Ladies and gentlemen, welcome to the Atlas Copco Q3 Report 2015. Today, I'm pleased to present CEO, Ronald Gieten and CFO, Hans Olomage. For the first part of this call, all participants will be in listen only mode, and afterwards, there will be a question and answer session. Speakers, please begin.
Thank you very much, and very welcome to all participants on this telephone conference. We are presently, Ronny and myself, in the center of hard rock drilling technology in the middle of Sweden, in Orebro. So hence, we don't have any on-site presentation this time. We will do it at the telephone conference only. And of course, after an introduction of Ronny, we will come back to questions and answer session just as we normally do.
So without further ado, I hand over to Ronny to give his comments on the Q3 report that we just released earlier today.
Okay. Thank you. Thank you, Anzula, and welcome all of you. I will do as usual, go quickly through the presentation so we have time for questions. And I'll go immediately to the slide heading with Q3 in brief, which is number 2 of the presentation.
Like you say, the heading is a mix demand. And actually, you will see also during the call, try more and more to understand what we mean with mix because it's not only mix that we see some growth in service and low in equipment, but there's also in equipment we see also some mixed development. In other words, some good businesses and less good business. When it comes to the growth in service, more or less like Q2, we see almost everywhere some growth in service. Keeps up even on the mining side.
It keeps growing the service business. It's a little bit hesitation. You see that and that's always when one sector is adapting in the oil and gas that people are recalibrating and people are sometimes a bit destocking. You see that when I did my investigation, I consider this as a temporary softening of the business. When it comes to the equipment, the large units, which I have been talking now, I don't know, for how many quarters is still soft.
So large CapEx is not there. And on top of that, we also had during the quarter also some cancellations, which you have also seen in the write up from the mining side. So stable industrial business, but yes, still weak mining. And I think it's not a surprise when I also say a weak oil and gas part. Geographically, Europe, as we also mentioned that I think in Q2, Q1, almost all countries are developing positively.
But some of the BRIC countries, mainly that is then China and Brazil, it's tough. We see also some tougher environment on the Middle East side. But I'm very pleased that the execution even in a tough environment, We have been executing very well. So I'm very pleased to see that the troops have done what they can do. So we came out with record profit, of course, helped with some currency, but on the other hand, all businesses delivered and also this organization also was able to come up with the right operating cash flow.
So I'm very pleased to see this happening. Of course, what keeps us in this level, it's all about innovation because many of you have been asking me many times about price thing and how can you get market share. There's only one big secret. It's driving and striving for innovation. And I'm now on Slide number 3.
So here's a couple of examples on the vacuum side. You remember 2 years ago, we acquired Edwards. We are heavily investing in new products to penetrate new markets and also strengthen the existing markets from Edwards where they are. But this is one example, but I can also assure you we do this even on the mining side. We do the same drive to create at the end of the day productivity for our customers.
Now I'm on Slide number 4 on the figure side. Not more to say than I think what you see here. Good record operating profit, so 5.3 €1,000,000,000 margin adjusted 20.4%. So finally, we are back on the league where I always like to be, the 20 plus and also the operating cash flow, which I already mentioned that before. So we are really transforming our assets in cash where we can do that.
If we then go to Slide number 5, where we look geographically, I've already elaborated a little bit on that. So very solid Europe. Asia, although you see a +2, but it's a bit mixed. A solid India and a couple Singapore region, as an example, softer. Middle East, Africa was weak this quarter.
So of course, hit by 2 sectors, which are weak, and that's the mining and the oil and gas. So eventually, yes, I think it's normal that you get a lower level there. Then we go to South America. We see also here a minus 17%. And yes, if the biggest country is really weak, that's I mean, in Brazil, yes, it's very difficult to keep up at a good level.
So and we take measures where we feel we need to do and also like unfortunately in Brazil, we are adapting also also to the new level. Then if I go to North America, CMI is 7. I will elaborate a bit later also when I'm talking about different business areas, but it's mainly here also from oil and gas. Those who are familiar with Texas will see that and understand that. And of course, business area, but it's mainly here also from oil and gas.
Those who are familiar with Texas will see that and understand that. And of course, it's a big sector, not in total. For us, it's our exposure is not so high, but the drop was significant and that made it also that you see it at an aggregate level. And then I think also here, we had the same ecom part where compared to last year, where we had less orders from the semicon, the intels of this world. So that was in quick the overview geographically.
If I then go to Slide number 6, the organic growth, There you see we are always coming around to 0. And of course, this time, it's highly affected by the mining part where we had a cancellation and then the oil and gas. Let me then go to the bridge, Slide 7. Here you see still a significant currency effect, and that's mainly, of course, for us, dollar, euro and of course, then euro, Swedish kronor. What made the biggest effect, Anzula will elaborate a bit more when he talks about the different detail, Riches.
