Ladies and gentlemen, welcome to Atlas Copco Q1 2014 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 listen-only mode, and afterwards there will be a question and answer session. CFO Hans Ola Meyer, please begin.
Thank you very much. A very welcome all of you to this conference call regarding our first quarter results for Atlas Copco Group. As usual, I have Ronnie Leten, our CEO, here with me today, and he will give us his comments in a brief moment. After that, we have the normal Q&A session. As we have the AGM today, after this meeting, we will have to cut at 3:00 sharp. I ask all of you to note down your absolutely best question right now, because it will be one question and possibly a follow-up, a quick one, for each participant in the Q&A session. I hope we can stick to that. With that, I leave it over to you, Ronnie.
Thank you, Hans Ola. I will then also be short so that we have some question time for Q1 report. I go immediately to slide number four of the outline so that you know where I am hinting to. In summary, what we see on the quarters today, a bit mixed. We can definitely not say it is one-size-fits-all. That is definitely not the case in this quarter. We see a solid, strong development in industrial tools. I am very pleased to see that, to work there, of course, helped by the MVI, but also the push work we do. Stable demand for industrial compressors at a low level for the larger tickets. That is an area where we do not see it really moving.
An improved demand for Construction Technique is also nice to see, even as you all know that China in the couple years is softer. We see now a good development there and good demand in the Americas and in Europe. Last but not least, a stable demand for mining equipment. Of course, if we compare historically at a low level, I think that is also no surprise for anyone of you. I am very pleased to see Edwards, our new acquired vacuum solution business. It had a very strong quarter. It was always nice when you do a bigger acquisition, when you can say that. Service business continued to grow. The resilient part of our business is still there. It is still working.
As you all have seen in the report, it is a lower profit margin compared to last year, of course, heavily affected by our Mining and Rock Excavation Technique business area. We keep investing in sales and service in R&D, as I have said also before. Of course, we have also a couple of extra one-time costs and a couple of under absorbs that show when we talk about the total, which Hans Ola will elaborate a bit more on that. I go to slide number five when we come to the figures. Orders received increased 8%, of course, significantly influenced by the contribution of acquisitions, because organically, we went down 2%. The revenue increased, but also had a decline of 2%. When you look to the operating profit, then you see the gap of around SEK 400 million.
Just to give you a quick one, where it is coming from, around a bit more than 200 is coming from currency. Actually, I think it is 220. 500 is coming from our Mining and Rock Excavation Technique business. These are the more or less, you could say, the SEK 700 million negative part. We have the positive part, which is a couple of other business area, plus the significant part is Edwards, which is around 300. What makes it then on par with last year? No growth in that case, but at least on par. Margin, we reported 17.6%. Adjusted, it is 18 point. The restructuring work and the under absorption has affected that part.
Like I mentioned, MR, when the Mining and Rock Excavation Technique, when you will compare it with last year, which has a +23% EBIT, and today 1 7+, okay, it makes around 2.5% on the group level. I think the rest I will let later you can see. You read it yourself, the figures, and the cash flow is around a little bit less than 2 billion. I go then immediately on the slide number five. I see that I got the wrong number here. The geographical overview of orders received. As you see the slide here, the figures are included Edwards, but for competitive reasons, I will only comment on the figures excluding Edwards, because otherwise I think we confuse all of us. It is only the figures excluding Edwards we talk now for a while when I am talking on the geographical scope part.
If we take the Americas, we see a good solid increase, let us say, coming from all business areas, except where we see in the Mining and Rock Excavation Technique, which it is a bit softer there. What we can say, if we take the three countries in that continent, it is really coming from United States. Mexico and Canada, as you know, it is mining business, which for comparison reason, is still soft. United States is doing fine. We are doing well, I should say. South America, there you see a solid +10. We see a good Chile, a good Brazil. One should say, I think Brazil was last year, the first quarter, a bit softer, and mainly coming from MR, but that catched up. We see actually a good development in Brazil, because that is the main business, that is always good to see.
