Very welcome to Atlas Copco's conference for releasing the second quarter results of 2013. We are in sunny Stockholm, but we cannot enjoy the sun because we're in the Atlas Copco house in Nacka for the time being. We'll try to be brief so that you can all enjoy the nice, sunny summer weather here in Stockholm. We will take about an hour, and we'll do it in the normal format that Ronnie Leten, our CEO, will give his comments in the beginning, and then from there on, we take a Q&A session. For that Q&A session, not only because we're in a hurry to get into the sunshine, we will try to restrict it to only two brief questions per questionnaire. Please, if you can respect that, I would be very happy. That allows more people to ask their question, and that, I think, is fair.
Without further ado, I leave the word to you, Ronnie.
Thank you.
Take it from here.
Thank you, Hans Ola, and good afternoon to all of you. As usual, I will go through the slides, try not to forget to refer to which slide I am so that you are still with us. Slide number two, which is the summing up for the quarter. A healthy demand for service, a good development on equipment, softer mining. That's more or less, I think, the summary, if we can say, on Q2. Service continues to develop, that's good to see. One could think about on the mining side, it's tougher, we see still potential there. Industrial and construction demand improve. We see that happening, I think it's not a surprise, a weaker mining equipment part.
Maybe just for everybody to put on the mining equipment today, equipment for mining is around 7%-8% of the Atlas Copco Group. We have launched a lot of new innovative products, which makes us successful and is also giving us the potential to grow even faster. On top of that, we also have landed 4 acquisitions where a couple of them were really also bringing new products and new segments into the group. Profitability, solid. One should know that we got a really strong headwind from currency, what was more than SEK 500 million, Hans, you will allude more on that when we look to the cash flow through bridge. Last but not least, a strong cash flow. Slide number three, where you see the figures, most of the figures you have seen.
If we take the operating profit, SEK 4.5 billion. If you just make quickly the calculation, with the currency, you can say it's more or less on par of last year. Operating margin 20.8%, of course, diluted by the currency effect, which was more than 1%, earnings per share at SEK 258. More or less, I think, solid financial figures. Slide number four and look more to the geographical spread. Maybe a couple highlights before I go to the different continents. Positive Europe. You can say dramatic drop in Australia, one should know that we are comparing with the top quarter ever. It really makes that tough comparison, Africa, Middle East, a solid development. The rest I will take one by one when we go to different continents. The Americas, now on slide number five.
North America, mainly I could say U.S., if we talk about the industrial compressors and tools, a good development. We still see a good development in that part of the business, which you will hear me saying several times, a softer mining equipment order intake. A healthy continuous development on service and parts for our business. North America, if you think more specific, U.S., still a good development. South America, when you have a couple big countries on the mining, I think about Peru and Chile, that is tougher there you see a sequential decrease. On the other hand, when you take Brazil, you still see a reasonably good development, if you make a correction for the mining, you will see even an increase there. Europe, like I already said, positive.
Of course, again, we're comparing with a softer quarter last year, because I think you all remember, Europe is already a while in the lower level. On the industrial compressors and on the tools, and mainly when I talk tools, the motor vehicle tools industry, we do very well. The more you go north of Brussels, we see also a more positive development. Softer when you talk about Italy, Portugal, France, and Spain, which are still tough. Construction, slightly increase, mining, to repeat myself, continues to decrease. When we take a couple of strong countries, Turkey. Turkey is doing very well since a while and keeps doing. We have two other big countries there in Europe, U.K. and Germany, they continue to develop very well. Middle East, Africa, I think a reasonable good level.
Of course, when we compare with last year is even +16%, mainly coming from good South Africa, also some good development in Saudi. Slide seven, Asia. You could say -1%, we could say more or less flat. You look to China, slight growth. What it says here on the slide, sequential growth. I would say a slight sequential growth. That's good to see where India, on the contrary, is still going down as we also said here, a softer demand in India. The other countries more or less continues as before. Australia, I already mentioned, -50%, maybe remember last year, maybe I think we had a +40% or something. Really here, it's of course a big swing as we're comparing with a very strong of last year quarter, mainly coming from the mining part.
If we look here with the perspective over more years, see we had more or less four or five quarters where we had softening. If we repeat ourself from history, next quarter maybe need to be positive, we'll see what happens on that part. The sales bridge, very condensed summarized, we could say 5% currency, 4%-5% price volume, that is more or less the picture where we are on all this receipt side. Currency is a big part. Swedish krona, strengthen of the Swedish krona, we can say that compared to last year. Another part is the weakening of Australian dollar, Canadian dollar, real, yen, and South African rand, which also are big markets and have been softening these currencies, which of course is also a negative effect for us in the currency.