And then I think you see price volume, yes, is the minus 5 on orders received and is 0 on revenue. And I will elaborate a bit when I'm talking to different business area on volume. But anyhow, it's significant, that part. I would skip Slide on the group side Because I will go immediately to compressor technique, which is Slide number 9. Still keep growing in service.
So that's good to see. Of course, sometimes it goes a bit more than other quarters. This quarter was not so strong on the growth side of service, but still at a good level and explainable level. So I don't see in the foreseeable future no reason to doubt that we continue to grow in this area. I think we have a very efficient machine working there.
And on the other hand, I'm sure also that our customers also appreciate our service here. But equipment was weak. We should not try to find other ways there. But on the other hand, we will start to explain it geographically, a strong Europe. I was pleased to see that on the compressor side.
But on the other hand, we got a hit in China and a very strong hit in Brazil, where we saw the market adapting. On the other hand, if you take United States, which was also affected, but if we dig a little bit deeper in that to see and try to understand the United States, we can say that it is the oil and gas part, which is weak. And then I'm talking really weak, which was in the quarter real adaption compared to last year. And also, we had a lower vacuum orders mainly from the same income compared to last year. And that made the United States also for compressor technique looking weak.
But if we take these things away, it's still an okay component or country, I can say that. And then I think the big ticket is still weak. We had a very soft gas and process, so the largest compressors we have was weak. Was that a surprise for me? No.
But of course, it's part of our business. And if it's weak, it's weak on that side. Operating profit, there I'm very pleased to see that. We are back in the league where we would like to be. And if you look to the graph on that slide, you'll see that also that we have creeped up.
The guys have really focused on the right parts and kept investing, but on the other hand, have adapted where there was some waste slipping in into the organization. So it was a good execution. And we keep here for sure investing in research and development, just to stress that part. And that is mainly also on the vacuum side. We'll then go to Slide number 10, industrial technique.
Continuous good development, good order intake, strong demand for a motor vehicle. I'm sure some of you have questions from me on Volkswagen for the time being. We don't see a change. It still continues to be a good one. And we also got good orders from aerospace and electronics because there also we have a very good value proposition to our for our customers and that also yield to good results.
Growth in service, we continue to do that. We had a small acquisition, which is in controlling line balancing. So that, I think, helped us to extend our offer. And also not to forget in the big record side, we also had record profit here in Industrial Technics. So it's always great for the guys that keep doing that.
If I then go to mining and rock excavation, growth in service and parts, so that business continues, and that is now, I think, maybe 4 or 5 quarters in a row that we have that. And we see also that our bigger customers respecting and really our offer. So that's good to see. On the equipment side, it gets thinner and thinner. I think at the end of the day, our ratio from consumables and services becomes maybe 100% from ZULA if we keep going like that.
But we had some order intake for sure, especially on underground, we had some. But on the other hand, we got the last day of the month also a couple of cancellations of machines, which was around SEK 300,000,000 or nobody likes it. But okay, if customers see that, that is something which they don't need it, yes, okay, we need to adapt. Luckily, we had not produced these machines yet. So from that point of view, there is no big legacy besides some engineering work and a bit here and there that we had already invested in that.
Unfortunately, and that we have been doing now for several quarters, we have to further adapt the suit. So we take further efficiency measures in the different areas, not only in one area, but it is in all the different areas. But on the other hand, and that I've said several times also, we keep investing in design and development, and that is done by design. We are fully committed into the future because we believe still that mining and rock excavation has a future. It's a cyclical business.
We all know that we lead here by innovation and having the best offer for our customers and that is we are committed to. The margin, I'm sure that the guys are extremely happy that they come back to the 20% week. So I'm also pleased to see that. So that is good. I would say congratulations to them.
Of course, held by currency, we should not deny that, but and mix. But on the other hand, they have tremendous under absorption in different plants where they also, in the meantime, adapting here and there and also these costs are fully absorbed. Then I'm going to Construction Technique, which is Slide number 12, a very good development on specialty rental and service. So the resilient part of our business, we're developing very well. We also had a small acquisition in Specialty Rental, which is on special dryers, which we acquired during the quarter and fits perfectly with our offer.
But on the other hand, we had a lower intake for equipment. And again, all these countries are always coming back, Brazil and China. But on the other hand, we had some green spots. And I think you see also the countries there mentioned India, United States and Europe, who showed some good development, and we keep pushing in this area. And the margin, of course, helped, of course, partly currency and also helped by favorable mix because, okay, the 2 businesses where we make most of the profit, specialty rental and service, of course, are growing more than the others.
