Ladies and gentlemen, welcome to the Atlas Copco Q1 2015 report. Today, I am 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 will be a question and answer session. Hans-Ola, please begin.
Thank you very much, and very welcome everybody on the line. This is the day of our annual general meeting, so we will try to stay within the hour of this call. We will try to allow as much time as possible for Q&A, as usual. Welcome to the Q1 report conference call again. We will do as we normally do, and by that, I will immediately hand over to Ronnie for his comments.
Okay. Thank you, Hans-Ola, and good afternoon and good morning to all of you. Before I go to elaborate on Q1 results, I would like to elaborate a bit on the Atlas Copco vision and outlook as such in general, what I am aiming for. Atlas Copco is a long-term growth project, which is supported by underlying long-term demands, like we have efficiency in industry, demand for commodities, and of course, the organization is driving infrastructure. This is, of course, our opportunities to grab these opportunities. How do we do that? We are constantly densifying our presence, and this we do by improving our competence, but also by putting feet on the street. We also do further investment in innovation, and for those who have been following Atlas Copco have seen that we have doubled this investment over the last five years.
Last but not least, and that is something which I'm sure will come up more during this call, we are optimizing constantly our operating model, which is based on agility and asset light, to make sure that in every weather condition, we have the right clothing. In other words, we are delivering results in every economic condition. That was for me, a short introduction to position a bit the Q1 result. If we go to slide number two, what have we seen in the quarter? We see growth in service, really solid organic growth in service. Our strategy works there. I think it was a good quarter there. What is lower, and that was also definitely lower than most of us expected. That was the equipment. We had a real lower sales in mining. We also saw larger units on compressor side.
We saw that was softer, although we saw a solid Industrial Technique, mainly coming from motor vehicle, and we saw a reasonable solid development for small to medium-sized compressors. For those who are following us also, saw that the vacuum orders were lower in Q1 compared to last year. This comes mainly from a tough comparison because first quarter Q1 in 2014, we had a very big order, and we knew that will not be repeated for vacuum. We got that. If you take that away, and you will hear me saying this a couple times during the call, you will see that vacuum had a very solid ordering call. Of course, last but not least, when you look to the figures, they look all bigger, but of course, heavily impacted from the currency. I'm sure that is for most of you, not a surprise.
If we then go to slide number three, the orders increased at 12%, a drop of 5% organic. I will elaborate a bit more on that when I'm talking to different business areas. Adjusted operating profit is 19.3%, mainly influenced by the long-term incentive program. Hans-Ola will elaborate a bit more why we're talking about 19.3% and not about 18.3%. The operating cash flow was solid, almost 3.5 billion SEK, which was a good development given this first quarter. We saw this reduction in inventory in our operation. If we go then to slide number four, we take the geographical areas, and I'll start with North America. You see a minus, and I can tell you it was the same when I saw the statistics first for myself.
I say, "A minus in North America, what's going on?" I think we need to make one correction here, or when we go to compare, maybe not a correction, but as a comparison, if you want to do a proper comparison. Again, this vacuum order I was just talking about, that took place in North America, which was significant. I think also the larger part of oil and gas We also got that not repeated because we all know for what reason. If we take that away, the difference is effective here, it becomes, in a difference, it's 10%. If we take away this vacuum and this larger gas and process order, it will be a plus 6% in North America. We still see the small to medium size compressors, we see a good development.
We see also good development in Industrial Technique in North America. It's a rather positive picture, except these ones when we compare. If you then go to South America, so we go down now, we see a minus 12% here. We all know we have seen Brazil, which is a bit tougher there, especially when it comes to construction and on the mining side. That is the main reason why we have seen a drop. Although when we take on the Industrial Technique side and compressor side, we still saw a reasonable market in South America. If I then take Europe, minus again also here, I should give you for comparative reason, there is also some orders also in the vacuum side.
I think what made it looking negative, plus also, and we all know, the Russian part, which also made the comparison more difficult compared to last year. All the rest, I think, on Europe was, if we take this part away, was to the positive picture. Middle East, Africa, you see a +11%. There I don't need to any correction. It's maybe surprising for all of you, but the Middle East is doing great. That is one of the reason why we got a +11%. It seems that the Saudi is keeping investing, that's good for us. I'm going to Asia. Here, a -1%. A softer China, that we can say, and that is mainly also from the mining part, a bit on construction side. Of course, the big takers on Compressor Technique are not there.
