Ladies and gentlemen, welcome to the Atlas Copco Q3 report 2015. Today, I'm pleased to present CEO Ronnie Leten and CFO Hans Ola Meyer. For the first part of this call, all participants will be in listen-only mode, and afterwards there'll be a question and answer session. Viggo, please begin.
Thank you very much, very welcome to all participants on this telephone conference. We are presently, Ronnie and myself, in the center of hard rock drilling technology in the middle of Sweden in Örebro. Hence we don't have any on-site presentation this time. We will do it as a telephone conference only, of course, after an introduction of Ronnie, we will come back to a questions and answer session just as we normally do. Without further ado, I hand over to Ronnie to give his comments on the third quarter report that we just released earlier today.
Okay. Thank you. Thank you, Hans Ola, welcome all of you. I will do as usual, go quickly through the presentation so we have time for questions, I go immediately to the slide heading with Q3 in brief, which is number two of the presentation. I'd like to say the heading, it's a mixed amount, actually, you will see also during the call, try more and more to understand what we mean with mixed, because it's not only mixed that we see some growth in service and low in equipment, but is also in the equipment, we see also some mixed development. In other words, some good businesses and less good businesses. 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 always when one sector is adapting in the oil and gas, that people are recalibrating and people are sometimes a bit de-stocking. You see that when I did my investigation, I considered 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. Large CapEx is not there. On top of that, we also had, during the quarter, also some cancellations, which was also seen in the write-up from the mining side. Stable industrial business but, yeah, still weak mining, 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, keeps on. Almost all countries are developing positively.
Some of the BRIC countries, mainly that is then China and Brazil, it's tough. We see some tougher environment on the Middle East side. I'm very pleased at the execution, even in a tough environment. We have been executing very well, I'm very pleased to see that the troops have done what they can do. We came out with a record profit, of course, helped with some currency, but on the other hand, all businesses delivered and this organization was able to come up with the right operating cash flow. I'm very pleased to see this happening. Of course, what keeps us in this level, it's all about innovation. Many of you have been asking me many times about pricing and how can you get market share. There is only one big secret.
It's thriving and striving for innovation, I'm now on slide number three. Here's a couple examples on the vacuum side. You remember two years ago, we acquired Edwards. We are heavily investing in new products to penetrate new markets and strengthen the existing markets from Edwards where they are. This is one example, but I can 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. I'm on slide number four on the figure side. Not more to say than I think what you see here. Good records operating profit, SEK 5.3 billion. A margin adjusted to 20.4%. Finally, we are back in the league where I always like to be, the 20-plus, and the operating cash flow, which I already mentioned before.
We are really transforming our assets in cash where we can do that. If we go to slide number five, where we look geographically, I've already elaborated a little bit on that. A 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 also solid, but on the other hand, China is softer. Middle East, Africa was weak this quarter. Of course, hit by two sectors which are weak, and that's the mining and the oil and gas. Eventually, I think it's normal that you get a lower level there. We go to South America. We see here a -17%, and the biggest country is really weak. In Brazil, it's very difficult to keep up at a good level.
We take measures where we feel we need to do, and unfortunately in Brazil, we are adapting soon to the new level. If I go to North America, see a -7%. I will elaborate a bit later when I'm talking about different business areas, but it's mainly here from oil and gas. Those who are familiar with Texas will see that and understand that. Of course, it's a business area, but it's mainly here from oil and gas. Those who are familiar with Texas will see that and understand that, of course, it's a big sector, not in total for us, our exposure is not so high, but the drop was significant, and that made it that you see it at an aggregate level.
I think also here we had the semicon part, where compared to last year, where we had less orders from the semicon, the Intels of this world. That was in quick, the overview geographically. I then go to slide number six, the organic growth. There you see we are always coming around to zero, 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 number seven. Here you see still a significant currency effect, and that's mainly, of course, for us, USD-EUR, and of course then EUR-Swedish krona, what made the biggest effect. Ola will elaborate a bit more when he talks about the different detail bridges.
I think you see price volume, is a minus five on orders received and a zero on revenue. I will elaborate a bit when I'm talking to the different business area on volume. Anyhow, it's significant, that part. I will skip a slide on the group side. I will go immediately to Compressor Technique, which is slide number nine. 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, an explainable level. 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.