That's not only in, like I mentioned, on the mining side, but also in the industrial field as well as in the construction field. I'm going to Europe, where we see some organic growth. It's good to see that countries which we were talking very negatively about, say, a year, two years ago, like Spain, Italy, even you can say France, Turkey, they are coming gradually up. I think that is good to see. United Kingdom is really keeping a solid development. That's good to see. We see also industrial tools, construction equipment doing fine in Europe. I'm very pleased to see that. That is always nice to see. Africa, Middle East. Soft on the industrial compressors, reasonable on construction equipment. That affected a bit down. If we go to Asia. Lower development in China and India. These are the bigger industries there.
What we can say about China, we could say that mining and construction, comparing with last year, is soft. CT is, I would say, okay. IT, I think we are really having here the MVI part, which was also okay. I think still in the whole region, good development on industrial tools and assembly systems. What's also nice to see in Asia, that our service concept works. Strong development on the service side. Australia, I don't think I need to say more than, it's equal to mining and rock excavation. That was in short the overview on the geographical part. I go immediately on the slide on organic. You see we are still not coming above the zero when it comes to the organic part. It's wild when you have seen that. That's a challenge for us. Go to the bridge.
Currency still negative, still difficult, a - 2. Price. We think the work we do on the innovation and really the price training and value selling allows us and support us to keep a positive pricing effect. That, for sure, is an area which we need to work on all the time, every day. We had the volume of a - 3, which was, of course, significantly coming from mining, which went down compared to Q1 2013. A slight drop in CT and up in Industrial Technique and Construction Technique. We go to the business areas. I flip over the pie chart where you see that Edwards will now mean 9% in revenue for us. In orders. Yeah, in revenue for business area. It's significant. Compressor Technique, a decline, organic, 3%.
A stable development on the Yellow Plant, where we can say very solid North America, maybe a bit flat Asia and Europe. Large orders still a challenge. Service continues to be doing well. I think that's where we have to keep investing and in the relationship with the customer and in having the feet on the street, and like I already mentioned, strong North America. Edwards, I will not mention more than it was a good quarter, mainly driven from the Semiconductor. That is where Edwards is also very strong, where Edwards has a leading position. Also here we see that investments for memory is going on, and of course, that is what we have to grab now. Operating margin, 20.4%. We keep investing in the sales and service, the feet in the street. Compressor Technique is the real organic gain.
Of course, if I really talk about compressors, we need to make sure we are at every negotiation table. We keep investing in the service and last but not least, also we keep investing in innovation, in design and development because we are the leader and we should stay the leader in that area. Of course, we got some, in the operating margin, some dilution from recent acquisitions, besides the Edwards one. Of course, a little bit on the Edwards, but also others. Of course, what you have already heard me saying on the currency side. Industrial Technique, double-digit growth, that is something we like to say, and that's why we got that. Motor vehicle strong, but also a good general industry, good development on service.
Yeah, it's hardly difficult if not all major regions had a strong development that you make 13% organic growth, that's good. One thing also to mention is also that our acquisitions, which we did in 2013, also doing well, get well integrated. That's good to see that they also contribute definitely on the top line. Operating margin, just missing the 22%, was a bit of dilution, like already mentioned on acquisitions and currency, but good support from the volume. Mining and Rock Excavation, the area where today we would definitely have the headwind. Since a couple of months, we can maybe say since mid last year, more or less, we can say that we're always around the same level as we have been now since that compared to quarter one, it's a -8% decline.
Service, I know that some of you really have been asking many questions on service, but we see an unchanged business level, that I think giving the service center, I think is a good outcome. On the consumables, it's a decrease, but of course, a mix where we see a real, we'll say, a stop on the exploration drilling. Consumables, where on the production drilling, there is still definitely a demand. Margin, excluding the restructuring, an 18%+, and we keeping adjusting the organization. As we speak, we have to reduce our operation, meaning in terms of factories, in terms of manpower, and that we work constantly on that. Construction Technique, our business area. Yeah, a solid organic growth, that's good to see. A bit of a mixed picture.