To to
to
to This year's 20.4% would compare to 19.5% last year, but still a good improvement, primarily helped by the better currency situation, as Ronny has already said, but still, again, back to above 20%. If I look at the financial net and it. To and the best estimate I can give for the coming quarters ahead as far as we see it today. And it's, of course, then at the end of this table here, you can see it's promising, and it's good to see that the return on capital employed has now turned after having seen the negative effect of a number of profit bridge relative to our large acquisitions the last 2 years and now the return on capital employed actually improved in this quarter. If I move to Slide 14, you are now more or less acquainted with this so called profit bridge.
And I would just on this, which is the group summary, you can see it graphically at the bottom of the slide. A few comments perhaps that you see the share based long term incentive program, which was negatively affecting last year, was a bit positive this year. So that is an impact on the profitability. Onetime items, as I just said, there is, of course, a few acquisitions, but the main impact is last year's negative restructuring costs that did not repeat itself this year. So hence, we have a cost is supporting us.
Again, it's supporting us with roughly a percentage point in terms of net effect on the margin. And when you reach the level of currency, you can see if you make the numbers that, of course, it is supporting us. Again, it's supporting us with roughly a percentage point in terms of net effect on the margin. And when you see also costs for a number of projects that we are doing when it comes to ERP programs. We are doing quite a lot on IT infrastructure.
And this is something that is weighing down on profit now more than last year, I would say. So but it's also our way of not making these huge this type of cost big, enormous programs. We take them as they come, so to speak. And that is sometimes giving a negative effect, sometimes a positive effect in the bridges. So if we then turn to the next page, you can see the different business areas.
Again, when it comes to compressor technique and construction technique, this organic flow through is not very readable because it is oscillating around pretty small deviations. In construction technique. I would only call it that in spite of negative revenue development in volume, we increased profit, and that's because of the mix that we are doing very good on rental and service in the quarter. So that has helped. When it comes to industrial technique, it's what we should expect.
They are doing fine. They're growing. And in mining, the only comment perhaps is that taking out currency and onetime items, yes, it signals, of course, that we are still doing a lot of measures as we go on in order to adjust and be able to defend the profitability also going forward, whatever how long this situation of relatively low equipment demand ever continues. We don't know. But this is also, to a certain extent, in the numbers.
When it comes to the balance sheet, yes, the only effect since December really, apart from making more money, is that we have taken out, of course, the redemption, which was sort of almost a full extra well, it was a full extra dividend. And then we have paid already also the half annual dividend. Otherwise, as you can see, the numbers are pretty similar to December, at least. If we go to number 17, Slide 17, finalizing with cash flow, Yes, it was a good it was not a record record quarter, but it was very strong. And it's backed, of course, by the high operating profit and a reduction of working capital as the primary takeout on that.
Those were a couple of comments. If I look ahead, perhaps I could also as I did on the interest net and tax, I could also give already that on the currency side, you saw that in absolute numbers, we still have a positive impact of some 6 70,000,000 on EBIT compared to the Q3 last year. When we compare and when we estimate that similar impact between Q4 last year and what we expect this year, it's actually quite a big of a change. And I think we will be almost close to a neutral to and to it. To to and
that service, which still continues to grow as I already elaborated during the talk. On the other hand, on the equipment
to
Yes, it's tough. It's not an easy area. But we believe more or less that this adaption, which we got during Q3, that we got that. And if we look sequential, that it will remain more or less at the same level when it comes to the equipment side and, of course, the positive side of service. So that made us putting down remain at current level.
So, Hansel, I think
Yes, we're done with that. It perhaps took a few minutes longer than last time, but hopefully then we have cleared out a few questions instead. But anyway, we do have time for questions. It will be strictly from the telephone conference. I would ask you to stick to your main question and possibly a follow-up on that one to allow more people to have a chance to hear some comments from Ronny.
So please, operator, can you just kick off the Q and A session then, please?
Yes.
The first question comes from Mr. Klas Beilin at TD Group. Please go ahead.
Yes. Hi, Ronny. Hi, Jan Zola. It's Klas from Citi. I have two questions, please.
I'll be brief. Just on Edwards first. I think part of the strategy was to increase the aftermarket business. It was lagging CT. You have also reduced the cost base.
When you look at Edwards today and compare it to previous down cycles, how much more cushion do you think you have in the business right now from the aftermarket improved cost structure? I'm trying to think of the operational gearing here this time around.
Yes. That is a good question. And of course, these things, this changing and developing that type of business would still take time. We are not there yet when it comes to the aftermarket penetration level as we are on the CT level. So that is one what you should really keep in mind.
I think it's going in the right direction, but not there where we believe it could be. We also on that same
to and and it.