Let me go to the different business area. As usual, we start with Compressor Technique. I'm slide 11 now. Industrial compressors remained at a good stable level. I think also the launch which we did of our latest new compressor, the GA VSD+, is very successful. This type of new development, new products, is what we need to really bend the trend and make sure also with that together, that we can deliver good results. Service and parts continue to be positive, the operating margin is at a solid 23%. You also know with a bit of currency headwind. Again, also here, we continue to launch new products. Last time it was for the smaller entities, as I already just mentioned.
This time we had a real good launch of a couple of large compressors, which again, also will make us more competitive and also support our pricing power. Industrial Technique, maybe the positive takeaway here is the strong order intake for motor vehicle. That was nice to see that we are very successful in delivering the tools for the new models. This happens in the U.S., happens in Europe, and also happens in the Chinese market. It's good in these three areas, where the biggest markets are, that we're also very successful. I see some sequential improvement in general industry. There it's a little bit tougher, especially in China, where it's a bit tougher there, but it is gradually coming back. Like I'd also said, we see some growth in Europe and Asia. Margin, 21.5%.
Okay, a little bit lower invoicing, which makes it a bit affected and of course, currency as the majority of that business is produced in Swedish krona here in Sweden. Again, we also won a nice award, the Red Dot Award, with this versatile tool, which also make us successful in the motor vehicle industry and also related businesses. Mining and Rock Excavation, weak demand, and as already mentioned, it's around now when we take it around 67% of our business is mining related when it comes to the equipment. The other one is more civil works. In that part, it's reasonably stable. We still see a good development in parts and service and on the consumable level, so that's good. That means there is production. There is production for copper.
There is production for iron ore, and we see that also when you look to the statistics, you see that is really there, and it's today even more than 60% of our market. Operating margin for this type of business, giving currency effect and giving the volume, I must say, great job from you guys. Great 22.1%. That is good, and we know that we are adapting the organization to lower volume. Unfortunately, I also have to share with you that Bob, the Business Area President, has decided to go back home and go to live in Canada, and we will hopefully very soon announce his replacement. Construction Technique. Also here we saw some organic growth, of course, only at 2%. We would like to see a bit more. It would be nice to get a little bit tailwind there.
Brazil, Western Europe, India, they are the markets where we see some improvement. Parts and service. That remains good. The operating margin is around 11.2%. Of course, again, a negative effect by currency and volume. Again, also here, you see the picture here of our new paver, fully branded Atlas Copco, the Dynapac pavers, which is really the ones we are launching and also make sure we will get more share of the market. On the profits, I think you have seen all the figures, more or less, than I think Hans Ola, maybe you can elaborate more when it comes below operating profit.
We'll come back to Ronnie soon. Just a few points. Most of it you have been able to read and think about already. The first thing is, of course, that the SEK 500 million, negative currency effect, in comparison with second quarter last year is very noticeable. It explains the drop, basically. There are some positives, of course, in that, I'll talk more about that on the coming slides. If we move down the income statement, we had a little bit higher financial items, charges or costs this quarter. It's not something that have established a new level, though. We believe that it will come back down a bit in the next couple of quarters, barring, of course, that there are new surprises on the currency side. From an interest net point of view, I would say that about SEK 150 plus is more a better expectation.
All the rest, which is hurting this quarter of revaluations of the derivatives and financial exchange differences related both to internal and external situation is not something that we predict will continue. Somewhere in the region of SEK 150 plus would probably be a better guess going forward. When it comes to the tax, it was a little bit higher, about the same level as first quarter. We believe that the underlying tax rate in the foreseeable future will probably be closer to 25% than the current one. There are certain issues that I talked about in April already. There's a lot of activity on transfer pricing audits going on all over the world, and there are certain issues on that where we don't know where the final outcome will be. There is a little bit of precaution on that one.
Again, we don't believe that it will be anything more than that. On that topic, perhaps it's also valid to comment a little bit on the other thing that has not affected the profit in any way. As you could read in the report, we have been receiving an assessment in Belgium of a deductibility of interest rates that has been disallowed in the first instance. We believe that we are following, in all respects, the legislation in that. We have appealed that verdict, which is representing about SEK 200 million. We have, however, since the outcome is not known, of course, we have put it as a contingent liability, but that is not affecting the income statement. I then move on to the next slide. I don't know how I do it on this one, there I found it. Yes.