Decline in Asia, already mentioned in the beginning, but solid North America and Europe, and I'm very happy to see that because I think we are stronger in North America and Europe. Hopefully, the tailwind keeps there. Also on specialty rental, we had a good positive development. Margin, even with the negative currency effect, we had a stable plus percent, +1 in operating margin. This, I would hand over to Hans here , who can talk a bit about the detail.
Thank you, Ronnie. We're on slide 13, if I have calculated correctly. You've heard Ronnie already comment a little bit on the operating profit results, and I will come back a little bit to that on the next couple of slides. If we look a bit further down, as you have seen, we have a little bit higher interest cost or financial costs, but also interest cost in the quarter. Not surprisingly, since we borrow more money this year than we did last year. We believe that this level might be a little bit higher. It should be a little bit higher negative costs in the second quarter due to the fact that we will both pay dividend, and we will also amortize one of the loans that we have in the second quarter.
I still believe that somewhere in the region between, let's say SEK 150 million and SEK 200 million, or at least below SEK 200 million negative, is a good guess for the next couple of quarters for the interest net. When it comes to even further down on the tax, as you can see from the slide, we had a positive development on the tax rate from 26% to 23.5% if I compare with last year. There are a number of contributing factors, but one important one is that Edwards actually comes in with a lower effective tax rate than the group had. That is helping us. Hence, I believe that this level, or let's say somewhere in the range of 23%-24%, is what we should be looking at for the next quarter or two or three.
Turning to the next slide 14, we have the famous profit bridge that Ronnie alluded to. Let me start from the right-hand part of that slide and just say that the currency effect, the one-time items and acquisition effects, and the rest, the so-called other effects together explains about 1.2 percentage points of the drop in margin from 20.5% to 17.6% this quarter. The rest, what is that? Well, you can see a very strange number there with 100% fall-through of the negative revenue. We need to turn to page 18, actually, to see a little bit more understanding of that. If I start by saying that on the group effect again, which then, as you can calculate, is the rest of the difference.
1.2 percentage points is explained by the other columns, and here is the big part, explaining something close to 2, between 1.5 and 2 percentage points on the loss of profit margin. Mining and Rock Excavation Technique alone affects the group in that respect by about close to 1.5 percentage points. The other negative contributor is the CT, which is not surprising when you see this table here. While Construction Technique and Industrial Technique actually contribute a little bit positively when we look at the organic effect on the bridge for the whole group. We look by business area. Yes, we have a strange situation in CT.
I have said it before many times that a single quarter can give very strange effects when you call it the flow-through because you have so many specific variations and mix effects that comes and goes between one quarter and another. Here we actually have revenue growth, but we have a lower EBIT in absolute value. Ronnie has given main explanations to that. We are still continuing to invest in more service organization, and we are clearly increasing R&D. The group, by the way, has 12% higher R&D in this quarter compared to last, if I exclude Edwards in that. That is a significant investment in itself. There is also a certain impact on the result of a slightly lower load in the factories than last year.
The other business area to mention, I would say the other things speak for themselves, is Mining and Rock, where the high flow-through here on the EBIT is related to the fact that we have SEK 75 million in restructuring, which we have separated. That doesn't mean that that is enough of the adjustment efforts that we are doing to come to a lower cost level over time and to also adjust to the lower load of the factories that we have had. There's still a high amount of under absorption in those numbers as well. I should also finally say that between the four, Mining and Rock and Construction Technique suffer a little bit more than the others from the negative currency impact.
We move on to the balance sheet on slide 16, again, very big variation from December to March, but you all know that it is mostly due to the big acquisition of Edwards. In very summarized ways, you can say that on assets, that acquisition has added about SEK 13 billion in SEK, minus SEK 10 billion that we used our existing cash for. You could see that SEK 3 billion of the increase from December is purely related to that acquisition, and another SEK 3 billion is then on the liability side. The rest of the difference is basically coming from the cash flow, as you can see on the slide number 17, then. These are numbers that you have had some hours now to look at.