On the other hand, I'm sure also that our customers also appreciate our service here. Equipment was weak. We should not try to find other ways there. On the other hand, let's start to explain it geographically, a strong Europe. I was pleased to see that on the compressor side. 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 trying to understand United States, we can say that it is the oil and gas part, which is weak. I'm talking really weak, which was in the quarter, real adaption compared to last year.
Also we had a lower vacuum orders, mainly from the semicon compared to last year. That made the United States also for Compressor Technique, looking weak. If we take these things away, it's still an okay continent or country, I can say that. I think the big tickets is still weak. We had a very soft gas and process or the largest compressors we have was weak. Was that a surprise for me? No. 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 see that also that we have creeped up. The guys have really focused on the right spots but kept investing.
On the other hand, they have adapted where there was some waste slipping into the organization. It was a good execution, and we had to keep here for sure investing in research and development, just to stress that part. That is mainly also on the vacuum side. If I then go to slide 10, Industrial Technique. Continuous good development. Good order intake. Strong demand for motor vehicle. I'm sure some of you have questions for me on Volkswagen. For the time being, we don't see a change. It still continues to be a good one. We also got good orders from aerospace and electronics, because there also we have a very good value proposition for our customers, and that also yield to good results. Growth in service. We continues to do that. We had a small acquisition, which is in controlling line balancing.
That, I think, helped us to extend our offer. Also not to forget in the big record slide, we also had record profit here in Industrial Technique. It's always great for the guys that they keep doing that. If I then go to Mining and Rock Excavation. Growth in service and parts. That business continues, and that is now, I think, maybe four or five quarters in a row that we have that. We see also that our bigger customers respecting and really our offer. 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 Ola , if we keep going like that. We had some order intake for sure, especially on underground, we had some.
On the other hand, we got the last day of the month also a couple of cancellations of machines, which was around SEK 300 million. Nobody likes it, but okay, if customers see that that is something which they don't need it, yeah, 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. Unfortunately, that we have been doing now for several quarters, we have to further adapt the suit. We take further efficiency measures in the different areas. Not only in one area, but it is in all the different areas.
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're all 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 you lead here by innovation and having the best offer for our customers, and that we are committed to. The margin, I'm sure that the guys are extremely happy that they come back to the 20% league. I'm also pleased to see that. That is good. I would say congratulations to them. Of course, helped by currency, we should not deny that. Mix. On the other hand, they have tremendous under absorption in the different plants where they also in the meantime adapting here and there, and also these costs are fully absorbed.
I'm going to Construction Technique, which is slide number 12. A very good development on specialty rental and service. 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. On the other hand, we had a lower intake for equipment. Again, all these countries are always coming back, Brazil and China. 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.
The margin, of course, helped because partly currency and also helped by favorable mix, because, okay, the two businesses where we make most of the profit, specialty rental and service, of course, are growing more than the others.
This year's 20.4% would compare to 19.5% last year, still a good improvement, primarily helped by the better currency situation, as Ronnie has already said. Still, again, back to about 20%. If I look at the financial net. The best estimate I can give for the coming quarters ahead, as far as we see it today, 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 relatively large acquisitions the last two years, and now the return on capital employed actually improved in this quarter. If I move to slide number 14, you are now more or less acquainted with this so-called profit bridge.
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, that is an impact on the profitability. One-time items, as I just said, there is of course a few acquisitions, the main impact is last year's negative restructuring costs that did not repeat itself this year, hence we have. It is supporting us. Again, it's supporting us with roughly a percentage point, in terms of net effect on the margin. When you see the 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.
It includes 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 the profit now more than last year, I would say. It's also our way of not making these type of costs, big, enormous programs. We take them as they come, so to speak. That is sometimes giving a negative effect, sometimes a positive effect in the bridges. 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, that's because of the mix that we are doing very good on rental and service in the quarter, that has helped. When it comes to Industrial Technique, it's what we should expect. They are doing fine. They're growing. In mining, the only comment perhaps is that taking out currency and one-time 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. This is also to a certain extent in the numbers.
When it comes to the balance sheet, the only effect since December really, apart from making more money, is that we have taken out, of course, the redemption, which was a full extra dividend. We have paid already also the half-annual dividend. 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. It was good. It was not a record quarter, it was very strong, 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 SEK 670 million on EBIT compared to the third quarter 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, I think we will be almost close to a neutral.
That service, which still continues to grow, as I already elaborated during the talk. On the other hand, on the equipment side, it's tough. It's not an easy area. We believe more or less that this adaptation, which we got during Q3, that we got that, and if we look sequentially, that it will remain more or less at the same level when it comes to the equipment side and of course, the positive side on service. That made us putting down remain at current level. Hans Ola, I think.