Investment. Both our feet in the street, we have not been talking so much lately on that, but we're putting really new people in that business. We do that. On the other hand, one should also know that we get a little bit headwind in that segment on currency, And maybe, Hansula, you can elaborate on that part. But that also we also get that part of it because that is embedded today in compressor technique.
So you don't see it because you will think of compressor a stronger dollar, oh, that's great for compressor technique, yes. But now there is another big entity which came in place, which has a bit of another dynamic, which is but in summary, we I believe and that is the simulation we have done. When we will get the dip, which some of you expect, would be, we are better off than they were whenever it's 3 or 4 or 5 years ago.
Okay. And then sort of a follow-up on the but switching to mining and thinking about service here. It's a good follow-up, yes. So on consumables, we're seeing sequential weakness now in most markets. Have you seen any weakness in copper as of yet?
I mean, I'm thinking Glencore free broadcasting production. Or is that something that is yet to come through? If you could develop a little bit, Ronny, on the commodities here.
Yes. I must say, I don't on that one in detail, I don't have it in front of me. But I think we still on the copper side, one hand, maybe there is a Glencore who is adapting, but there are other guys who are investing. So from that point of view, I think on the consumables, it's always a little bit of plusminus. It's not a big growth that we see there, but still normal levels.
So sequential normal, I would say that. But I think Kas, I have to skip the detailed questions on the consumer because I have not looked into that before this call.
That's fine. Thank you very much. Thank you.
Next question comes from Sanddia Azili at JPMorgan. Please go ahead.
Yes. Good afternoon, everybody. My first question is on cancellations and what the risk is here going forward. Do you actively screen projects that have been kind of or orders that have been in your portfolio, but they're not moving forward and canceling them kind of actively out of your backlog? Or were the cancellations you received in Q3 just purely in response to customers?
And have you revisited your backlog in terms of orders that are at risk and whether we should see more cancellations coming forward? And also on when a customer cancel, do you get any compensation like what we have seen in Q3 now?
Of course, on one hand, if we take it when we got this cancellation the last day of the quarter, I think for the guys who are handling this project because they are in constant contact with these guys who are handling that part. So they knew there were debates going on. And that's also the reason before we start working on these things that, yes, we need to have a firm confirmation that we don't do silly things on that one. I think we do scanning, but sometimes even customers, the ones who talk, they assume also that they get still the continuation of their budget. But then there are CEOs who suddenly take decisions and they say, okay, we need to cut another, whatever, 5% to 10%, and then the project is postponed or canceled.
So these things happen like that. And this time, okay, it were a couple of bigger machines for ADS, which we would have canceled and that made this amount of money. Do you get compensation? In all the contracts, we have this type
of
description of compensation. But you should think about if you go and talk to the RIOS and the BSPs and the Anglos of this world, even if it's in, they will definitely also sit together and start to negotiate with you. Of course, if we had done some costs, we get some compensation. So in this cancellation, it's not that we made a loss. It's not that we had to go scraps on inventory or we took more inventory on the balance sheet.
It's not the case in this case. But normally, it's not easy to get paid for the cancellations. That although it's in the contract, but it's always negotiated.
And a follow-up on construction. You talked about the margin improvement there and the mix that helps. But is the road paving business also moving up? Or is that still difficult?
Next question. It's still difficult. You should see on the road where are we from, Australia, Brazil, Russia And I think tough markets. So it's a tough market for them. I think they do a great job.
But these three markets were very strong markets for our road construction division, and they are all 3 down. But on the other hand, we see good development in U. S. We see good development in Europe. But there will be a day, I hope, that for the guys, because they're really working hard, that there is one day that all these markets are really on the positive side.
But it's a tough, tough market.
You should not we are not there yet where normally we should be.
Thank you very much.
Thank you, Andreas.
Next question comes from Mr. Markus Almerud at Kepler Cheuvreux. Please go ahead.
Markus Almerud here. So my first question is on geographic trends. So you see clear deceleration in
the U. S. And you
say it's both vacuum equipment orders but also oil and gas and petrochem. But has the oil and gas and petrochem, do you see a sharp acceleration in September? Or is it just bad all throughout the quarter? So hence, in other words, is the big delta that we're seeing here semis? So just on the sequential trends, please.
Yes. I think on the oil and gas part, because on the petrochem, I think that's another part. But I think on the oil and gas, what we have seen during the time in the quarter that especially on Texas and for those who are following Aplus more in detail and seen if you take we have one of our brands there, Quincy, which is really has good insight in the oil and gas. Really, these guys are hit because there you saw during the quarter that, yes, the orders were not coming. Because as an example, maybe 30%, 40% of the rigs in Texas and or in other areas there are standing idle.