We make an improvement on the operating cash flow compared to last year, in spite of having a quarter where inventory and receivables development tied up more capital. This is not related to the acquisition or to the new company, Edwards, but it's some of the inventory buildup in Compressor Technique and Construction Technique. Some reinvestment in the hire fleet, in the rental fleet. These are the main points apart from the result, of course. When it comes to investments, there is an impact of having Edwards in the group. About SEK 100 million or so is reflected in that. Without that addition, we would have seen what we expected, a clearly lower rate of investment in this quarter than compared to a year ago.
With that, I think we stop there, I will just then hand over the word to the operator who will repeat the instructions for the questions. Before we go into that, I remind you again, please bring your best question and then a follow-up, and not two or three right away. It will help the others. Thank you for that beforehand. Operator, please.
As a reminder, it's zero one if you have a question. Zero one on your telephone keypad. The first question comes from Aaron Ibbotson at Goldman Sachs. Please go ahead, sir.
Yes. Hi there. Thank you for taking my question. Good afternoon. I'll keep it very short. I'm just curious, partly if I look at the bridge, I guess, but partly if I look in general, in Compressor Technique. It strikes me as extraordinary, almost, that you can acquire such a large company as Edwards without incurring any additional costs. I know you don't like to highlight small, couple of millions here and there for lawyers and bankers. In general, is this a fair reflection, or would you say that there is at least tens of millions, if not maybe SEK 100 million also of additional costs if you take the whole process of getting Edwards on board? That was my question, I had a very quick follow-up.
Yeah. It is what you say. We don't have any extras in there. We have, of course, some costs related to the whole process inside Atlas Copco in the third and the fourth quarter of last year, but that was nothing extraordinarily big. We don't have a restructuring. As you well know, we haven't bought a company that is making similar products, we will not have a lot of upfront things to restructure and similar items like that. The one thing that we get questions on is the fact that sometimes companies, when they have made a major acquisition, they have to make step-up valuation of new inventory values.
We have not had to do that in this case, depending on the analysis of where the cost level of the inventory that Edwards had and where we will have the fair value consolidated in Atlas Copco. The only impact you have is what we have mentioned in the report, is the SEK 52 million, roughly, of intangible depreciation. Obviously, Edwards also had depreciation of intangibles on their own last year. That's the impact. We are not guiding you to expect big things coming forward either.
Okay, thank you. My very brief follow-up was just on the sort of margins that anyone who wishes can see that is coming through on Edwards here, the SEK 340 and the SEK 1,885. I realize it is not only Edwards, but almost only. Is that a fair reflection of, you think, the sort of the profitability you believe Edwards will have going forward, or would you refrain from drawing too much conclusion from it?
Yeah, of course, given the volume, what is in there, and the mix and the currency, if you take all this out, I think we should really be around that level. I am going to say, like I already mentioned in the beginning, I am very pleased to see that, because as we also in the beginning, we were at a lower level, it would have been a little bit lower, but I think keeping this level of output, of revenue, it should be like that. That is. Also, if you look back at the time it was listed, you can find back this information.
More or less around there. If you take the clean result. At this revenue level. Yes. This level. Thank you.
Okay, perfect. Thank you.
We have a request from Mr. Alex White at JP Morgan. Please go ahead, sir.
Yeah, good afternoon, everybody. It's Alex at JP Morgan. Just a question again on compressors. If I look at the orders and adjust for the specialty rental and Edwards, then the base orders were relatively stable sequentially from Q4, which is a lot more subdued than the normal plus 10 or 11% sequential uptick that we've seen historically in Q1. I just wonder if you can elaborate a little bit on what it is that you're seeing that gives you the confidence that compressors are accelerating going forward. Is it centered on any particular end markets or regions? Thanks.