We're done with that. It perhaps took a few minutes longer than last time, hopefully then we have cleared out a few questions instead. 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 Ronnie. Please, operator, can you just kick off the Q&A session then, please?
Yes. As a reminder, it's 01 on your telephone keypad if you have a question, 01. The first question comes from Mr. Klas Bergelind at SEB Group. Please go ahead.
Yes. Hi, Ronnie. Hi, Hans Ola. It's Klas from SEB. 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 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.
Yeah. Of course, you know these things, this changing and developing that type of business will still take time. We are not there yet when it comes to the aftermarket penetration level as we are on the CT level. 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 essence investment, both 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 Hans Ola, you can elaborate on that part.
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 Technique, a stronger dollar, Oh, that's great for Compressor Technique. There is another big entity which came in place, which has a bit of another dynamic. In summary 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 three or four or five years ago.
Okay. Sort of a follow-up, switching to mining and thinking about service here.
That's a good follow-up.
It's a good follow-up, yeah. On consumables, we're seeing sequential weakness now in most markets. Have you seen any weakness in copper as of yet? I'm thinking Glencore cutting production, or is that something that is yet to come through? If you could develop a little bit, Ronnie, on the commodities here.
Yeah. I must say, on that one in detail, I don't have it in front of me. I think we still, on the copper side, one end, maybe there is a Glencore who is adapting, but there are other guys who are investing. From that point of view, I think on the consumables, it's always a little bit of plus, minus. It's not a big growth that we see there, but still normal levels. Sequential normal, I would say that. I think, Claes Rådström, I have to skip the detail questions on the consumables. I have not looked into that before this call.
That's fine. Thank you very much.
Thank you.
Next question comes from Andreas Thilly at JP Morgan. Please go ahead.
Yeah, 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? Were the cancellations you received in Q3 just purely in response to customers? Have you revisited your backlog in terms of orders that are at risk and whether we should see more cancellations coming forward? Also, on when a customer cancels, do you get any compensation, like for what we've seen in Q3 now?
Of course. On one end, 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. They knew there were debates going on, and that's also the reason before we start working on these things that, yeah, we need to have a firm confirmation that we don't do silly things on that one. I think we do a scanning. Sometimes even customers, the ones who talk, they assume also that they get still the continuation of the budget. Then there are CEOs who suddenly take decisions and they say, "Okay, we need to cut another, whatever, 5%-10%," and then, yeah, the project is postponed or canceled. These things happen like that.
This time, okay, it were a couple bigger machines for ADS, which we got canceled, and that made it this amount of money. Do you get compensation? In all the contracts we have this type of, yeah, description of compensation. You should think about if you go and talk to the Rios and the BHP 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 compensation. In this cancellation, it's not that we made the loss. It's not that we had to go scrap some inventory, or we took more inventory on the balance sheet. It's not the case in this case. Normally, it's not easy to get paid for the cancellations. Although it's in the contract, but it's always negotiated.
On a follow-up on Construction, you talked about the margin improvement there and the mix that helps. Is the road paving business also moving up, or is that still difficult?
Next question. Andreas, it's still difficult. You should see on the road, where are we strong? Australia, Brazil, Russia, and I think, yeah, tough markets. It's a tough market for them. I think they do a great job. These three markets were very strong markets for our road construction division, and they are all three down. On the other hand, we see good development in U.S., we see good development in Europe. There will be a day, I hope, that for the guys, because they are really working hard, that there is one day that all these markets are really on the positive side. It's tough.
Market.
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.
Hi, Markus Almerud here. My first question is on geographic trends. You see clear deceleration in the U.S., and you say it's both vacuum equipment orders, but also oil and gas and petrochem. Has the oil and gas and petrochem, do you see a sharp acceleration in September, or is just bad all throughout the quarter? Hence, in other words, is the big delta that we're seeing here semis? Just on the sequential trends, please.
I think on the oil and gas part. On the petrochemical, I think that's another part. 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 Atlas more in detail and seeing if you take, we have one of our brands there, Quincy, which really has a good insight in the oil and gas. Really, these guys are hit because there you saw during the quarter that the orders were not coming. As an example, maybe 30%-40% of the rigs in Texas or in other areas there are standing idle. If they need some replacement of their compressor, of course, for those, the drillers there, they really take them from the ones who are standing idle, so you don't get the orders.