If they need some replacement of their compressor, because for those the drillers there, they really take them from the ones who are standing idle. So you don't get orders. And that means that you get really a minus maybe 20, minus 30 during that quarter. And that is what we are faced with in the oil and gas, especially in U.
S. And
that is is this a onetime? Can this happen again? I think sequentially, I don't think so because we already dropped more. Of course, it can always go to 0, but that I think I don't expect. But I think we got a drop during the Q3.
Semicon is something where it's a bit of a different part because we all the ones who are following the semicon have seen also that memory prices are a little bit low. But on the other hand, you still see that Intel and Samsung, the big guys are still having good investment plans and also looking to the change of technology. So there is a bit of wait and see moment now taking place, which maybe goes another quarter or another 2 quarters. But from our intelligence, we assume we think that I think demand will still stay at a good level.
Okay. Perfect. And then very quickly on mining aftermarket. If I read you right, you see profitability fairly stable and pricing very stable. And then also, is it possible at all to say how much of the margin improvement was mix and how it's coming from internal measures?
I think I will take the aftermarket and then I can talk on the mix. I think on the aftermarket, you should see on the mining, and that's also what we tried to explain all of you also when we go to the Capital Markets Day, what type of services we do. This is not Greasemonkey service. This is propriety service and is also dedicated propriety spare parts. So I think from a pricing point of view, because we always get pressure because people always are asking doing the different.
But on the other hand, and that is what we have been working on constantly, is to make our offer more efficient and also creating more value for the customer. I think you cannot cheat the customer in this area. But again, it is proprietary service. It is coupled on very good logistics, and that is execution. And that is keeping this margin where we are.
There's no secrets in this.
On the profitability, on the profit, first of all, of course, you know that there was a comparison last year, which included the onetime items. So if you take that away, the resulting extra profit margin improvement comes from currency primarily. Then, of course, the mix is also helping, obviously, but it's also true that with the deterioration of volumes, it's very difficult for the equipment divisions to improve by short term efficiency measures, if you see what I mean. It's something that goes on all the time, but it doesn't really give any positive impact until you get some volume back right. So it's currency and mix that is primarily doing the improvement.
And then you talk the business area.
Then I talk the business area
on mining, of course, yes, yes, yes.
I think you see now I have not calculated I don't have it here in front of me, but I think the ratio is equipment. Right. It's around 70 percent. Yes. So then and I think it's not a secret that we make more profit on service than on equipment, especially now with the low volume on equipment side.
Okay, perfect. Thank you very much. Thank you.
Next question comes from Mr. Ben Marlin of Morgan Stanley. Please go ahead.
Yes, good afternoon. Hi Ronny. Hi Hanzola. First question please, just coming back to vacuum. Can you give a sense maybe on how much orders were down year on year in the quarter so we can think about the development of the rest of the group?
And then related to that, we've obviously seen CapEx cuts in recent weeks from names like Intel and TSMC, as you say. Has that already been reflected, do you think, in your Q3 order intake? Or is that yet to come? Thank you.
So welcome back, Ben.
Thank you.
Yes. I think on the orders, the down is around, say, around I don't have it here in front of me, but it's around 10%. And some of them are already because they are already in because it goes very quick there, and that makes it sometimes difficult for us because the decision cycles are extremely short there. And that is also the reason why we need to have as a factory response time, it needs to be also very quick. And that is Edwards is geared up to doing that.
But there is some of them are already in because like ASML, you have seen the result of ASML, what is it, last week or the week before? Yes, you saw that. So they have not ordered to us either. So we don't have it. So they're in.
Thank you. And then a follow-up, if I can, on currency for Han Solo. The $670,000,000 year on year benefit in Q3 seemed a little bit higher than expected given some of the moves we saw in emerging market FX over the summer. Did you get any benefit from hedges or option corridors in the quarter? Because it seems quite a big step down to being flat in Q4.
Thank you.
No. It's actually so that when it comes to the dollar and the euro, it didn't deteriorate at all. And it actually increased a little bit sequentially. So that, of course, is an important part when it comes to profit in the group. We don't have exactly the same distribution of where we in what currencies we earn the money and where we sell, so to speak.
And that explains why you might have seen that it was a little bit more in absolute value than what you expected.
Got it.
Thank you. Thank you.
Next question comes from Mr. Sebastian Grootter at Exane. Please go ahead.
Hi, good afternoon. A question on pricing. I mean, you have innovations, which should drive higher price for equipment. You have labor inflation that should drive higher price for aftermarket and yet pricing is flat in order. So I just would like to have your view on the competitive landscape.
What do you see over the last few quarters in the in your main businesses?
And then you mean mainly on pricing there, no?