That's slide number 16. It's the usual way of looking at what has changed from last year to this quarter's profit. You can immediately see that the currency is the dominating factor here, and it really relates to what-- It gives the result that Ronnie has already said. It affects about slightly more than a percentage point if you do the mathematics correctly on the margin compared with last year. If we look a little bit more into the different parts of the business, you can immediately see that when you take away the currency impact, which by the way, is about one percentage point negative on Compressor Technique, similar on Industrial Technique, and about one and a half percentage points negative on the other two business areas. You can see that Compressor Technique is really making a very strong quarter.
If we have problems, it's not very surprising to have a problem that you make more profit than you make more revenue compared to last year. We should keep in mind that it's not only a tremendous amount. We also commented last year that we had some costs. I would call them investments in our market organization, quite a lot of service build-up, which didn't yield so much result last year. Now we see that coming through in a better way. Hence, a very nice flow-through on the profitability and Compressor Technique. Industrial Technique, Mining, and Construction Technique are, of course, suffering from not only the currency impact, but also from lower volumes as you can see, and that affects the profitability. Mitigating a little bit of that fall is that they have a better mix.
They have a little bit more of an aftermarket in those numbers than last year as a percentage. Otherwise, the flow-through would have been more negative, I would say, specifically in Mining. On the balance sheet, well, not stopping so much. I will add a few comments on the next slide, which is the cash flow. This slide, number 18, just want to point out that you remember that between December and June, we have borrowed EUR 5 billion in anticipation of amortization of loans in the early part of 2014. Temporarily, that is, of course, only boosting both cash and loans, but that will be corrected as we come into 2014, if I use that word. Of course, between December and June, we also have SEK 6.5 billion roughly in dividend payments, as you know.
If we go on into the cash flow, commenting a little bit more on balance sheet items, you can see one very dominating point in this bridge is that the net financial items, now I underline again, the cash flow effect from net financial items, not the profit effect, was hugely negative last year and is positive this year, SEK 400 million versus minus SEK 800 million. That relates to the valuation of currency swaps and interest rate swaps agreement that we have, or contracts that we have. It is not something that is going to affect the income statement, but it has to be revalued every quarter, sometimes we have these effects when we close a swap contract, and we roll it over into a new period. Taxes reflects a slightly lower profit level as we saw before, then change in working capital.
The main reason for building more working capital in the second quarter is that the revenue, the invoicing, is much higher than in the first quarter. That explains why we tie up a little bit more receivables. That's the main thing. Between inventory and trade payables, it's actually a slightly positive impact on the cash flow. Otherwise, the rest is rather uneventful. We invest a little bit less in this quarter compared to last year. Ends up at the very healthy SEK 3.3 billion in cash flow for the quarter compared to SEK 1.9 billion last year. I think with that, I invite Ronnie back and just comment on the outlook before we start the Q&A session.
I think I can-
There's not much so much to comment on.
Not much to say. I think everybody can read it. I suggest that we go immediately to, yeah, the Q&A.
The Q&A session. We will have questions also from the telephone conference participators. Perhaps before we take the first two questions here, we ask the operator to give the instructions for the questions on the telephone conference, please.
If you have a question for the speakers, press 01 on your telephone keypad, that's 01 to ask your question.
Thank you very much. I just remind everybody that let's try to keep it at the one or two questions maximum, to allow more people to put questions. We start here first. Guillermo, please.
Good afternoon. Guillermo from UBS. Two questions. First, regarding your earnings statement, can you give us a little bit more granularity with regards to regions, divisions, and aftermarket versus investment? The second question regards to Mining Equipment. I'm wondering, and I'm scratching my head trying to think of what happened over the last quarter. A lot of the subcontractors to the mining industry, which sometimes actually buy your product to sell efficiency to the mining players, have been told that during the second half this year are going to have lower volumes. More importantly, they're also being told that they're going to have lower prices. I cannot think of that conversation being different with you when it comes to the pricing of your equipment. I may be wrong, but I want to just sort of gather your thoughts on that. Thank you very much.