Where we had a +1% was on Industrial Technique and a reasonably good development on the small to medium size compressors. One thing what is good in Asia, because we used to talk only about China, we see a positive development in India, where we see a good development going on. Of course, when it comes to Australia, that you know it's all about mining side. I had hoped to see a positive part of that than I have already explained. If I would make the full correction for the group where we had a -2% in the orders growth, and do a correction with the gap and the vacuum, we will have a 0%, which is a +2%. It would have been a flat development part in that. Sales bridge.
You see it here. Nothing to say. Structure, okay. A couple acquisitions we had done, currency. I elaborate about that's big. The price volume. I think I'm sure on the prices. I leave you to asking some questions about that. I'm going to the business area, I'm going immediately to Compressor Technique. A very good demand in service. It's good to see that strategy works, the small to medium size compressors are solid development. Again, I'm repeating myself, of course, here on the larger compressors, it's tougher there. I've been saying that a couple quarters up, it still keeps going in the wrong direction, but it is what it is.
On the vacuum, I will not repeat my point what I already said in the beginning, I think if you take that away, it's a good, robust development on the vacuum side. You say it continues to develop. Operating margin, of course, supported by currency. That is for sure. We see also here the negative equipment mix that is a little coming from vacuum, where we had a bit of headwind from currency, what made the profitability a bit lower for the vacuum part. If we take away the vacuum out of Compressor Technique, because that is what you could compare last year very easily, I can say we are up to a solid 23% profitability. From that point of view, compressor is more or less back in the league where they should be minimum. I'm going to Industrial Technique.
I would say congratulations to the guys there. I think I'm very pleased with the development. Of course, we had good support from motor vehicles, from aerospace, a bit more gas part, so our new acquisitions, in this high torque part, of course, they have a bit tougher place. You cannot be all the time at the right moment, but sure, this will be huge businesses. We see good development on the service business, continues to do well, so our strategy also works there. Also our new acquired self-piercing riveting business, the Henrob business, is doing fine. We see also good order intake from that point. Profit-wise, 22.7, of course, they have a bit of headwind from acquisitions. When you have new companies, you always have some costs you have to take. We took them. That is for sure.
I think of course we are helped by currency. Mining and Rock Excavation, a tough place to be today, I should say. For sure, lower order intake, poor equipment than, when we were sitting here together, talking to you guys. What I had thought three months ago, I had thought that we would have a new low level, but at least, we will have a robust level. The good part in Mining and Rock Excavation that we have seen in the last five, six months, is a solid growth development on service, and that's good. It seems to be that our customers are using their equipment a little bit longer, and of course, at the end of the day, you have to come and make a compression, and do some service on the machines, and that is what is happening now.
On the consumables, you see it decreased somewhat. I think again, you need to make a bit of a distinction. Exploration is still very low, where we see production drilling at a good level. I think that development stays good at a good level. Of course, when you compare one quarter to another, you always can have a bit of swings. We see a good development here. You see it also in the consumption from iron ore, zinc, and copper, that the world is still using these things in a good way. Operating margin, we just missed the 19, so 18.9, which we always like to have a bit more, yes, that is also the reason why we further work on our efficiency measures. We do this step by step. We take some costs in for adapting to our new level, unfortunately.
On the other hand, we keep our focus on innovation, on R&D. It's not that we go to cut there dramatically or that we cut in feet in the streets. We keep on that part. Of course, we focus on time to market efficiency, on the overhead to reduce that. On the other hand, we keep really the core investment. Construction Technique, lower order intake, the larger portable compressors was lower. We had also a little bit softer road construction equipment and we said, "Oh, what's going on there?" That's mainly coming from a softer Australia and a softer Brazil, which were good markets for road construction.
Unfortunately, they got headwind there. These are big markets for them. That is a softer market these days, where we see, on the other hand, good development in Europe and good development in North America. It didn't compensate in the quarter for the drop in the other countries. Operating margin, 12.2%, with the costs we're taking in and the further optimization, I think it is what it is in this level now. If we take it here, slide 12, the operating margin. I will now hand over to Hans Ola. I think it was most of them I have said. Maybe there is one.
When you look to the operating profit in absolute terms, of course you see here, going up, +20%. If you take this other part long-term, it's +23% operating margin growth, which I'm very pleased to see that we grow more in the operating profit than we grow on the revenue side.
Thank you, Ronnie. I'll just try to be very brief. The rest, below operating profit, net financial items was a bit more negative than last year. There are a couple of explanations. The currency effect on interest, which we pay in EUR and USD is one explanation why it increases. We also have a number of subsidiaries where we unfortunately in countries where the only opportunity for them is to borrow in foreign currency and predominantly in USD, and that has also inflated the interest cost for those countries. I would say looking forward, is there anything extra that will not continue to be there? Well, in comparison with last year, I think it's explained by that. Looking forward, I don't see a big change in the financial net for what we can say.
