you could comment on pricing, your customers in Asia are now increasing prices for the first time in 7 years. I thought pricing would be stronger for you there, particularly if there are bottlenecks. Do you think pricing can increase more in Vacuum into the second half?
I think first for the demand, we still have big project orders coming in, both on semi and flat panels, and that volatility will remain. We feel it over time, it'll be less and less, and we will try to strengthen that ourselves by the focus on industrial and the recurring service business. On the pricing, I think that industry has always been driven by that the suppliers should reduce their pricing. The way we counter that is always with new innovative products, to bring something new valuable to the customers. Over time, I think we have done that quite successfully.
I think the gross profit levels of the group, which you don't see per business area, indicates exactly what Mats is touching upon. We talked last quarter and a couple of quarters before about the questionable information value of our price component in the bridge due to Mats' comments, and we will see how we can cope with that in the future. I think it's a very valid point what Mats said now that price for us is not really denominator for future profitability, that's for sure. In the price in this bridge, I would say.
Yeah. The price in the bridge is in principle comparable products from one year to the other, but everything that's new or project is actually outside. It might not give you the best picture of the actual price development.
Okay. Can I ask a quick follow-up just on Mining and Rock and the drop-through? When I look back at previous uptrends, you typically sustain a high drop-through of around 50% for two to three quarters before costs go back in. Now we quickly fade here versus quarter one. Did you hire more salespeople? Did you invest more in Mining 4.0 R&D, or what is the reason for the lower drop-through in Mining and Rock?
I think I tried to say just before, Klas, that just at 63% for some business area in one quarter is not the perfect information carrier of flow through. 37 or 39 for me is good. If it has been 50 the quarter before, it can be for very many different reasons, just mathematically. I don't read anything. Of course, they are recruiting, of course, they are ramping up capacity and trying to speed up deliveries of components in order to be quicker in deliveries. In times of quick recovery, we have seen this many times before, that there can be a struggle to get all the components where you compete for the same material or components with many capital goods sectors, not only our competitors. That I think is a little bit behind that development right now.
Nothing more than normal in a sharp upturn situation.
My main point is on pricing.
I think we covered that. You mean mining prices?
Mining, because if you have bottlenecks on the volume, where your drop-through is coming under pressure, that should be followed in pricing be stronger for you.
That is relating to exactly the same explanation that Mats just gave generically and also for Vacuum Technique, I would say.
Okay. Thank you.
Thank you.
Our next question comes from the line of James Moore from Redburn. Please go ahead. Your line is now open.
Good afternoon, everyone. Hi, Hans Ola , Mats. My question is on vacuum margin and growth. Do you think the 25% margin is sustainable? On growth, you're up 20% just organically in the first half or SEK 1.1 billion. I'm trying to get my head around how much that was up 35% in semi and 5% in the rest, and whether it's artificially skewed by something like a Galaxy S8 that could come down next year. Just concerned about that.
Okay. Now, on the margin, of course, we do everything we can to try to keep it as high as possible. I think what we have communicated internally, at least, that we try to stay above the 20%. Of course, it's many variables in there in terms of pricing and volumes and things like that as well. I think that we do a lot of work internally to make sure it's more and more sustainable over time. I think I mentioned it a little bit earlier with a strong focus on industrial, which is actually developing quite nicely, and also the service for both industrials and semi. We also look a little bit at agility in our manufacturing base to see that we can ramp up and ramp down to maintain a good capacity versus the demand, if you could.
Just to add on perhaps to Mats so that there is no misunderstanding. It's of course not an internal projection that everything about 20 is fine in the next quarter. That's certainly not. What we mean is that the agility and sustainability of this business is very much in focus. Just like Compressor Technique to take one close-by example, we are making everything we can to cope with even less favorable demand situations, not only from semi, but also general, so that we can maintain in those situations also a very strong operating margin. As you have never heard us project next quarter's profit margin, we are not doing that this time either. It's clearly so that as long as they operate on this high level, they generate very strong profitability, that's for sure.
We want more growth.
We want more growth. You've heard us say before that the ultimate bottom line for Atlas Copco is value creation, whether you call it EVA or OVA or whatever, and that's exactly the main focus. Obviously, we don't plan to be less efficient if everything else stays the same.
I understand all the EVA points. I was just really trying to understand whether we're talking about over 30% growth in semi versus single digits.