Maybe I take the mining equipment first. I hope this is the last question I get on that part. To remind you, it's 7% of our business. I hope to get a question on the 93%. I think first on the pricing, this is not a new story. This is, of course, now more highlighted because you see when you go to visit mines and the headquarters and all that, you see there's a lot of activity going on. New CEOs, new strategies, new reviews, a lot of consultants coming in, and there's a lot of areas. We need to have short-term money here and there. They debate all this. One thing is, it's very easy to give different prices if you don't get any volume. That is a part, first one.
I think when you don't buy and you get price reduction, there is not much. I think in this, and that's another discussion, what we also get with the same owners is about productivity. You have heard me saying in the summary what results. We keep investing in new equipment. We keep investing in research and development because that at the end will give real cost reduction. This will really give OPEX reduction. Maybe not CapEx reduction, but at the end of the day, it is where the return is. That is where the story still goes. Of course, okay, it will be a bit more tougher because people fight for the same order that can happen. Will it be softer? I'm heading to my outlook statement also.
I don't see, I've already mentioned a couple of times now on the equipment side that it is already very low. I don't see, for the time being on the equipment side, that suddenly the mines will start to order a lot of equipment. Although volumes are okay, if you look to copper, iron ore in a couple, the volume there. The uncertainty on pricing make it more difficult to really, let's go for it. I think we will need to wait a couple quarters. Hopefully it's maybe one, it's maybe two, but at the end of the day, something will land. What we also see is that the bigger players, the Anglos, the Vales, the BHPs and all that, if you look to their CapEx reaction, it's not really falling off the cliff. On the contrary to some of them, it goes even up.
What you see is that smaller players, smaller companies, that's also where our cancellations are coming from, that they are tougher because they have to see that the project is not coming they cannot really hang in for a while, they have to be very careful, too. When it comes to the outlook statement, I think when it comes to mining equipment, I still see what I believe a slight reduction, somewhat lower, if I stay in my same terminology. Somewhat higher maybe on the industrial part. Service, I think that continues to develop. Depending a bit where the minus is, you have the construction, which is maybe the different. That made us when we were debating, it becomes very here and there. That make us to say, okay, it sequentially a flat or not.
Next, another question here in Stockholm, or we go straight.
Yep.
Andreas Koski from Nordea. Also on Mining. Can you give us a better feeling of the cost structure in Mining and Rock Excavation? How much is variable cost and how much is fixed cost? If we assume that sales would have been down as much as orders, i.e., 19% in terms of volume, what impact would we have seen in the margin?
Yeah. I think, you have heard us, at least from myself, four and a half years now preaching agile and resilience. Now the proof is here. You've seen, I think the result already today from this business area with headwind of currency, they have taken really cost reductions. We don't have the habit to announce this, but we take as they come. That is in that part. When it comes to the equipment side, there is really a lot of agility. One should not forget, and that is I would keep eyes in the stomach. I will keep investing in the presence. I will not go to lay off salespeople who have been building up experience of 20 years. I think that will be a very unsustainable decision.
I will keep the feet in the street, we keep where we need to invest, we keep investing. Second, on design and development. Of course, we will revisit certain projects and see that, because it's always good. We should never miss a good crisis to do that. These are the things what really will hang in, I will not create certain agility. The other parts are rather flexible in that. Either with insourcing and reducing workforce, which unfortunately will take place more in the months to come. That, unfortunately, I have to say. I think one could say when it comes to the mix, when of course you have consumables and aftermarket, you can make the calculation yourself. You know how that will work out.
Thank you.
We turn to the telephone conference for two questions.
The first question comes from Mr. Klas Bergelind at Nomura. Please go ahead.
Yes. Good afternoon, gentlemen. It's Klas Bergelind from Nomura. I have two questions, please. Firstly, on your service business, Ronnie, in mining, this is not a question on equipment. We're getting some evidence on miners now considering more insourcing of service contracts to do more work themselves. I was wondering if you have seen anything of this at all, or if you think that you guys are more protected given your underground exposure. That's my first question. The second question is on Europe and Construction Technique. Last quarter, you said that the increase was largely due to seasonality, now there is an increase again. Are you taking market shares here, or is this underlying improvement? Thanks.
Maybe I'll start with the construction guys. If you will listen to my guys, they will definitely say that we take market share. There is maybe a bit of self-help part, maybe it's an understatement a bit, when I say a bit. They do good work. You remember that on the road construction part, that we have done a lot of work, that is yielding some result. Not at the level where we would like it to have, but it's coming. On that part, I cannot be disappointed. Of course, we are not there where we want to be. The trend is already there, where we would like it to be, but not the level there.