Of course, there are always exchange differences that you cannot predict beforehand and so on. Basically, we expect it to stay roughly at these levels in the near term. When it comes to the tax expense, it was 24.5%, as you have all seen, compared to 23.5% a year ago. I would say that it stays as we had expected, between 24% and 25%, and that is also what we expect going forward. On the earnings per share, SEK 266 is a nice increase from last year, and without the impact of this increase of provision for long-term incentive that Ronnie talked about, it would have added SEK 20 or more on that to SEK 286. The reason we do adjust for this, because of course it's not our normal [isotope] to talk about what results should have been, so to speak.
We normally try to be as transparent as possible. Due to the structure of this program of long-term incentive, we have to book the cost as an administrative salary cost or comparable personnel cost. At the same time, we already know that we will not make that loss because we have already bought Atlas Copco shares to hedge for this development. Unfortunately, we cannot take that profit when we sell those shares into the result. It will only affect the so-called other comprehensive income, or if you like, it will be adjusted against the equity. In a way, we think it is fair that one do mention these items specifically when they are as large as they were this time. If we move on to the next page, number 13, you can see that impact in the so-called profit bridge for share-based long-term incentive programs.
For the rest of the comments, I think we turn one page more, and we look at the business areas. I think the ones before, you can ask questions, of course, later, the Compressor Technique swing between a negative revenue and a positive impact from volume price and mix on EBIT is not so difficult to understand. It is a true improvement, if you like, but it is also a small number. It is not a good representation for a flow-through. Industrial Technique have invested in a number of new businesses, as you know, and they keep on doing that. There is a relentless focus on growing these businesses, and also there is some preparation, let us say, in the marketplace for being able to support the newly acquired businesses in the best way.
On Mining and Rock, I think Ronnie has commented already, of course, the impact in the one-time items of +75 is last year's restructuring cost, that you know. Then the question mark is, of course, is this a normal flow-through of revenue drop of SEK 300? No, that is absolutely not what we see as a normal either. We have come to a level of drop in revenue where, of course, the effect of staying with feet in the street, staying with the R&D portfolio that is meaningful, et cetera, will give, in some quarters, these type of numbers.
When we come to Construction Technique, it is a little bit of a different explanation why the so-called flow-through, or the negative flow-through, if you like, is so big, and that relates mostly to the unfavorable equipment mix that is still hurting the business where large portable compressors have dropped rather significantly in volume, and that gives a negative mixed effect on the margin. I turn to the next page. It is not very eventful on the balance sheet side, to be honest. I can just remind you that the pure translation effect of reporting in Swedish krona gives us another SEK 5 billion from December only. If you go back between March last year and December last year, it added more than SEK 10 billion in pure translation into Swedish krona.
Of course, you can understand that it's not a volume-driven increase in the balance sheet at all. I turn to the next before I leave it back to Ronnie, on the cash flow. You can summarize it basically in two events if you want to explain the increase of operating cash flow from SEK 1.9 to SEK 3.5, that is basically a higher profit, the top level of the chart, which is, of course, supported by a lot of translation from the strong U.S. dollar as well, of course. The other one is a better net working capital development in the first quarter. If you add those two together, you basically explain the difference in operating cash flow. With that, I hand over to Ronnie again for the near-term outlook.
For our most sophisticated sentence. As you see yourself on that slide, near-term outlook, it's the same as last time. Yes, we underestimated, or I underestimated the weak demand of equipment, mainly on the Mining side in Q1. That is what is the takeaway from the miss. We can take it compared to last year. Here, this is also sequential, I still believe that we have a solid development. Given our service business, we should not forget that our recurring business is almost 45% of our business, is growing and is doing well. I believe there are, in certain segments, also positive signs on equipment. That is where I would let it be.
Thank you, Ronnie. Operator, can you quickly repeat the questions, we start firing away?
Yes, I remind you, it's zero one on your telephone keypad to ask a question. That's zero one. We have the first question here from Mr. Peder Frölén from Handelsbanken. Please go ahead, sir.
Yes. Good afternoon, Ronnie. Good afternoon, Hans Ola. Could I please start with on large compressors, both oil and gas, and also large normal industrial compressors. Is it fair to assume that the revenues organically are down 15%-20% now after maybe four to six quarters of negative orders? That's my first question. The second question is really related to the outlook. As you alluded to, you keep the outlook. What risks do you see to the current outlook? Why should the equipment be better sequentially if we assume that service is as great as was in the first quarter? That's my two questions to begin with. Thank you.