Yes. On pricing, I mean, do you see any change from your competitors as you are not able anymore to price your innovation?
Yes. I think if I listen to my salespeople, they always mention that competition is dropping price here and there. But I think this is a game what always will go on for that part. And I think if you look today on lower pricing, why is it? Of course, on the mining side, you get pressure on, let's say, on the consumable side because there is in certain markets, it's not easy to differentiate.
So you get a little bit pressure there.
But on
the other hand, when you take, say, the new variable speed compressors, there we get possibilities to get a better rewarding from our customers. So you get pluses and minuses in this part. What you miss in this market really is and we should not before on the service side, if you take it, is a fantastic way to talk to your customers because everybody accept that. That the inflation is rather low. It's what come and tell you.
So I need to have a different story, and you can only have a different story when you come up with a new offer. So that is where we see that it is more difficult than when it was 2 years ago or 3 years ago when you had some inflation. So that and that is the reason why internally, if you would hear me talking internally, like I'm brutal, and I use the word deliberately on the execution in the service side because we need to beat yes, because there is always
slipping cost inflation. And that we need to really to make sure that we can compensate. But just to perhaps you know it, Sebastian, already very clearly. But just to make it clear that when we talk about the price bridge and 0%, as you alluded to, we are comparing the same offer last year with this year. So if we innovate with new models, etcetera, that is not included in the pricing bridge.
It comes as a part of a higher price for a new product, but that goes in volume, if you see what I mean.
Okay. Very clear.
So then
Yes. Follow-up on the marketing Yes. A follow-up on
the marketing expenses.
They have come down as a percentage of sales in Q3. I mean, are you stepping down your marketing efforts? Or it's just a temporary phenomenon?
No, no. We of course, we like if you take it on the mining side, of course, we have adapted in the field here and there. But it's not that we have started to go crazy cost cutting exercise. We have not done that. But of course, we like I said, when I used the word on the service side, of course, we really try to be good executors and some of them are adapting here then.
But I don't there is any significant you should not read anything on that, that they are doing some projects here and there. The Feet and the Street ratio is still at a good high level.
Okay, very clear. Thank you.
Next question
Next question comes from Mr. Andreas Koski at Deutsche Bank. Please go ahead.
Yes, hi. Andreas Koski from Deutsche Bank. Can you hear me?
Hello? Yes.
On your outlook that you are changing this quarter on the near term demand outlook, now you are looking for a demand situation on about the same level as in previous quarter basically. I just want to understand what has changed here because as I can understand it, you have been talking about flat demand situation for equipment for a long time now and an expectation of service growth. So is it your view on the growth potential in the service business that has changed or in the equipment side?
Not on the service side. And you remember when I start in the beginning of our presentation here, I said it's a mixed development and it's mixed in different circumstances. But what Naples changing is that when it's not on the service side, it's more on the equipment side. You see the mining, okay, you know before, I've been talking all this time about the big tickets. Like I said, it's already 4, 5 quarters.
But also now you have the oil and gas part. You have also a bit of Brazil, which you have a bit more China and that we cannot compensate fully with a stronger Europe, reasonable U. S. So that made us really hard to be a bit more, yes, you could say cautious, but okay, it is what it is. Because if you take China now as an example, because we didn't elaborate so much of that.
If you are in shipyards, it's tough. If you are in steel production, it's tough. If you are in coal, it's tough. But if you are in medical, oh, it's hallelujah. If you are in the flat screen, it's hallelujah.
Even if you are in agriculture in China, it's good. So and then you have to see where are where is the weight of all this part. And that makes it actually rather difficult to make a good straightforward analysis. And that's what we came to the title of mixed development because it's not straightforward. And if you listen to my explanation, what in hell is he saying now, it's down here, it's up there.
It's really swinging from left, right to center.
Yes. But in total, you don't expect equipment to be down sequentially?
No. Yes, I think maybe we have a positive if you read the outlook straight, we I haven't been talking a positive service and service is 45, then equipment must be a little bit down because otherwise my math is going to
be Yes, it's 0, but I think you need some degree of error here. So
it's something we
can't do maybe it is
unchanged Yes.
If I could really I'll tell you, if I could really make this projection for now sitting here and for 3 months, I will not do this job. Then I would maybe sit somewhere else in the
In the nature. In the nature.
In the nature. Yes. Okay. But it is you need to take a little bit into consideration. It's a waiting.
Yes.
May I follow-up up with a question on mining and the cancellation or the cancellations because as I understood it, they were quite a few. So are all of the cancellations coming from 1 single customer? Or are you seeing this more broadly among many customers? And what do you think the risk is for further cancellations in Q4?