Sorry
There's a specific impact on the Galaxy S8, which is a big Samsung product, which could mean you could be down on the first half next year in semi alone.
Yeah. I forgot the Galaxy question, James. I'm sorry for that. As Mats alluded to, we see that the industry is getting less over time, and we alluded to it in the Capital Markets Day last year, that we don't see the same type of enormous swings between trough and peak in the industry, and that is, of course, very healthy and very good for us. It goes with the consolidation of the industry and the ever-increasing demand for new memory capacity, et cetera. In this quarter, we don't have any super deals that suddenly changes the whole prospect. We haven't made two times the profit on some deals that will suddenly evaporate next quarter. I can't say that we see anything of that nature in this quarter, James.
Thank you very much.
Good. Thanks.
Our next question comes from the line of Lars Brorson from Barclays. Please go ahead. Your line is now open.
Yeah. Hi, Mats, and hi, Hans Ola. A question for me, and maybe just a follow-up. First of all, on your demand outlook, Mats, I'm struggling a little bit to understand why this has been lowered to staying at the current levels. I'm looking at demand trends, as you also pointed out in VT, vacuum, that continue to be very strong. I'm looking at PMI numbers as you continue to support your industrial businesses, particularly in Europe. As you point out on the mining side, we see some brownfield coming through now. I can't help but think that you've built the consensus expectation and feel we need to adjust this down slightly. Maybe you could just help us understand what is taking that outlook down from the previous level, and it will be helpful if you could give some divisional commentary around that.
I think the main part of my comments for vacuum is a little bit more long-term. We can see the demand coming, and I'm talking maybe one to five years more. We can also see the investments that China is taking a strong position in the chips industry. I think that will come through as well. We are increasing our capacity in China to meet that demand. More on the high level, I think we see it as quite a positive to be in line with what we have seen in Q1, Q2, to continue to have that level of activity we haven't seen in the past to our customer base, so we don't read it as too negative.
To just follow up on that, of course, you say we have lowered the growth expectations perhaps for the next near term quarters here, but we wanted to put it in perspective to that as you ask the question. Really it's like when you have your forecast for stock prices, Lars, that if the market already comes there quicker than you thought, you probably have to go to hold instead of buy. I think the market has turned and become very favorable on many market segments at the same time. That we feel is very positive to remain at that current high level.
Can I just ask as a follow-up on pricing, which I think was related to vacuum earlier. I was curious as to the broader group and what you're doing around pricing there. We haven't seen price move beyond your "plus 0%" in your order bridge for a few quarters now, for a few years. I'd expected to see better pricing this quarter after four quarters of solid order growth across the business, particularly of course, in mining, but also in vacuum. Can you help us understand a little bit better what you see in terms of pricing coming through in the second half of this year?
I think Mats' comment is the most important comment. If we can just add, of course, we introduce new products, and there we believe that when we follow the requirements and demand from customers, we have pricing power, no doubt about it, but it's not reflected in the way we do the sales pitch here. You could then say, "Well, what about service and spare parts? Are you not increasing prices?" Yes, we are increasing prices, but in a low inflation environment, it's still, of course, not coming through in a big way compared to what is happening on the equipment side. It's slightly positive, but it's still within the margin of 1%. That's why it's called zero or one as in Compressor Technique. I think we cannot elaborate more in detail on it, but that's the only extra comment, perhaps.
I'll go back in a queue. Thanks.
Yeah. Thank you.
Our next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes. Good afternoon. My question is around compressors and the gas compressor business. I see the statement is quite negative about further deterioration there. Can you talk a little bit about what actions you could take? I think you alluded to this on the last quarter call, but things seem to have got a bit worse.
I think, it is correct that we saw a little bit of positive signals in Q1 in the oil and gas business, but I think in Q2, I think it's rather weak. What we do internally is in principle that we continue to work on new products and new portfolio, and of course, we are adjusting our capacity to the demand that we see right now.
Yeah. I think oil and gas is not the exclusive segment that we cover. There's air separation applications that we don't get really the big orders that we sometimes get. It is big orders in this compared to industrial compressors, it's a completely different pattern. You can get a reasonably good quarter.
We don't feel that it has really changed the trend, let's say, of demand.
It's run from separate factories, if I'm right. Were there any actions taken, charges taken, small or otherwise in the quarter to try and right-size this business?