That means that you get really a minus maybe 20, -30 during that quarter. That is what we are faced with in the oil and gas, especially in U.S. Is this a one time? Can this happen again? I think sequentially, I don't think so, because we already dropped more. Of course, we can always go to zero, but that I think I don't expect, but I think we got a drop during the Q3. Semiconductor is something where it's a bit of a different part because we all, the ones who are following the semiconductor scene 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.
There is a bit of a wait and see moment now taking place, which maybe goes another quarter or another two quarters. From our intelligence, we assume, we think that, I think demand will still stay at a good level.
Okay, perfect. Then very quickly on mining aftermarket, if I read you right, you see profitability fairly stable and pricing very stable. 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 you can talk on the mix.
Yeah.
I think on the aftermarket that you should see on the mining, and that's also what we try to explain all of you, also when we go to the Capital Markets Day, what type of services we do. This is not grease monkey service. This is proprietary service, and there's also dedicated proprietary spare parts. I think from a pricing point of view, because we always get pressure because people always are asking, doing the different. 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. Again, it is proprietary service. It is certain dedicated software, dedicated inspection, special spare parts. That is where you make the money and then coupled on very good logistics.
That is execution. That is keeping this margin where we are. There's no secret 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 one-time item. If you take that away, the resulting extra profit margin improvement comes from currency primarily. 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. It's currency and mix that is primarily doing the improvement.
Then you talk a business area.
I talk a business area on mining, of course. Yes.
I think you see now, I've not calculate, I don't have it here in front of me, I think the ratio is equipment-
It's around 70%.
Yeah. I think it's not a secret that we make more profit on-
No
service than on equipment, especially now with the low volume on equipment side.
Okay, perfect. Thank you very much.
Thank you.
Next for a call is Ben Mattlin at Morgan Stanley. Please go ahead.
Good afternoon. Hi, Ronnie. Hi, Hans Ola. First question, please, just coming back to vacuum, can you give us 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? 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.
Welcome back, Ben.
Thank you.
I think on the orders, the down is around, I don't have it here in front of me, but is around 10%. Some of them 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. That is also the reason why we need to have, as a factory response time, it needs to be also very quick. That is what Edwards is geared up for to doing that. There is some of them are already in, because like ASML, you have seen the result of ASML, was it last week or the week before? You saw that. They have not ordered to us either. We don't have it. They're in.
Thank you. Then a follow-up, if I can, on currency for Hans Ola. The 6.70 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. 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. 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 Sebastian Kuenne at Exane. Please go ahead.
Hi, good afternoon. Question on pricing. You have innovations which should drive a higher price for equipment. You have labor and inflation that should drive higher price for aftermarket, yet pricing is flat in orders. I just would like to have your view on the competitive landscape. What do you see over the last few quarters in your main businesses?
You mean mainly on pricing then, or?
Yeah, on pricing. Do you see any change from your competitors, as you are not able anymore to price your innovations?
Yeah. I think, if I listen to my salespeople, they always mention that competition is dropping prices here and there. I think this is a game what always will go on for that part. I think if you look today on our pricing, why is it, of course, on the mining side, you get pressure on, let's say, on the consumable side, because that is in certain markets, it's not easy to differentiate. You get a little bit pressure there. 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. You get pluses and minuses in this part. What you miss in this market really is, and we should not underestimate that, and you mentioned that, Sebastian, I think it's a good observation. I think inflation.
Inflation has before, on the service side, if you take it, is a fantastic way to talk to your customers because everybody accepts that. If the inflation is rather low, what I 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. That is where we see that it is more difficult than, when was it? Two years ago or three years ago when you had some inflation. That is the reason why internally, if you would hear me talking internally, I'm brutal, and I use the word deliberately, on the execution in the service side. Because there is always slipping in cost inflation, and that we need to really to make sure that we can compensate that.
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. If we innovate with new models, et cetera, 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 that-
Yeah. A follow-up on the marketing expenses. They have come down as a percentage of sales in Q3. Are you stepping down your marketing efforts, or it's just a temporary phenomenon?
No. 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. 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 there, but I don't think there is any significant. You should not read anything on 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.
Thank you.
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. Hello, Andreas.
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 there, 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. Is it your view on the growth potential in the service business that has changed or in the equipment side?