I think when it comes to the large compressors then. We see that, of course, what was the whole takeaway if we go back a couple quarters, it was a lot had to do with China. We should not underestimate how much larger installations for large compressors China and Asia did. That was significantly lower, and that was always also every quarter more or less was my story. What has come on top of this is the oil and gas, directly and indirectly. I'll give you an example. We are also in geothermal business. We do hydrocarbon expanders, which we produce in the U.S. which are used in geothermal. Of course, due to the lower oil and gas prices, of course, the break-even or the payback of these investments will be a bit longer, meaning when do they hold these orders?
I know from a couple orders myself, which are hanging there, which are negotiated. Of course, the board looking to the new spreadsheet with a new future price of oil and gas. They hang in, and that is what is not coming through. These are what I call the indirect oil and gas part. Of course, we are not so much in the oil and gas when it comes to E&P. That we are not there so much, but of course, indirectly, we have a bit here and there. That's the main reason of the larger compressors. The rest, there is nothing going on. Of course, there are still orders going on in that area, but not the same magnitude. That's what you see. When it comes to the outlook, it's rather easy, Peder.
First, I think we still believe in a good solid development sequentially on service. That was also the reason why I hinted and say, "Hey, guys, when you read this outlook, don't forget we do around 45% on service, and that is solid growth." Second is sequential. If we look ourselves and we go to make an evaluation about our own outlook, what Hans Ola and I do myself, where did we miss? Where did we get it wrong? We don't like to do that. We see that the main miss what we had when it comes to quarter one was on the mining equipment part. We had expected much more. The rest were for us, you can say a bit here and there, but I think if we would not have mining, you would have not seen it.
That is the reason why if we then look to Q2, we assume that on the mining side that, okay, this will be consequentially more or less the same level as it was in Q1. It will not go down more than it has done between Q4 to Q1. That is the background, the simple reasoning behind our
Okay. Thank you.
Thank you.
Next question is coming from Lars Brorson from Barclays. Please go ahead, sir.
Thanks very much. Hi, Ronnie. Hi, Hans-Ola. A question from me, and also just a follow-up on the outlook. Just on mining and the 10% order decline organically there. Can you give us a sense, Ronnie, for how that breaks down between equipment, aftermarket, and service engineering? And just on the decline in consumables, I'm trying to square that with, again, production growth for miners, and if anything, perhaps a slight return now of exploration budget from some of your mining customers, such as in gold. Are we seeing a level of mining de-stocking here? Is there a sense perhaps that you might be losing share? Can you talk a little bit about what you're seeing specifically in consumables? Thanks.
This is a question for an hour. I will try to do it very Development on service, that we see a good organic growth, and that's also what I said in the call, and we see that trend has changed, let's say, last six months. We see a much more demand for service. We see also a reasonable good activity, although not really growing, but still a good activity when it comes to production consumables, and we don't see almost nothing when it comes to exploration. That is difficult. When you look to this quarter, I think both mining and construction orders went down, because you should not forget when we talk about mining and rock excavation, we also are delivering equipment to tunnels and other type of construction works, and that was also lowered this quarter.
The explanation, it's definitely lower in both areas, on the mining and on the construction. Do I see that the mines are de-stocking? First, I don't think they have any of our equipment in stock, the mines. I think they use it. The only thing what I see is that they use them longer. If I start to call around and try to demystify the whole thinking, how come that equipment goes down and service goes up? Then you listen to them, and you see them also that they try to use them longer, and focusing on these improvements, because that's immediately cash flow for them.
That's clear. If I can just be allowed a follow-up on the demand outlook. Again, I'm struggling a little bit with the improving demand outlook for industrial divisions. We've been through three quarters now of you suggesting industrial divisions are improving sequentially and being held back by the rest. If you X out FX and structure, there doesn't seem to be much of an improvement coming through here. I take the point about large compressors, but can you talk a little bit about what you see sequentially, particularly in Edwards, which obviously is the more volatile business, and again, we heard quite mixed commentary there from the semicap equipment names so far this earning season, but again, a couple of your vacuum pump competitors actually seeing a sequential improvement. Some commentary around that would be useful. Thanks.
I think I have to disagree with you. I think if you look to our figures and also listen a little bit to my explanation, I think, on the industrial part, Industrial Technique has gone up, I think organically, and that I think is for sure. When you look to Compressor Technique, and you take this one order, this maybe two orders, which we had in Q1 for vacuum last year, if you take that away, which was a one-off, the underlying business was positive. Then I think coming back to the first question from Peder on the larger compressors, if you look to that, if you take that away, then you see the small to medium sized compressor business, you see developing positively. You see Industrial Technique do its business positively, and you see definitely the service business on the industrial side going up.