I think we commented in the latter part of 2016 that although it was not always disclosed in a one-time specific action, yes, we have taken quite a lot of measures. Of course, we are following day by day, week by week, what further actions can be taken, if any. That's of course high on the agenda as long as the revenue and profitability is not at the level that where we want it to be.
Is it a separate business unit within it? Can it be separated out? Would downsizing it impact the rest of the business, the rest of compressors?
No, it will not.
Okay. All right. Thank you very much.
Thank you.
Our next question comes from the line of Andreas Koski from Deutsche Bank. Please go ahead. Your line is now open.
Thank you. Hi, Mats. Hi, Hans Ola. I would like to take the opportunity to ask you, Mats, a longer term question as you have been with Industrial Technique for a very long time. I think you have seen a mix shift within your Industrial Technique business with more battery driven handheld tools, taking shares of pneumatic driven handheld tools, and this is also something you write about in your annual report. I just want to hear your view about the risks for Compressor Technique with more and more battery driven handheld tools. Compressor Technique, I think almost 40% of revenues are generated in the manufacturing industry. How much of that do you think could, to some extent, disappear because of the mix shift that we are seeing in Industrial Technique and businesses like that?
I would say that that shift in the car industry, for example, has already happened. Essentially, 90%, 95% of sales into the auto industry today is electric or battery. That shift has already happened, and as you can see, had very little impact on the compressor business. I think it's a very valid question if there could be other applications, of course. We have not been able to identify anything major that would change the demand for compressed air, and we continuously find new applications that we go after.
You would say that the manufacturing exposure that you have in Compressor Technique is not at risk from this?
You see a demand shift, as I said, which has already happened.
You still have 40% in the manufacturing industry, so I understand in the automotive business.
Yeah, if you go into the general industry, that shift will go much, much slower because you don't have the volume. In the car industry, you make 55 to 70 cars an hour, it's more pilot build or project build in the general industry, there you will not have as easy payback on a more expensive electric tool or battery tool.
Okay. Thank you very much.
Our next question comes from the line of Peder Frölén from Handelsbanken Capital Markets. Please go ahead. Your line is now open.
Thank you. A slightly longer term question. If you look at the vacuum business today, it's growing as you mentioned initially and shown the pie chart, could you tell us where you are now in terms of exposure to semis, to industrial, where you are on the aftermarket ratio and, maybe most importantly, what do you think the ratio should be in the future?
I'm sorry, follow every question.
I can take it Mats, first, then you complement. Of course, in this period specifically, semi is completely dominating as a single customer segment, that's for sure. If you put service and equipment together, you're easily covering closer to 60% than 50%, I would say, or it's well above the half of the business. What is very important for us, Mats alluded to it from a long-term perspective, is to continue to grow also what was important for us in buying Atlas in the first place, to utilize Atlas Copco's extensive network in the world to grow on industrial applications of Atlas. We talked about, at that time, to build and to widen the range of products, come with innovative products in that segment, and we are actually very pleased with the development that we see there right now.
That's of course not going to change the exposure by quarter very much because semi is so big and so successful. We are also not only growing on the industrial in general, also growing with a stronger focus on service part of the business, not the least to be prepared for a downturn that might or will come, the timing is difficult to predict. We see positive growth on the service. Again, if you start from a level where, of course, the semi business is so much bigger, it will take some time until it really affects the proportion of the sales. We have talked about a 25-ish%, if we take the whole business area, we are in that range still. It doesn't move as long as the equipment grows so fast as it has done in the last year.
You don't see it, so to speak, but you have to look at the absolute growth. There, we are very pleased with that.
I think on the industrial side also, it's more about the coverage. There we go to market both with Atlas Copco brand, we go with the Leybold brand and the Edwards brand. We differentiate the products and product offers and value creation for our customers. We see good development there. As Hans Olav said, it will take a little bit of time, and also to build up the service network for these customers will take even more time also. Okay. Thank you. Thank you.
Thank you.
Thank you.
Our next question comes from the line of Alexander Virgo from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Thank you very much. Good afternoon, gentlemen. Just a quick one, as to whether you can give us a little bit more color around the growth in small and medium sized compressors, just by regionally, or anything to call out in terms of market and market demand, that would be very helpful. Thank you.
I think.
No, go on.
It's mainly within the industrial compressors you talk about, the small and medium. There we have seen a healthy demand, which is mirrored in the orders received you have seen in Q1 and Q2. Also a good recovery of business in Asia and China. You can see the strongest development has been in Asia over this quarter. Hans?