When it comes to insourcing and service, yes, I think these discussions are always coming when there's a crisis because you have the social partner and the mine, and let's go for our own people and this part. One should know also that we are a niche player. We have a very specialized product, which is not just replacing tires. Most of the work is done at sophisticated machines, proprietary service, proprietary parts. Once you have really outsourced, it's not so easy to do the insourcing. You see these discussions going on, but I think it's not the main activity, what takes place for us in that. I think on the service side and mining, and I've mentioned that in so many occasions, we still have a lot of potential self-helped growth that I even don't want to use that in favor of myself in that one.
Thank you.
Thank you. Another question? Yes.
The next question comes from Mr. Aaron Ibbotson at Goldman Sachs. Please go ahead.
Hi there. Good morning. Well, actually it's after lunchtime, so it's good afternoon. I have two questions, if I may. The first one was just on Compressor Technique, and you alluded to some payoffs from previous investments. I am trying to understand how we should think about this going forward. If I look at the margin, sort of underlying margin improvement in Compressor Technique, how much is that is driven, would you say, by mix effect, i.e., sort of flat equipment and slight growth, as you say here in aftermarket? How much is driven by this payoff from your investments or lack of repeat maybe of investments? That's my first question. My second one is actually just a clarification. It is mining equipment, but I just want to understand your 7%. Are you talking about order intake here, revenue through EBIT, when you say 7%?
If you're talking about order intake, is it correct then to understand that it's down roughly 60% year-over-year or something like that? Is that a number that you guys recognize? Thank you.
Yeah. I suggest when it comes to the details on these numbers that you give later a call to Mattias. He will give you the right after the comma. When I mentioned on the 7%, that is meant on the orders received when we take this quarter.
Okay.
You remember, Aaron, that we always said two-thirds is mining and one-third is more civil works. That is more or less that-
No, it makes total sense. I got to that number. I just wanted to clarify. Thank you.
When it comes to CT, when you remember last year around this quarter, when we talked about CT and looked to the profitability people were asking what is. I think we have done a lot of investment in presence, and presence. I think I lose more or less.
I think so.
A second one, I think we keep investing on the product and that part. Sometimes it is cost hit in that quarter, and we take as it comes. That is an area, Hans Ola, I think you have already said in the flow through. It is some payback we get, of course also we should not be afraid to say that we also have efficiency improvement when it comes to service in other areas, even we got a negative currency effect that part. I think it's good work what they have done over the last 12 months in CTS and in CT, should say, which yield this type of result where they are today with their EBIT level between 23%-24%.
There's no chance you can sort of, give us any steer on what the aftermarket and Compressor Technique did. We're talking low, mid, high single digits. Any that type of indication on the year-over-year development there?
They keep growing. I think they keep growing at more or less at the same level of contribution.
Okay.
There is no dilution on profitability when we talk about the service business in Compressor Technique.
Okay. Thank you.
You're welcome.
We have a question from Mr. Andreas Willi at JP Morgan. Please go ahead.
Good afternoon, gentlemen. My first question is on clarification on the mining equipment share within your sales. If you look at the sales level of SEK 7.9 billion this quarter, what's the share of mining equipment in that, and how much backlog do you have? You said you're taking measures to bring costs down or take employment out in manufacturing. Have you already provisioned for this as part of the Q2 numbers, or is that something we see in the second half of the year? The second question on compressors. What have you seen in order intake in the last few weeks, maybe last month in emerging markets? If you look at it historically, normally when PMI order components come down, we get a relatively quick follow-through on your industrial compressors orders coming down.
What have you seen in emerging markets, is basically Europe and the U.S. up enough to offset the emerging markets in Q3? Thank you.
I will let the first question to answer by Hans Ola. When it comes to CT and the emerging market, I must say I have not recognized a difference. I'm trying to recall the different months now and the countries. It was for me no change as such, and I'm trying to look to the yellow canaries I always use as a good indicator. I didn't see a trend difference in that part. For me, I didn't see that. When it comes to the U.S., we still see a good development, but the sequential growth is not at the same level as it was seven, eight months ago. Okay, you also get tougher comparisons, but there is still some growth that we see.
I understood the question, Andreas, as the revenue number on mining equipment, right?
Yes.
Not the order. It's a little bit more than 40%, and consequently it's lower than 40% when you take the orders received, the equipment part.
Out of the SEK 7.9 billion, about 40% you're invoicing now is still mining equipment.