Beside the negative one, if you compare, is that big order of vacuum and the bigger orders from oil and gas. That is the picture which I see. Maybe it's not always easy for you to see it when you see aggregated figures, but that is the situation.
That's helpful. Thank you.
Next question is coming from Mr. Andre Kukhnin from Credit Suisse. Please go ahead, sir.
Yes. Hi, it is Andre from Credit Suisse. Thanks for taking my questions. I guess a lot has come down now to the size of these one or two large orders. Maybe for us to be able to see that too, could you help us with quantifying them so that we can take it from there?
You want us to quantify them? Is that the question?
Yeah. If you just give us a rough order of magnitude for this one large vacuum order that is making such change.
Yeah. Hang on.
Sorry. We had a negative of 2%, which is, of course, helped on the one hand by structure, and then we had an organic decline. On that, we said for the group world, it was a -2. If you look at the global map that Ronnie referred to, right?
In local currency.
In local currency, a -2 for the whole world. Right?
Yes.
It consists of -5 for organic and then a plus 2 point something on structure. On that level, the group was affected by those orders that Ronnie, by 2%. Right? It would still have been a negative organic decline. It would've been an organic decline, but still, the impact of those specific ones that he talked about, was 2%.
Got it. Thank you.
If you look at the CT level, it's impacted by about 5%, by extracting order in the U.S. and the big order in the vacuum. Of course, the impact then is much bigger when you look at North America individually, but that you can figure out by the weighting that you see on there.
That's very helpful. Thank you. Just a quick follow-up on FX. We obviously saw the over SEK 1 billion tailwind in the quarter. Was this the sweet spot for you in terms of the order of magnitude of the FX tailwind, or does that come in later in the year given the currency moves during the quarter? I think you have some hedging, although not very much.
When you phrase it like sweet spot, of course, it changes from week to week, and that's what we see. Is this the best world we have seen? Well, it's pretty close to it, to be perfectly honest. You have to go back many years to find comparable levels as a mix of currencies for Atlas Copco. That's true. When you look ahead, then you have to compare it, because I think that you come from this bridge effect of one point something billion Swedish krona that you referred to. The bridge effect will then be a result of what happened in the second and third, and the fourth quarter last year. We expect that if everything stays as it is today, that the impact will be as a bridge between Q2 and Q2, at least as big or in the same level as in Q1.
We will see it continue to be very significant in Q3, then it will taper off a little bit into fourth quarter. If we look at what has happened, we had a constant improvement of the currency situation during the Q1.
Yes.
Since then, it has basically stayed on that level, if you like. Because I'm not just referring to the dollar, of course, I'm taking all the currencies into consideration when I say that.
Got it. Thank you very much.
Thank you.
We have the next question from Mr. Alexander Berger from Nomura. Please go ahead, sir.
Thanks very much. Good afternoon, gentlemen. A couple of questions, please. Just on construction, the first one. Adjusting for North America, orders up about 14% reported, I think, but adjusted to currency, maybe down six or so. Just wondering how you can give us some color around that in light of the comment you made earlier on. Just trying to understand the comment around demand for portable compressors and specialty rental as well, I guess also in construction. If you can help us out with that would be very helpful. Lastly, just on your comment around underground mining equipment demand decline, just wondering if you can give us any more flavor for what's driving that specifically. Thank you.
I don't know if I understood the first question correctly. I will try to answer, but I think I understood that was around North America. When you look to construction, you said it is negative. Yes, I think when you look to this, I think we have a bit less orders on the portable side. On the portable compressor side, that is, I think, less than before. You can question, are the rental companies buying less? I think because we had big orders coming in the last quarter, Q4, and last year we got that, which maybe we paid a little bit in Q1. They were landed in December, maybe if they would have landed in January this year, it would have been a bit different. They came in.
We don't see, let's say that we can say that the construction business, the outlook is negative in U.S. I think I don't see that. I cannot use that as an argument, it's negative, and that is one of the reasons what we found out. I think when it comes to the portables, this has already taken place a couple quarters. It's also a bit driven by exploration, once you know that we had a good portable business coming from exploration and water well drilling. Water well drilling is coming back. We see that gradually coming back in India, that's good. Exploration, where we also had the requirement of bigger portables, that we don't see yet coming back, that is where we are suffering a bit from on the portable. On underground, I will repeat myself.