Yeah, I know it was more just underlying that what we see, if anything, in the last two, three quarters, happening gradually, is a good, solid growth in small and medium size, which is run as a separate division or separate divisions, compared to the large industrial compressors. They're only latent, very often alluded to them as yellow canaries because they signal that the general business climate was improving or deteriorating. I think that gives us a little bit of confidence that it's a broad and it's a good market environment that we see. To be perfectly honest, I don't recall any of the regions that really did bad for that business in the world. As we said, from a couple of years of a little bit of a struggle, China is coming back strongly.
Yeah.
Okay. Thank you. That was very helpful.
Thank you.
Our next question comes from the line of Alasdair Leslie from Société Générale. Please go ahead. Your line is now open.
Hi, Mats and Hans Olav, Alasdair from Société Générale. Just a quick question on Vacuum. Are there any areas that you are not yet present in and where you see particularly attractive that could offer synergy potentials going forward? Thank you.
I think we see that we have a significant market share in semi, as you have seen. A little bit lower technology in flat panel, and that mirrors also our market share a little bit, that there is more competition in flat panels. We see that we are starting a journey on the industrial side of things, that would include service as well.
Starting the journey was, of course, correct, we bought Leybold, which were already on that journey, so to speak.
in comparison to semi-
Absolutely
quite a long way to go.
Absolutely. With the acquisition, we already took a step in the direction that we want to have a more balanced exposure.
I mean, if you look at this combined, of course, very clear market leader as well.
Okay. Absolutely. Just to follow it, on vacuum, are there any specific product segments that you see would be very valuable for you going forward? Because the trends we see in semi, and industrial.
I think for semi, I think we have a good coverage, and it's principally key account management. The number of customers might be between 10-20 in the world. In industrial, I think it's not only the end user, but you also need the coverage working with the right distributor in each territory. I think it's a little bit on channel management, I don't think there is specific applications. It's more like compressors, I would say, everyone has a little bit of vacuum and a little bit of compressor in their industrial applications.
I think the new areas that might be there to fill in is also very much targeted from our own R&D development, obviously, though it's not that we are looking to find huge gaps that we can satisfy with an acquisition or something. That is not the way, there might be small segments, of course, of market where we need to strengthen our offer. Primarily it's growing on the strength that we already have.
Absolutely. Got it. Thank you.
Thank you.
We have a follow-up question from James Moore from Redburn. Please go ahead. Your line is now open.
Well, thanks for taking the follow-up. It's just on the growth development in mining. Last quarter you kindly broke out double-digit growth for service and consumables and near doubling for equipment, and I'd love to ask if you could help us a bit with either the 25% order or 16% sales growth development this quarter.
You're talking mining, and you're talking what is equipment and what is aftermarket. Is that what you meant?
Yes, please.
Yeah. Still in this quarter, of course, from a growth rate point of view, it's absolutely clearly shown that, for example, underground equipment has had a very strong growth. The positive with the service part is that it's growing much better than it did in the last couple of quarters, and we actually have a number of indications where the closed or, let's say, temporarily or permanently closed mines that we reported on quite a lot during Q1, Q2 last year. We see a reasonable proportion of those that are already opened up again and in operation, and that seems to reflect well on our own service division. The growth rates are stronger there as well. In service, it's very difficult to grow year-over-year 50%, 60%, like you could see when it comes to certain product areas at least.
We are evaluating the growth rates on service are higher than we have seen in the most recent quarters.
Is that to say they've accelerated from the double-digit level you saw last quarter?
Yeah, we are still above the double-digit level.
Okay. All right. Just one other one was on currency, while I've got you. I'm looking ahead. I get your comment about the next quarter, what I see is the one after that and the start of next year could be even more material negatives. Is there anything you could say at this stage as to how big you felt they could be?
I think we are touched upon Q3, we expect it definitely from a top line or sales bridge, it will compare negatively on currency, definitely. Also from a profit bridge point of view, we believe that it will be somewhat negative, Q3 to Q3. When you then move a quarter further to your point, it's just to look at what happened last year, it will be more negative compared to Q4 last year, and so on and so forth. You're right that in that year-on-year comparison, we will probably have the most negative bridge if everything stays as it is today in Q1 next year. You're right about that. I don't like really to start giving absolute values in terms of projecting how that will look. The next quarter at least, we believe it will be slightly negative, yeah.