Yeah, that's exactly what I said. Yeah.
Yeah. In terms of the provisions taken for these measures you have mentioned earlier?
We don't disclose exactly. That's the work we consider we have to do constantly. Sometimes we have to build up resources when we grow, we don't disclose that as an extraordinary cost either. That doesn't have any revenue against it. It's constant work. It's continuous work. When we have big restructurings, like we close a plant or we move a plant, yeah, then we will give you an indication of how much it is. It's taken. We see it as something we have to do, and we do it continuously, adjustment, we don't disclose a specific number. Is that always the case for every quarter coming forward? I don't know. It depends on the character of the change, if it's a clear one-time cost, then we will tell you how much it is. It is affecting somewhat the profit margin.
On the 40% you said in mining, in equipment, if aftermarket 60% and you have civil, mining equipment can't really be 40%. It would then include civil equipment as well, the 40%.
Well, did you say 60% for service? We include consumables in that, if that is what you mean.
Yeah. Basically, if 60% of the SEK 7.9 billion is consumables and service-
Yeah
at least 40%
which breaks down into civil equipment and mining equipment.
Yes.
It's about 30%, maybe, or just below 30%, which is pure mining equipment still.
I talked about MR, sorry.
Okay.
You're right. You asked about mining equipment.
Yeah.
We don't follow it to the-
Lab results
You can say it's more or less.
Yeah.
Okay, you can say more or less it's one-third is civil and two-thirds is mining.
Yeah.
In this type of a cycle, yeah.
Yeah. Thank you very much.
Okay. We move back here, I think. Perhaps we had too many questions, but are there any more questions in Stockholm here? We have too many people enjoying the sunshine, we have more participants on the telephone line. I think. Yeah, we have a follow-up here from Guillermo. Go ahead, since there were no one else raising their hand.
Yeah, a question regarding mining again, sorry. Production numbers that we've seen actually on the majors are actually quite good. Over 10% in most cases year-over-year. Is your aftermarket up the same, or it's up less than that, i.e., are the miners getting more efficient?
It's up less than that. We don't have a service business that is growing double digits for the time being in the group. Again, it varies a little bit between the different business areas. It's not up double digit, no. We go to the conference call again. Another question, please.
We have a question from Mr. Phil.
Sorry. No. Okay. Yeah. Go ahead. Sorry. We take the telephone conference. Then we go back to Stockholm.
We have a question from Mr. Phil.
I'm confused here. I'm blinded by the light, as the song said somewhere in the lyrics. I take it back then. Give a second question in Stockholm first. Sorry for that. We come back.
No, there.
Yeah.
When we look at Europe, Mr. Leten, do you think we are getting close to bottom here in Europe? You're talking about the difference between the north and the southern part, but now in general, is confidence coming back to the customers? Are they beginning to ask for tenders on the bigger compressors? Are they getting on the margin, or are they just getting slightly more optimistic?
It's an easy question, but a very difficult answer. I have already, I think, mentioned, I think two months ago when I was in one of the conferences, that I got the sense that I think maybe Europe is bottoming out. When you look to our figures, and I'm just trying to state what I see, I must say yes. I think it is, but there is still a big mix. Without to be political, and I've used it, northern part of Brussels is doing well.
A rather small area, northern part of Brussels.
No.
Oh, no. Sorry.
North.
North of Brussels. Yeah. Sorry.
Yeah, that's.
Couldn't help myself.
It's small. Yeah.
Sorry.
North part of that is really doing well. I think when you take Spain, Italy, the other part is still tough. If you take it maybe in total, you can say more or less it may be bottoming out, but there's still a big difference between Spain, Italy, and if you take Germany, Benelux.
If we summarize, so North America, industrial demand is doing fine. Europe, we are bottoming out. China is coming back. Basically, the world is doing fine, and we're step by step We'll increase from here.
Let's hope, yeah, you are right.
Okay.
As a final comment on Europe, when you hear the countries, Germany, U.K., and to a certain part, other parts of the northern part of Europe, these are rather export-strong countries. That is, of course, always giving a little bit of a spread effect that the growth might come from somewhere else in the world. We don't have a perfect match that everything comes in the right region where the actual end demand is. Nevertheless, that is just an add-on comment on it. Now we go back to the telephone conference.
We have a question from Mr. Philip Wilson at Redburn. Please go ahead.