Yeah. I can take, and I go back a bit of what I said when I was elaborating on the business area, Compressor Technique. What we see is the big ticket is still not on the level where it used to be. I don't see much changing, no significant changing. It may be also, and if you look back and read back some of the transcripts when I was doing the same here, you see these big tickets come from Asia, and we don't see that part happening today in, let's say, one country, China.
That's one area. On the other part, when it comes to the small to medium-sized compressors, what I said a couple minutes ago is I see a good development in North America. That is doing fine. Asia, Europe, stay flat. That also made us say, okay, we have a stable order intake for small and medium-sized compressors. That's what I see. I still see a good development on the service side. It's mainly now when you talk on compressor side, you can say the key champion today is North America, and it's more or less all type of business. If we take the big one, the big three compressors, and that's what I'm a little bit hoping for.
As normally you don't hope in business, you work hard and try to get results, is the LNG business where you read about that is coming, and you see good quotation levels there. We'll see when that part is either landing in Japan or in Korea. If that is coming, okay, that would, I'm sure will change the remarks which we will make on the larger orders. If you ask a couple of end markets, that's what I see really come. I think when it comes to the gas separation business, that is low, but that was also mainly an Asian business. It's a bit spread. Oil and gas, I'm a bit questioning, of course, beside the LNG, but that is almost marine business.
Is that historic sequential uptick that we usually see in Q1, is that usually driven by the big-ticket items then? Do you also normally see a sequential uptick in the smaller stuff?
I think it's mainly, yeah, because you don't see these big swings in the small to medium side, because that is a short cycle business. People decide, book it, and it's a EUR 5,000 to EUR 10,000 to EUR 15,000 order. That goes very quick. I think the big ones, you see that mainly in the beginning of the year that you get that part, the first part. Of course, it's a bit of what type of business cycle you are. I think that's the dilemma, what we all have today. I don't see today the demand for larger tickets coming. Of course, besides the LNG, which I know now, I happen to know as I was traveling there and I saw this coming up. The other part, it's not moving. I'm not reading much in that one today.
It's true that in a reasonable growth environment, we do see bigger difference between Q4 and Q1. If I look historically, that's exactly right in your observation.
That's mainly coming from Asia.
Yeah.
Okay, thanks. My second question or my follow-up question, if I may, I'll just slip it one more in, was just can you give any more detail around the motivation for the management change within Compressor Technique? Is there anything that you can say on the call?
I think the leader has accomplished his mission. It's a certain period, he has been leading that area, and we felt that at a certain moment it was, you pursue other horizons and certain opportunities coming up, what made me say, okay, we are really looking for a change.
Okay, thanks for your answers.
The next question comes from Andre Kukhnin at Credit Suisse. Please go ahead, sir.
Good afternoon. Thanks for taking my question. I'm afraid third one in a row on Compressor Technique. Looking at the margin performance x Edwards, which I think was down about 200 basis points, management change, and the tone of what you're saying about sort of where a leader have to stay the leader, hence need to invest more. R&D intensity going up. Can you just reassure us that there's no sort of stronger or wider forces working in this market, i.e., competition stepping up, maybe new entrants, et cetera, that is driving it? Am I trying to sort of dwell into one quarter too much?
I think, you have given already the answer. You ask a rhetorical question. I think we read a little bit too much in all these areas in one quarter. I think Hans Ola already, when he was elaborating something on the bridge. We have kept investing in field industry, meaning in sales forces, in opening up offices in Africa, in Irkutsk, if I take, in Russia, I think going west in China, buying some distribution in U.S. We keep doing that. Of course, then the volume is really not coming immediately. With this high profit level, you see it immediately in the flow -through. That is what is happening here. Of course, what I will for sure do is say, guys, we have been investing here and there. When will it come? Will it come within three, four years?
Are we really good to do the investment now? Should we not move our cheese and spend the time where the real business is, instead of investing everywhere? That is where we need to really debate also in compressors. It's not that you should go to read today, now suddenly it goes down. We lost significant market share. Competition is coming, and then China. I don't see that part. The machine is still investing in top compressors. We have a very solid presence in service. Maybe the suit of the body is maybe a bit too heavy, and we need to adapt a little bit here and there, but it's done by design.