Yeah. Not on the service side. You remember when I start in beginning of our presentation here, I said, and the mixed development, and it mixed in different circumstances. What made us changing is a bit, it's not on the service side, it's more on the equipment side. You see the mining, okay, before I've been talking all the time about the big tickets, like I said, it was already four or five 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, that we cannot compensate fully with a stronger Europe, reasonable U.S. That made us really to be a bit more, you could say cautious, but okay, it is what it is. If you take China now as an example, because we didn't elaborate so much of that.
If you are in shipyard, it's tough. If you are in steel production, it's tough. If you are in coal, it's tough. 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. Then you have to see where is the weight of all this part, and that makes it actually rather difficult to make a good straightforward analysis. That's what we came to the title of mixed development, because it's not straightforward. If you listen to my explanation, what in the hell is he saying now? It's down here, it's up there. It's really swinging from left, right to center.
Yeah. In total, you don't expect equipment to be down sequentially?
No. I think we have a positive. If you read the outlook straight, I haven't been talking a positive service. Service is 45%, equipment must be a little bit down, because otherwise my math is straightforward.
If it's zero, I think you need some degree of error here.
You're right.
If it's come through, it is unchanged.
Yeah.
You're right.
If I could really, I tell you, if I could really make this projection for now sitting here and for three months, I would not do this job.
As a matrix? Okay.
Yeah.
Okay.
You need to take a little bit into consideration. It's a waiting stuff.
May I follow up with a question on mining and the cancellation, or the cancellations, because as I understood it, they were quite a few. Are all of the cancellations coming from one single customer, or are you seeing this more broadly among many customers? What do you think the risk is for further cancellations in Q4?
Yeah. The reason I say cancellation is from two customers, and it's a couple of machines. That was, when I said it, and I said it in plural, then I had to say, "Okay, Ronnie, why you say it like that?" It is several machines, big machines, and it's from two customers in two countries.
Okay. Perfect. Great. Lastly, shall we expect any cash outflow from the acquisition of Henrob in Q4, or will that come in 2016?
You mean the deferred-
Exactly
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.
If I recall, I think it will be next year.
Yeah, I think so too.
I hope we can pay.
I hope we do, because that means that the business is thriving and going forward.
The business is, I can elaborate a bit on that, as it is not so small. I think it's still going in the right direction. That's good. We get good deliveries. That's one thing. Good output. Second, also, the attraction we get is good.
Yep. Thank you very much.
Thanks. On the next, please.
Next for
is from Andre Kuklin at Credit Suisse. Please go ahead.
Yes, good afternoon. It's Andre from CS. 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?
Yeah, if I listen and you get the occasion, if you come to the Capital Markets Day to ask the guy.
Sure
Do that, it's no problem. The projects on the different models is still good. I think also our CSA business, GSS business, our Tensor business is still getting good attraction. From that point of view, I have not heard them immediately to say it goes down. How far is the visibility? I think, yeah, they discuss the projects, again, 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, yeah, of course then we will also be affected. 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 our offer. We just talked with Andreas about Henrob. I think we get more attraction.
That was also the reason why we did this type of expansion of our product range. Yeah.
Got it. Thank you. 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, it wasn't getting any of the benefit, you then stopped hedging, if rates did move that you would get it next year. Can you just update us on that, if we should expect anything next year?
We have stopped, it doesn't mean that there were not still remaining hedges live, if I put it that way. That's true, it's sort of tailing off, if I put it that way. The situation is of course different when you are in pounds than if you are in-
Korean won
in Korean won, et cetera, compared to the normal Atlas Copco structure of exposure. 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. I don't want to go into details exactly on how big impact that is. It's of course diluted a little bit within the big Compressor Technique, we shouldn't make it a big impact point. On the business as such, it has affected, of course, to a certain extent.
Just to elaborate on that part, to say Edwards' profitability is still at a good level.
Absolutely.
It's affected.
Absolutely
slightly negative, but still at a good level.
Compared to Q3 last year, it is not as high as it was.
No
It's still at a very good level.
Where we had the negative effect. Yeah.
The negative FX effect is part of that. Yeah.
Got it. Thank you very much.
Thank you.
Next question comes from Mr. Peder Sjölén at Handelsbanken. Please go ahead.
Yes, good afternoon. My first question relates to the compressor business. Could you please help us to understand the different growth components for service for the large compressors and the small medium compressors to get to the flat organic growth year-on-year?
Yeah. Service plus.
Yeah, I heard that. Is it four or is it eight?