Yes. Good afternoon, everyone. It's Philip Wilson at Redburn. I have two questions, please, and I'm afraid they are both on mining. Going back to your earlier comment, Ronnie, can you help us understand on customer mix a bit in mining, and can you say roughly what proportion of your mining sales go to smaller junior miners, and have these customers been higher margin in better years? We're just trying to understand what you expect, whether you expect it to be a source of future negative mix pressure. That's the first question. The second question is, for your mining sales outside the West, so Australia, Chile, South Africa, et cetera, do you sell everything in dollars or local currency, or what is the mix? Just to help understand the impact of the recent emerging market currency weakness. Thank you.
When it comes to sales, the majority of our activities is done in local currency. Of course, when you do these negotiations and you look forward, of course, you take into account that when certain local currency is devaluating, of course, the prices will be adapted. That is the way the majority of the business works. It could be with a letter of intent that you have a dollar or a Swedish price in it that's fixed in it. The majority is done with an adapted local currency. Atlas Copco people are used to that. When you see the drop of South African rand, of course, local prices will go up to adapt to that. When it comes to sales, I think the majority is, of course, for majors. That's for sure, that we have that.
Margins are mainly, they are not a big significant difference. Margin is sometimes also depending on what type of machine it is. Is it a lot of adaptations? How is the competitive landscape at that time? There is not a significant difference in that part that you suddenly see that, yeah, the margins are 10%-15% digit differences, that we don't have that type of difference.
Okay, thank you.
Another question from the telephone conference, please.
The next question comes from Mr. Ben Maslen at Merrill Lynch. Please go ahead.
Good afternoon, everyone. Hi, Ronnie. Hi, Hans Ola. Two questions, please. Firstly, on working capital, could you talk a little bit about how much working capital is still tied up in the mining equipment cycle? Just what you'd expect maybe in the second half of the year as you deliver what's left of the order book. Would you expect a big inflow as we saw in 2009? Secondly, on M&A, just a bit of color maybe on how the pipeline is, market valuations look right now, and just divisionally, what are your priorities? Thank you.
You can start.
I can go first. On the working capital, absolutely. Depending on what the business will do and as going forward, when it comes to the order intake, it will have an impact on the working capital situation, specifically in MR. We will, exactly as you said, we will still continue to invoice at a higher level than what we receive orders currently. That, everything else equal, is reducing the inventory level. It will have a positive. That component isolated, at least, will have a positive impact on our working capital. In size or in amount, I cannot compare with 2009, the direction is absolutely, that's what will happen.
Okay, thanks.
Yeah. When it comes to M&A, Ben, we have been hunting constantly. We keep hunting, also in quarter two, we landed four acquisitions. Activities are going on. We map the market, and we keep trying to get the right nice add-ons in our business. Market valuations, what I've seen, and especially if I just take these four as a reference, I think they are normal valuations. I think when they are too expensive, I think you will not see them, and I will not talk about that. They will not land. I don't get the impression that what we are looking for, that price will be the deal breaking. Okay, you always have a couple here and there cases where people are very opportunistic, and when apples start to talk, the prices go up.
When we really start to become serious with these nice add-ons, I don't see price as an issue.
Okay. Thank you very much.
Thank you.
The next question comes from Mr. Lars Olsson at DNB. Please go ahead.
Thank you very much. Good afternoon, Ronnie and Hans Ola. In mining, sorry to return to the topic, but from the perspective of your mining OE order intake, can you give us a sense of where we are across your key commodity exposures from a year-over-year perspective? Are you starting to level out in your coal and perhaps your iron ore exposures? Would it be right to assume that gold will have a very challenging second half year ahead of it, again, from an order perspective? Thanks.
Yeah, I don't think there are many new gold equipment orders landing for the time being. That's an easy answer. I think when you look to our order intake from mining, I think I mentioned also when I think the same question came more or less also from Aaron, where he was hinting to that. I think it is already at a very low level. The majority of these orders are underground and then smaller surface drilling machines. That is where we see still some activity going on. When it comes to the bigger surface mining equipment, that is today very soft.
On your base metals and coal exposures, again, would it be fair to assume that we are starting to level off there on a year-over-year comparison perspective?
Coal today, coal in the world, I think you only see more or less two, how can I say, continents investing, and that is India, where we still see some orders coming in for coal. I think that's less for us, I think when it comes to China. I think all the rest is rather soft when it comes to coal for the time being, especially for our machines.
We are not in the underground.
We are not in underground.
Demand at all, as you probably know since before.