What I learned is that there is definitely activity, and that is also what we see in our consumables. Production consumables are used, that means that the machines are used, because we also see that they require services and new rolls, that works fine. It's less new equipment. They drag on a little bit longer, and one should know, if you just go back in history, it's actually mid-2012 that we saw the shift, and we didn't get so much relation as we all get in 2008, 2009. That meant that that order income, what we had in 2000 was delivered out in 2013. When these machines, 2013, are put in production, they're only one or two years old, and we don't see new green fields or expansion going on.
Mines are using their machines, and also management is wishing to utilize the machines in that way longer. That is what we suffer today on the equipment side. When will it come? Will it come back within a half year, a year, two years? We will see. Eventually, something need to come back because we cannot keep overhauling all the time. Although I don't mind, because from a profitability point of view, it's not a bad business. Unfortunately, I have a bit too much under absorption, and that's also what Hans-Ola tried to say when we were talking about the profit bridge. Of course, we get under absorption in factories, in our feet hitting the street, in our customer center. That is where we then, what do I do with it? Time being, we keep going on with that.
We keep the commitment in R&D. We work hard on automation, and we keep our feet in the street. That is the way it works. There's nothing dramatically changed. When it comes to market share and all that, because I think, this is an oligopolistical market. We know what our friends are doing, and our friends knows what we do. It's not the natural of market share shifts here and there. That part is rather, stay stable.
Okay. Thank you.
Thank you.
We have the next question coming from Mr. James Moore from Redburn. Please go ahead, sir.
Yeah. Good afternoon, everyone. I've got some questions. On vacuum, thanks for your comments on the big orders last year. Looking forward, are the Edwards management team reporting back to you at all on inquiries that they're seeing any signs of semiconductor cycle rolling over? I've seen big cuts at Intel and others, and that feels like that might be the next phase. Secondly, price. I think you just reported your lowest number at zero for both orders and sales for 13 years or something. Do you have any visibility looking forward on this in a deflationary world? Do you think this might turn negative, or do you think we're finding the trough? Maybe I'll come back on mining.
Yeah. James, I hope everything is fine with you. On the vacuum side, I think it's a good question, and this is also what every second week I'm talking to the guys in Crawley, where the guys are sitting, "Okay, what do you see? What is Intel doing? What is Samsung doing? What is all the ASMLs of this world are they doing?" For the time being, and of course our visibility, and that's also I should say, our visibility is not 12 months. Our visibility is, say, three to four months, and that still looks okay. Of course, we're also reading statements what the different companies make and what effect could it have on us. What we see today on the ground, so in the pubs, in the people we're talking to, that they still keep going on and investing.
On semicon, for the time being, still a good development in that area. That is what I got, James, from the guys. When it comes to pricing, yes, you are spot on. Price management is leadership. It is driven from innovation, because innovation create pricing power. That is where we need to work on, that is also what we try to do. On the other hand, in a low inflation market, it is much more difficult to get also price up for your service offers. That is where it is more difficult. I think we still get good price momentum when we come up with new innovative products, that is what I am driving like crazy on that part. It is tougher on the mining side. There we see sometimes crazy behaviors, opportunistic behavior. Okay, I am sure this is happening.
It happened also in 2008, 2009, that there is a crazy order here, there is a crazy order there. Sometimes a big order, that has a negative impact on pricing. That is what we also see in our statistics.
By the way, I am doing a bit better, thanks. Just back on mining, just the flow-through, you explained, you had some charges, I do not know, I guess SEK 30 million-SEK 40 million. Even without that, it is still quite a big flow-through. You explained the absorption effect of the sales force and innovation costs. I am quite surprised given that the OE business is falling, which is lower margin, and the consumables business within aftermarket, I think is lower margin than service and spare parts. I would have thought there should be some mix help. Is it that we are really talking about going to an equipment model where an old style equipment model, give it away for free and make the money on the aftermarket, and the industry is just facing that pressure?
If that will happen, if I find out one of these orders, like if Atlas Copco is doing that, I will immediately stop that. I think also in the way we are organized, it will be rather difficult to do that. I think if we look to the profitability of the mining and rock excavation, I would also have liked to see a bit more, just to make it straight. Of course, there is some shelter and some explanation on, okay, we keep investing in R&D because, okay, Ronnie has not given instruction to cut R&D with 30%-40%. Of course, we have to optimize it further, but we keep investing. We keep heavily investing in automation, because we believe that will be the next, when the mines start to order, that is what they need. That we do. We keep also our feet in the street.