Got it. Thank you.
Thank you.
The next question comes from Mr. Peder Frölén, Handelsbanken Capital Markets. Please go ahead, sir.
Thank you. Good afternoon, gentlemen. Thank you for taking my questions. On service, you mentioned, Ronnie, that you grew quarter-on-quarter or you mentioned that you grew year-on-year. Could you please inform me if that's the case on quarter-on-quarter? I guess it's not the case in mining. That question is very much related to the other divisions, I guess.
If I take, now I have to talk from my head, quarter-on-quarter, of course, on mining side, you don't see much growth. On the contrary, I think it's more or less flat, if you take away, of course, currency. We see still a good positive development on gas technique side and Industrial Technique side. That is still on the growing level. We also mentioned, I think, in some of the areas when I was giving comments, healthy growth in service, in Industrial Technique, sales continuously growing from gas technique. If I just go back to my slide.
Yeah. Okay. It's quite important. My follow-up then on compressors. Hans Ola, you mentioned the inventory build was mainly in compressors and Construction Technique. Is that a normal thing in the first quarter or does that help the profitability somewhat during the quarter?
No, it's very much a typical pattern for some of the divisions, clearly. In the Construction Technique area, definitely where there is a buildup for the high delivery season starting at the end of Q1 and going definitely into Q2. That we have seen before. Again, there are, of course, a couple of effects that will be different in Q1 last year compared to Q1 this year, as I alluded to. You have to go down to details to understand. I don't think from an inventory buildup, it seems as more or less what happens in most years, actually.
I think I can elaborate a bit, Peder, we have already been elaborate on that one. Of course, our inventory as a total is on the high side. That's an area where we can improve as a group.
Yeah.
What you see here, it's mainly a bit seasonal. It's, using that word from Ola. We see that, it's always that at the end of the year, we get closing of work orders, closing of really special orders. They close, then you build up at the year it starts.
We haven't seen the relative improvement yet.
No
In industry management as Ronnie alludes to. For the first quarter, it's not unusual.
Yeah.
Okay. Thank you so much.
Thank you.
The next question comes from Mr. Erik Karlsson, AKO Capital. Please go ahead, sir.
Thank you very much for taking my question. Could you just quantify exactly how fast the aftermarket is growing in the Compressor Technique division year-on-year currently? If you think we should expect an acceleration given the investments you're making in that area. Thank you.
I think the exact figure is a bit, that it's, let's say, mid-single digits growing that we have. I think you come up to around 7%-8%. That is where you most likely will end up. I don't have it here exactly in front of me, that's the area where you are coming, if you take that part. Of course, that is because we do also some small acquisitions from distribution, they're also in this phase. We don't take them out. That's the area of growth where we are cruising. It's still, Erik, it's still at a healthy growth level, where we see our one-to-one ratio is improving. We get more sophisticated. We work hard on getting it also higher efficiency. I think also in North America, you saw our acquisition of the last two distributors.
That's all in that same strategy to get hold of the total very rewarding services.
Very good. Thank you very much.
We have a question from Mr. Andreas Koski, Nordea. Please go ahead, sir.
Yes. Good afternoon, and thank you for taking my questions. I looked back and noticed that this is the first time you expect an improved demand for the coming quarter since the first quarter of 2011. This is, of course, encouraging to see, but demand in the first quarter this year has been largely unchanged. Can you please explain on what ground you expect an improvement in the second quarter? Have you seen improved demand throughout the first quarter, or have you seen an increased tender activity, or why are you raising the outlook for the second quarter?
When you read our outlook, where we said increase somewhat. That, I think, is important to remember that sophisticated work. Hans Ola and I, we debated many times about that work. If you take it, and you take the second sentence, which we deliberately wrote in that, I think your question is a gift for me. I think what we see today on the mining side, and of course, you should look to Atlas Copco's mining exposure, where we have seen now for 8 to 9 months, more or less same level of demand for equipment, which is less one-third, a little bit more than one-third of the total revenue. You know also of that one-third, one-third is construction. We see some good development in that area.