What is important to repeat perhaps, is that if we are now looking at the level in Q2 of SEK 860-SEK 870, I just take the dollar to the krona as a proxy of all the currencies, of course. We are now looking more at SEK 830-SEK 840 level, perhaps. It's important to remember that the profitability we have in Q2 is at least not reflecting what we had last year in currencies. As you well know, we don't hedge ahead, it's pretty well updated to the current level. Slowly getting a little bit worse as we see it today. At least we're not losing on profitability the same way as we are losing on the bridge component, of course. That's just to remember that we don't have a hedging effect that suddenly will turn very negative for us in Q1 next year or something.
Thank you, Hans Ola. That's very helpful.
Thank you.
Our next question is a follow-up question from Lars Brorson from Barclays. Please go ahead. Your line is now open.
Thanks, Hans Ola. I did want to just talk briefly about mix, both in mining and in CT, if I could, within the quarter. Can you help us understand what the sales mix in mining was this quarter? That is OE versus services versus consumables.
I don't have the exact numbers for it. We tend to be a little bit cautious on monthly and quarterly values because sometimes they can be a little bit erratic. As we just said, if you look at the order intake, and the same for revenue, actually, on a year-on-year basis, obviously, we have the sales mix against us. We have grown much more on equipment than we have on service and consumables, and that is never helpful. Of course, part of that negative is compensated by also having a little bit better absorption in the factories obviously, it normally doesn't help that much, and that's why you see a relatively stable sequential development of the operating margin, even though you would expect that it should continue to improve.
That we were already at the reasonable level of revenues in Q1 sequentially, we didn't increase so much. We should also remember that from a currency effect compared to Q1, we already have a negative comparison in Q2. We sort of peaked, and in Q1 from our currency basket point of view. We don't give you all the numbers of these bridges, because we think that it's not very valuable to dig into a detail where there are hundreds of components that affect our profitability. Cutting it short, the mix effect is negative on a year-on-year, clearly, and on a sequential basis, it's not such a big difference actually compared to Q1.
No, I understood all of that. I was just hoping you could give a little bit of a quantification around that, because clearly Mining margins is where, at least relative to expectations, you disappointed somewhat, perhaps because we're underestimating that adverse mix shift we're seeing from services to OE. Therefore the question was more, what is that magnitude? Or in other words, where are OE margins currently? If you could help us with that would be very helpful.
That would be a novelty if I helped you with that, I won't. I think what my answer you should read into it is that we are affected by exactly what you say yourself, whether it's been underestimated or not. Of course, the sales mix is not helping currently because we are growing so much on certain parts of the equipment.
Understood. If I finally just could sneak in the question around mix in CT. Obviously the 100 basis point improvement year-over-year in CT was very encouraging. I was very happy to see that, but you are also seeing some favorable sales mix. Could you help us a little bit with the order of magnitude of that and what you see in the second half? Presumably, that will, to some extent reverse if some of these larger gas and process orders start to get invoiced in the second half.
No, the reason for the comment is what you touched upon. Of course, if you have a good quarter, a big quarter for gas and process, and then you don't have it next time, it will be affecting the sales mix and hence the margin, because the margin is far from what we have on the industrial compressors and the service on industrial compressors, for example. I cannot quantify, and I won't quantify exactly what is what in that move from 22 to 23 and so on. It is really just to understand that this is not a level which has everything in the positive territory, with a perfect mix, with a perfect currency basket. The comment is there to say, well, we do 23.4%, but of course, it is not all components that are helping that. I think what we want to say is that it is a good level.
We have always talked about Compressor Technique being a 22, 23% margin business. I think, again, to come back to what Mats said, our focus is on growing value and on growing. If we can do that at these margins, we are super happy.
Great. Thanks.
Thank you. Okay, I think we have exhausted the hour, ultimately. I think that if there are any further questions that come up, our investor relations department or myself, we are of course available for any questions coming after this call. I thank you very much. Thank you, Mats.
Thank you.
for your first quarter comments. Second quarter comments, I should say. We thank everybody on the line, of course, for participating. Let me just leave you with a reminder that in November, we will have a Capital Markets Day, and the date is the 14th of November. You can just put it down as a little bit of a note in your calendars, and there will be much more information coming on that later on. Without more comments from our side, we hope that we will speak and see you in October when we comment on the third quarter results. Thank you very much. Bye-bye.