Yes. The reason I say cancellation is from 2 customers and it's a couple machines. And that was when I said it and I said it in plural, then I had to say, okay, Ronny, why you say it like that? But it is several machines, big machines, and it's from 2 customers in 2 countries.
Okay. Perfect. Great. And then lastly, shall we expect any cash outflow from the acquisition of Henrobb in Q4? Or will that come in 2016?
You mean the deferred purchase amount? Well, to be perfectly honest, I don't have it in my head if it's continuous, but I think it goes into next year. But if there is anything If I recall,
I think it will be next year.
Yes, I think so too. But I hope we can pay. I hope we do because that means that the business is thriving and going forward.
Yes. And the business is I can elaborate a bit on that as it is not so small. I think it's still going on in the right direction. So that's good. We get good deliveries.
So that's one thing, so good output. And second, also the attraction we get is good.
Thank you very much.
Thanks. So on the
next, please.
Next traffic comes from Sander Kukhnin of Credit Suisse. Please go ahead.
Yes, good afternoon. It's Andre from CES. Thanks for taking my questions. Can I ask on automotive CapEx? You did say that you don't expect a substantial impact, but could you talk to us about how much visibility you have on that and your kind of thinking behind it and customer conversations that keep you positive on that segment?
Yes. If I listen and you get the occasion, if you come to the Capital Markets Day to ask the guy straight and do that, it's no problem. The projects on the different models is still good. I think also our CSA business, our GCS business, our Tensor business is still getting good attraction. So from that point of view, I have not heard them immediately to say it goes down.
Now how far is the visibility? I think, yes, they discuss the projects. But again and we know the case now in Volkswagen, if there is certain measures going to be taken in whatever next Board meeting and they cut whatever, yes, of course, then we will also be affected. But on the other hand, I see still good projects coming on from the other players, even from the Korean players, from the Chinese players, from the Japanese players because we're also expanding or extending our offer. We just talked with Andreas about Henrop.
I think we get more traction. So that was also the reason why we did this type of expansion of our product range. So
Got it. And a quick follow-up on FX for Edwards. I think at the beginning of the year, you said that Edwards was hedged for this year. So I wasn't getting any of the benefit and you then stopped hedging. So if rates didn't move that you would get it next year, can you just update us on that if we should expect anything next year?
We don't we have stopped, but it doesn't mean that there were not still remaining hedges live, if I put it that way. So that's true. But it's sort of tailing off, if I put it that way. The situation is, of course, different when you are in pounds and if you are in Korean, Wong, etcetera, compared to the normal Atlas Copco structure of exposure. So hence, that is the reason why they have been negatively affected while the rest of the group has had a profit margin improvement, if you see what I mean.
But I don't want to go into details exactly on how to how big impact that is. It's, of course, diluted a little bit within the big compressor technique. So we shouldn't make it a big impact point. But on the business as such, it has affected, of course, to a certain extent. But just
to elaborate on that part, let's say, Edwards profitability is still at
a good level. Absolutely. It's affected
slightly negative, but still Compared
to Q3 last year, it is not as high as it was, but it's still at a very good level. Yes. There we had a And the negative FX effect is part of that. Yes. Got
it. Thank you very much.
Thank you.
Next question comes from Mr. Peter Fillon at Handelsbanken. Please go ahead.
Yes. Good all Good afternoon. My first question relates to the compressor business. Could you please help us understand the different growth components for service, for the large compressors and the small, medium compressors to get to the flat organic growth
year over year.
Yes. Service plus? Yes. But yes, I heard that. But is it 4 or is it 8?
Yes. I think Peter, and we never I think you can ask Matthias on this, but I never give that type of percentages. But I can say it's still at a good level. And this has not this is in this type of magnitude that you just mentioned. Large is down.
I think you can maybe I think almost maybe close to not double digit, but coming close. And then you have the small to medium size. And the small to medium size asked a little bit explanation because that is the yellow canaries, if you remind me. You heard me talking about Quincy during one of the calls here of your questions. That's oil and gas.
That is down significant. And then also, we have in certain segments also in China, where I was talking about like shipyards, steel production, coal, where also small to medium sized compressor also had exposure where they got down. If you take excluding this, you have still a slight positive on the small to medium size. So if you take the small to medium size in total, you will also have a small minus. If you take away the oil and gas Quincy and you take some segments away in China, you will have a plus.
That's very clear. Could I just ask on the guidance? I mean, last guidance was slightly up. We talked about sequential demand. Now it's flattish.
Just to be very clear here, are we talking about invoice sales or are we talking about organic orders? It started to be quite different down here.
The outlook, yes, the outlook, maybe you can explain what the outlook, what you need to understand behind the What do we mean with demand?