We don't see yet really giving the quotation level going further down on that equipment side. Service I have already elaborated on the mining side, where we also see a real flat, solid development. On the consumable side, it's a bit mixed where we see the production consumables, especially for underground, doing fine. That is driven by the demand of copper, the demand of iron ore, the markets we sell. I think service is more difficult. If you take that all together, we see that mining for us, the exposure we have, we believe we could remain at the same level. Where we see some signs of positive development, especially on the industrial side and on the construction segment, that mainly come from Europe and North America. There we saw some positive sign.
Given that Asia and, I don't know, maybe Asia, stays more or less at the same level, maybe after many considerations in Asia, it can be somewhat increased. On that one, it's still volatile. It is always a bit of uncertainty, you read also the newspapers and see the reports like I do, I have to talk about the business I see for Atlas Copco, that was the conclusion to take. I'm not always right, think about that.
Perfect. Thank you. A quick comment on Edwards, who did well in the quarter. I just wonder if there are any seasonal effects to expect in Edwards, say, during the year or if they don't have any seasonal effects.
I am not on the silicon. I don't think there is any, say seasonal, as the word seasonal says. I think we need to see what is the end market. I think that falls to an area where, as we talk, we will learn all together here, what is the demand of an install base of memory, of all this type of chips, when the big guys are investing, and that is happening as we speak, that it's a lot of memory investment in silicon. There is where Edwards, Atlas Copco this time, is very strong. Also where we see these guys who are investing, we also have a good customer share. That helped us to pick up all these orders. It's nothing to do with seasonality. It's pure segment rhythm.
Sounds good. Thank you very much.
Next question comes from Mr. Ben Maslen at Bank of America. Please go ahead, sir.
Yeah. Thank you. Afternoon, Ronnie, Hans Ola. Just on the mining business. Your orders are now slightly ahead of your revenues for the quarter, and you are guiding demand sequentially fairly flat. Does that mean we should assume that your production is now relatively in line with demand on the equipment side? Should we see margins start to stabilize at these levels or maybe improve as your cost-cutting actions kick in? Thank you.
Yeah. Eventually, yes, but give me a couple more months. I also believe that, and we alluded already, I think it was, I do not know, it was Peter who asked about the inventory. You also saw that I took over from Hans Ola to remark that I see also our inventory in total is a bit too high also on the mining side. That means more or less that some of the products will be either being reworked, which is also an inefficiency, but we call it growth. I think if we go on another Maybe I put me no on tonight, but a couple months further, I think maybe I will then say yes, given that the volume stays on the same level to give this part of the orders received. We need a bit more time.
You will get a bit more under absorption also what Hans Ola mentioned, when he was elaborating on the flow through bridge. It is a bit what I said, a couple months when we met all together. It will take a bit of time. As you know, we have not mentioned or not released any restructuring program, we take as it comes.
Okay. Got it. Thanks. Then maybe a follow-up on compressors, where I think you had a negative flow-through or drop-through in the fourth quarter as well, again, on the cost side. Should we assume that you have got two more quarters of higher cost headwinds to work through before you start to hit easier comps? I guess I am asking how long before we get back to a positive incremental margin, you get growth and that drives a positive EBIT effect. Thank you.
Yeah. I think I will repeat a bit, I don't know what question was asking it, but we have been investing in CT in certain geographical areas, in certain segments. If you take as an example, under low pressure. You know that's an area where we have been working, a lot where we also see we have still some potential. Of course, we put in feet in the street, and it takes time because we have the product, but it takes time before we really get the customers to dance with us. We have the people, but we do not have the orders. Of course, you have to see, okay, can we win here? Because also, and you know very well also that CT is an organic game.