We have not really cut there. Of course, we try to reduce overhead. On the factory side, I think, we have not taken, and that is deliberately what we have taken. We have not come out with a big restructuring cost program and say, okay, and then we take it as it comes, and our guys, our divisional heads on the mining side, they take the cost as they come. They take it as it is. Of course, they have to explain their result, but of course, when we show the flow-through bridge, that's where it all comes together. If we had a restructuring program, you would have partly seen in that part that. Maybe Hans, later.
Yeah. I can just add a few numbers or reflections on that. We've said it before that even though we try, just as you do, to calculate very accurately the true impact of different currencies from one quarter a year ago to this, it is not doable in a perfect way, like debit and credit have always to be the same. You can't have that type of surety, but we wouldn't put it on the slide if we didn't think that it was our best attempt to do it anyway, of course. What I'm saying is that if we miss that a little bit, of course it will have a significant impact on the other column, which is the residual. With that, having said that, I think that the effects that Ronnie talk about are really what also what we see.
It's not that we are trying to hide a huge restructuring that we don't want to tell you or something like that. There are a lot of things, though, that is going on in an adjustment period, where you use people to consolidate R&D resources. You consolidate even a few factories that you decide to close down, but you don't want to get rid of the knowledge and everything. During those periods, of course, when you don't have any revenue, the cost stays, and it's not very productive costs during those quarters, perhaps, but it's part of the investment and the commitment. Of course, there are always a few other, you do a trade-in deal here and there, which is difficult to assess whether what are you giving away? Is it extra cost that you put to the deal, or is it the price that you adjust?
Of course, in this type of quarters where the revenue is very, the true volume is very low, you get all these things floating up to the surface, I think.
Given, James, like I said, also I would like to see it a little bit better. That is also what. If you would talk to the guys directly, they'll immediately make that confession, that it can be a bit there. It's a bit of a leak here and there.
Absolutely.
Of course, I get this augmentation or explanation what Hans Ola said, and yeah. Okay. We are working on a better bottom line there. Then I'm talking profitability.
Thank you very much for the color.
Yeah. Thank you.
We have the next question coming from Mr. Andreas Koski from DekaBank. Please go ahead, sir.
Yes, thank you very much. Can you hear me?
Yeah.
Perfect. On the EBIT margin in Edwards, if I remember correctly, when you acquired Edwards, you guided for an EBIT margin of around 15%, and then in 2014, it turned out to be significantly higher volumes than you expected, and Edwards performed better than you had expected. Now we are seeing weaker volumes, so margins are going down. If I have done my math correctly, the EBIT margin for Edwards in the quarter was somewhere between 16% and 17%. I wonder, have you changed anything to the structure of Edwards that would change your guidance of a 15% EBIT margin, or is it still what you expect on a longer term basis?
Just one extra color, perhaps, that the numbers you referred to are correct, by the way. We did guide to 15% in the acquisition. We did better. They did better in 2014, the division. The impact now is that they're a little bit hurt, actually, in the profitability compared to a year ago, because they have some negative effect, actually, from being a pound-based business. Also, to a certain extent, they have not had the benefit that some other parts of Compressor Technique have had due to the fact that they had a longer hedging, or First of all, they had a hedging policy when we bought them, and for a certain period of time, they continued to do that. The extra help from a stronger dollar has not really given them any boost.
It's true that it's a little bit softer than it was in the good quarters last year, but still at a significantly better profitability than we guided in the acquisition.
That supports very well, that's also when I see more the divisional figures, because we see that immediately. When we do the reconciliation, as Hans-Ola explained, take away the currency and the hedging and all that, they are running more or less at the same level as last year. At the same level. There is no significant under-absorption here and there. One should know that firstly, we write down some intangibles. That is what we do, that we take. Second, also, if you remember, when we did the call, when we announced that this is a growth project, we will invest heavily in R&D for our general vacuum and utility vacuum. We take them straight in the P&L. We also put in more feet in the street, and that is what we are doing.
You know these products, some of them are touching the market as I am speaking. We also launched a new industrial vacuum on the Hannover Messe , was it a week ago or 2 weeks ago? That, I think, will be costly take immediately in. They are not enormous. Of course, on divisional level, may be worthwhile to look into, but on a group level, they are not significant. That is what we take in. Taking these 2 remarks separately, I think it is still at a good solid level and significant higher than when we guided for 2015.
I agree with that. To ask the question more straightforward, if you acquired Edwards today, would you still guide for a 15% EBIT margin?
No.
No. I think the guys will laugh like hell, the guys in Crawley. No, they need to be.
If we take away, I think, that question I got, if we take away all this intangible and all that, I think it comes close to a 20%. If we will compare.