Yeah, I think you know, Peder, and I think you can ask Mattias on this, but I'm never give that type of %. I can say it's still at a good level. This is in this type of magnitude what you just mentioned. Large is down. I think you can maybe, I think almost maybe close to not double-digit, but coming close. You have the small to medium size, and the small to medium size asked a little bit explanation, because that is the yellow canary, if you remind me. You have heard me talking about Quincy during one of the calls here of your questions, that's oil and gas. That is down significant.
Also we have in certain segments also in China where I was talking about like shipyards, steel production, coal, where also small-to-medium-size compressor also have exposure where they got down. If you take excluding this, you have still a slight positive on the small to medium size. If you take the small to medium size in total, you will also have a small minus. If you take away this oil and gas, Quincy, and you take some segments away in China, you have a plus.
That's very clear. Thank you. Could I just ask on the guidance? 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. He asked the outlook. Maybe you can explain what the outlook, what you need to understand behind what do we mean with demand?
Yeah. Well, demand is what we try to do all the time, is we say What is our customer intelligence telling 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.
Yes.
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 three months, just as little as we make a profit projection for the next three months. 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. In that, we of course, know that a positive development on service demand will normally not suddenly turn into a negative one, et cetera. The trends are, of course, one guidance for us to say this and to change the outlook. It's not really an order projection.
It's really trying to feel all 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?
To elaborate on this, because I don't like to be wrong. How come we are off? That's another one, because that 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 five, 6%, we have it like that. I think the drop is significant, and that then if the drop is significant, yeah, you see it, even if it's small. The other one is that we had lower than I expected semiconductor in the background.
If you take these three together. Okay, you got there. It is not more complicated.
No, exactly. That is what I wanted to sort of conclude. Thank you for that.
Yep.
Okay. Thank you.
We have a request from James Moore at Redburn. Please go ahead.
Hi, everyone. Hi, Ronnie. Hi, Hans Ola.
Hello.
A question on your cost base. I see your headcount was down 2% year-on-year in the quarter.
which I think the biggest drop since 2009, 2010. I wondered if you could elaborate on, firstly, on which regions or divisions are seeing the biggest decline. Secondly, when you look forward at your headcount plans into the fourth quarter, into the next year, should we expect that rate of headcount decline to increase or decrease?
Okay. Yeah, James, we were waiting for your question because it's already over four, I knew you were hanging in. That was a special service to you.
I can't hear.
No, I think it's a good question, actually. Where you see the downtrend in the headcount, that is, first, we even have, compared to the volume, sales volume and service, we had a slight change in the headcount and service. Why it's coming then? Because we have been working hard the last year on efficiency in service, mainly in Mining and Rock Excavation, but also a little bit in the CT area. That also has yielded in a better profitability. 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 had now.
Where you can expect most of it to come, still to come, is in the larger units from the different businesses, I'm hinting to that in process, I'm 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, there we do it in stems where we have a built-in agility, that will not cost us any. Of course, it's not fun to do it will not be any cash out that we have.
Where if you really want to make a sensitivity analysis on the headcount, you will see that these guys are maybe not going down as much as they want to or they have to, this is mainly coming from the R&D, where we have, by design, kept the people, 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&D, all this about it. There you will see that the flexibility which we should normally could apply, by design, we have kept these people.
That's very helpful. 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 in what you see in the current order trends?
I think, of course, I think on the other hand, the most of our people, if you look Are not sitting in the manufacturing. We have more service people than we have manufacturing people, and in service, we are still growing. Therefore, of course, we have to be brutal on, like I use the word again, on the service side, but there we have many more people than we have in manufacturing. Maybe we have 12,000, 13,000 service people, and we have maybe 9,000 to a little bit, maybe a bit less than 10,000 manufacturing people. On the manufacturing people, which is equal to equipment. If the volume is not there, we have to adapt that, and that we do. On the other hand, again, and I'm repeating myself, by design, I keep my design level.
Even in mining and rock excavation, we keep investing in design and development. Actually, as today, we had the board meeting, we discussed that. We said we keep committed to the automation. We keep committed to the mine of the future, because that is where, when the upturn comes, that is where we will lift 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, it was the fault of me and Ronnie taking a little bit too long time in the beginning. I hope that you feel that you are very welcome to come back to any of us, including Mattias and Corin and Linnea at the investor relations office for follow-up questions, of course. For now, thank you very much for participating, and hope to see many of you at the Capital Markets Day in Stockholm, the 17th of November. Thanks for today. Bye-bye