If we really want to grow there, we need to invest in design and development, in innovation, and we need to invest in feet in the street, because I cannot go out and acquire because the trust authorities will immediately stop us. The only way to get deeper into the market and get more share is by doing this way. Sometimes we are successful, sometimes we are a little bit less successful or not fast enough in our success. I think fundamentally, I think nothing is changing. It's just a matter, of course, how we come to the success.
Okay. Got it. Thank you very much.
We have a question from Mr. James Moore at Redburn. Please go ahead, sir.
Yes. Hi, everyone. Thanks. On Edwards, it looks like revenues grew 28%. Is that correct? Do you have an organic number in that? It's largely organic. I have a follow-up on CT.
That's largely organic, as you say, James.
In Compressor, can you say where R&D and selling costs are as a percentage of sales and what the percentage change was year-on-year? I'm just trying to understand this flow through a bit better.
I think I mentioned the R&D is growing 12% from last year. That is in Swedish krona terms, so if anything, it could be a little bit higher than that, but something in that order.
Yeah. Is it that you think that your selling cost and your R&D in Compressor is now at the level it needs to be or could still go a bit further?
You mean in growth guides, you mean?
No. As a percentage of revenues, I was thinking.
You mean the costs or what?
Yes. The R&D expense and the sales force expense as a proportion of sales. Yeah.
Yeah. I think the proportion of sales, giving the profitability, I would like it to go down, of course. That's what I just said to the previous question. We need to get that return of that invest. I think if the organic growth was negative, if you keep investing in feet in the street and in design and development and you don't grow organic, the math is not going in the right direction. Either we cut or we grow.
We know we have had a couple of quarters where we have alluded to the large compressors that hasn't really gotten the orders, but it has not been super strong on revenue either. If we compare with the revenue level with Compressor Technique had in Q4, it is of course significantly lower in Q1 if you deflate for Edwards.
At that level, a [1% cost] will hurt your margin immediately, of course.
Sure. Thanks. Thanks, guys.
The next question comes from Mr. [Arne Smith] at SEB. Please go ahead, sir.
Hello. I think my question has been answered, actually. I'll pass. Thank you.
Thank you.
We have a question from Mr. Erik Karlsson at AKO Capital. Please go ahead, sir.
Thanks for taking another question. Just on Construction Technique, where the margin was stable despite the currency headwinds. Just how do you feel about that business in terms of the improvement you've done to the product range and service networks so on?
Yeah. Thank you for that question, Erik. That business area exists about a couple of the businesses where we had the Portable Energy business, which is a good leading business worldwide. It's well spread. I think we have the best product there, and that, I think, continues to perform. We had the construction of the demolishing tools, where we have really expanded our offer, opening the value part of the business, not only the premium part. That is coming up because that is an area where we still can take more, where I also felt that we can grow more geographically. There I see it, our strategy of the premium and the value works. The move to rent is implemented, or the rent strategy is implemented on the demolition part.
I think last but not least, the other part of the business, one of the acquisitions we did years ago, called Dynapac. Today we call it road construction. There we have done tremendous work over the last three years by bringing down first the breakeven. We closed several factories. We really reduced the overhead to increase the agility. Last but not least, we also made a whole new range of products, of rollers, of pavers, and also recently about graders. That is what I'm really positive. My statement is about touching the market. We see that's one of the reasons also why we are on the positive side. I'm very pleased to see that work. Are we there where we want to be when it comes to profitability side? No, of course, we got a big headwind.
You see Australia was a very good market, and you know what happened in Australia, and you look to the Gulf, which is difficult. Second, also Brazil, which is also difficult. That plays a little bit against. On the other hand, we see good norms coming in North America and Europe, so it's promising.
Very good. Thank you very much.
Thank you, Ronnie. As I noted, Erik came back with a repeat question here, which is perfectly fine, Erik, but that signals to me that we have exhausted at least the big part of the question queue. Unfortunately, we have to break here anyway because Ronnie has to run and prepare for the annual general meeting. Thanks very much for participating. We are, of course, as usual, be it on investor relations or myself, ready to answer any follow-up questions on the phone in the next couple of days. Thank you very much, and goodbye.