Oh, yeah.
The same accounting rules. It is coming to that type of level today. It is like that.
Okay. Thank you very much. Lastly, on cash flow, because you had some payments related to acquisitions you made in 2014, I suppose it relates to Henrob.
Correct.
Should we expect that all payments have been made now, or should we expect more payments to come during coming quarters?
Not perhaps immediately, but if you recall the acquisition announcement, we paid the big portion in September last year. We paid the deferred portion of the payment in the first quarter, quite rightly that we did. As a deal structure, we also have an earn-out portion of the transaction, which has certain gateways decided, of course, but we cannot pinpoint when that will happen in the future. There will be some, but I can't say when they will come, related to the same acquisition, you're right.
Okay.
When you bring up the cash flow, I actually forgot to mention that, on the same topic, Henrob is a very strong growing business. It was when we acquired it, and continues to grow significantly. Already at the time of the acquisition, a big investment plan for 2015 and 2016 was underway. This we have seen to a certain extent already so far, but it will be clearly visible from here on to the end of the year. I would probably put it somewhere for that three quarters that we could be talking about SEK 400 million-SEK 500 million on top of what you would consider an Atlas Copco run rate, ex Henrob.
This is for, it's-
Buildings, machinery.
Yeah, the riveting.
Yeah.
The rivet-
For the rivet plant
that we need to build up in Detroit and in Memphis.
Just to clarify, was it SEK 400 million-SEK 500 million per quarter or in total?
No, for the remainder of the year.
Okay, perfect. Thank you very much.
Thank you.
Yes. We have the next question here coming from Mr. Sebastian Kuenne from Exane. Please go ahead, sir.
Hi, good afternoon. Maybe a follow-up on the FX at Edwards. Could you help us quantify that impact in Q1 out of the SEK 425 million positive impact from FX on the compressor? What was the negative portion of Edwards, and can you help us with the hedging, you mentioned, how that will develop in Q2, Q3, Q4? That's my first question, please.
Sorry, I lost you already in the beginning. I'm sorry.
Okay. Just coming back on the Compressor Technique, FX was coming below my expectations. You mentioned FX, Edwards, the negative transaction impact at Edwards from FX. Could you help us quantify that? You mentioned as well the hedging, could you help us with Q2, Q3, Q4?
Well, on the sheet, you're right that, if I understand, you're right in the profit bridge, you were surprised on the fairly small currency impact. Is that correct?
Yeah.
Part of the reason is what I commented on the vacuum, that they haven't enjoyed any of that part as of yet, because it was already hedges at lower levels before. I can't quantify it more than that, unfortunately. Going forward, you were questioning.
Hedging the drops. Should we be,
The policy has been changed in the meantime. Even though there are hedges throughout 2015, that will still have an impact, let's say, we don't know where the dollar will be next quarter, of course, but if it stays like it is, it will have a similar effect, but in volume, it will be slightly lower and lower as we stop this hedging gradually.
Okay. A question on the outlook, if I may. It looks like, if we compare with Q2 last year, the volume was just negative 1%, volume was negative 3% in Q1, minus 1% in Q2. It looks like comps are slightly difficult, in Q2. Do you take that into account in your outlook of sequential improvement?
No. Our outlook is short as it is, one thing for sure, that we always look at demand for Atlas Copco products and services together, we look from where we are today, we look three to four months ahead. That's what we're trying to do. The outlook should not be seen how was last year in any way. It's trying to gauge, are we feeling an increasing trend, a flat trend, or a slightly decreasing trend? That's what we're trying to do.
I'm just questioning, will you come in July in Q2 and say, "Okay, but last year we had a couple of large orders as well, so comps were difficult as in Q1?
That's up to us, of course, if we didn't mention them in the second quarter last year, then you are right that we should help you to understand that, if that is the case. When we have a quarter look, then we are not talking about the outlook, then we are talking about what you expect for Q2 in numbers, right?
Yeah.
These are two different things for us. The guidance is not really there to show what the bridge will be when we report Q2. It's of course very often that the indication is more or less coinciding with whether we show a growth or we show a decline, but big orders can of course distort that. You're absolutely right.
Especially in the same quarter.
In this, referring to what we just said and talked a lot about in Q1, we will try to guide you and help you understand whether there indeed was some significant orders in Q2 as well.
Okay, I got it. Thank you.
Thank you. With that, unfortunately, we have to stop. As I warned, we have the annual general meeting soon. We thank everybody for participating, and as always, the IR department and Mattias and myself will of course be available for any follow-up questions that you might have. Thank you for today. Bye-bye.
Bye-bye.