Yes. Well, demand is what we try to do all the time is we say, what is our customer intelligence setting us? What are the sales companies feeling? What is reported from each of the divisions in terms of what is the activity level, what do we see. Of course, it translates normally into a similar picture when you look at our order development.
But really what we are not wanting and what we are not willing to do is make an order projection, so to speak, for the next 3 months just as little as we make a profit projection for the next 3 months. So it is to try at least to help understand how we assess the customer demand compared to what we have seen in the last quarter. That's what we really mean. And in that, we, of course, know that a positive development on service demand will not normally not suddenly turn into a negative one, etcetera, etcetera. So the trends are, of course, one guidance for us to say this and to change the outlook.
But it's not really an order projection. It's really trying to feel, are the companies that we serve, the segments that we serve going to stay roughly at the same level? Or is there an indication that it's going down somewhere
or up somewhere? And to elaborate on this, because I don't like to be wrong, because who likes to be? Because how come we are off because that's another one because that makes irritates me. I think first, of course, you can say the cancellation that I had never expected that we got that. I think the more reaction of oil and gas, although it's not big exposure for us, maybe 5%, 6%, we have it like that.
But I think the drop is significant. And that then if the drop is significant, yes, you see it even if it's small. And the other one is that we had lower than I expected semicon in the back end. And if you take these 3 together, then you're there. It's not more complicated.
No, exactly. That's what I wanted to sort of conclude. So thank you for that.
Yes. Okay. Thank you.
We have a question from Mr. James Moore at Redburn. Please go ahead.
Hi, everyone. Hi, Ronny. Hi, Hanzola. A question on your cost base. I see your headcount was down 2% year on year in the quarter, which I think is the biggest drop since 2009, 2010.
And I wondered if you could elaborate, firstly, on which regions or divisions are seeing the biggest decline? And secondly, when you look forward at your headcount plans into the Q4, into the next year, should we expect that rate of headcount decline to increase or decrease?
Okay. Yes, James, we were waiting for your question because it's already over 4, but I knew you were hanging in. So that was a special service to you.
I can't do that.
No, but I think it's a good question, we even have compared to the volume, sales volume in service, we had a slightly change in the headcount in service. And why it's coming then? Because we had been working hard the last year efficiency in service, mainly in mining and rock excavation, but also a little bit in the city area. And that also has yielded in a better profitability. Whereas the biggest change is in mining and rock and then you have a bit in CT and a bit in CR that is where we have now.
Where you can expect most of it to come, still to come, is in the larger units from the different businesses. And then I'm aiming to do gas and process and then hinting to the larger units for mining and rock excavation. There you should expect most things to come. Of course, we are adapting also on the vacuum side, but there we do it with stems where we have a built in agility and that will not cost us any because it's always not it's not fun to do it, but it will not be any cash out that we have. Where if you really want to make a sensitivity analysis on the headcount, you would see that these guys are maybe not going down as much as they want to of the headcount.
And this is mainly coming from this is mainly coming from the R and D, where we have this by design kept the people. And then second, also in the feet in the street, where by design, by agreement also with the Board, we say we hang in. Of course, we make sure that the people are efficient, that we get efficient R and D and all this about it. But there you will see that this flexibility, which we should normally could apply, we by design, we've kept these people.
That's very helpful. And if we think forward to next year, do you think that pace of decline might get bigger? Is this the start of something more material? Or is this a sort of run rate that we could expect and what you see in the current order trends?
I think, of course, I think on the other hand, most of our people, if you look, are not sitting in the manufacturing. And we have more service people than we have manufacturing people. And in service, we are still growing. So therefore, of course, we have to be brutal on, like I used the word again, on the service side, but there we have many more people than we have in manufacturing. And maybe we have 12,000, 13,000 service people, and we have maybe 9,000 or a little bit maybe a bit less than 10,000 manufacturing people.
But on the manufacturing people, which is equal to equipment, yes, there we if the volume is not there, we have to adapt that, and that we do. But on the other hand, again, and I'm repeating myself, I'm by design, I keep my design involved. Even in mining and rock excavation, we keep investing in design and development. And actually, yesterday, we had the board meeting. We discussed that.
We said we keep committed to the automation. We keep committed to the mind of the future because that is where yes, when the upturn comes, that is where we will live from.
Thank you very much.
Thanks a lot. I fear that there might be some more questions on the line. We took a little bit longer than an hour, but it was the fault of me and Ronny taking a little bit too long time in the beginning. But I hope that you feel that you are very welcome to come back to any of us, including Matthias and Karin and Linea at the Investor Relations Office for follow-up questions, of course. But for now, thank you very much for participating and hope to see many of you at the Capital Markets Day in Stockholm, the 17th November.
So thanks for today. Bye bye.