Coal is for us, a minority. I think if you take coal and in Australia, I think it's very weak for us.
If I could just be allowed one follow-up question on the capacity adjustment. You'll continue to make gradual capacity adjustment here recently in South Africa, back in November in Europe. To the earlier question, what's preventing you from making a more significant adjustment here, and how should we think about the cost under absorption in the second half and perhaps going into 2014?
I don't think we adjust as we go. I don't like this really revolutionary one-off adjustment because I don't think it's needed for our business. I think also it does not create the right atmosphere in the company, and we really adapt where we need to go. I think also I have to be respecting the people in the organization. If they come up with 22.1% EBIT giving a currency effect of more than one and a half percent, I think they do their job. Then I have to back off and I say, "Okay, you guys, you adapt," and I wait.
That's okay. Thanks a lot. Thanks, Ronnie.
Thank you.
Yep.
We have a question from Mr. Markus Almerud at Morgan Stanley. Please go ahead.
Hi. Markus Almerud here at Morgan Stanley. My first question is on China. Could you talk a little bit about what you're seeing underlying? You say you see sequential growth, but that was on the New Year. Could you just give a feeling of what we're seeing there? My second question is on aftermarket, the [outsourcing mining]. What kind of growth are you seeing there at the moment? I think you've said in press article that you expect somewhere low to mid-single digit growth in coming years. Is that something that you're still looking for? Thank you.
I made that statement. Maybe I should when it comes to grow. I still confirm that, I think giving the potential, giving our customer share what we have today in service. You can take mining or you can take Industrial Technique, or you take Compressor. I believe that our growth for aftermarket should be between this 5% and 10%. Giving, okay, when you have more tailwind, it goes a little bit easier than when you have headwind. That I think the self-help business development, further feet on the street, getting more connectivity, more products for service. I think that should be our ambition. I don't think that we are not on track for that part. When it comes to China, I think it's a bit also self-helped.
I think we do good work when it comes to the Industrial Technique, and compressor. I think we have invested a lot in compressors. Maybe lately we have not been talking so much about that, maybe I didn't talk so much about feet in the street and really entering deeper into the Asian market. We have been working doing that. We have really increased our footprint in China. We have really hired a lot of more people. We have also trained a lot of more people. That is yielding some results. A second one should know that, was it 2, almost 3 years ago we decided, 2 years ago, we more or less, we start to be up and running.
We had really done a big investment in Nanjing when it comes to mining, where we also had changed our product offer to the Asian market and particularly to the Chinese market. That is a couple of self-helped remedies which now come and give some results. I think we are beating a bit the trend. Okay, I'm talking only about the figures I see, I'm not a macroeconomist.
If you look at the compressors in particular, and you look at the underlying trends and underlying demand of what you're seeing down there, is it kind of a sequential improvement still if you would take the New Year's into account, what you're feeling, I know it's objective and just a feeling?
I think it is when it comes to compressors, when you take the big tickets, the big tickets is still difficult in China. Let's just take the larger air separation compressors. You hardly sell anything today in China because there is no investment going on in air separation. Big tickets for the oil and gas, for the Gas and Process division as we used to call, we have hardly that. Of course, there are other applications which come on. I think Fuel Gas Boosters, all that type of thing. That is pipeline compressors. This is another type of business which we see coming in and that's where we try to enter in. When it comes to the yellow canaries and the small to medium size compressors. I think that is okay, that level.
That is definitely not dropping off and gradually improving, coming from a better penetration, coming from a better product offer, whatever. It's a bit here and there, but I think I see gradually some improvements and, yeah.
Okay. Thank you very much.
The next question comes from Mr. Andre Kukhnin at Credit Suisse. Please go ahead.
Good afternoon. Thanks for taking my questions. Firstly, on Construction Technique, I'm thinking about it in the context of a business that's been invested in, and now maybe you could harvest that investment. Is that how we should think about it? Like what you've done in Compressor Technique, or is this still in a kind of full-on investment mode, and therefore we shouldn't expect as pronounced kind of margin gearing when volumes come back?
Yeah. I think, with the work we do in Construction Technique, we have done over the last two, three years, we have done a lot of capacity adjustments, movements. We have invested and still investing a lot in design and development, new product range. I showed it also one of the pictures in the slides. We have opened last year, I think is it 10 or 11, new, really, sales companies, dedicated Construction Technique. We have done that and of course, time of harvesting is coming close. That is also what we work hard to see happening. I was going to say hope it will happen, but I should not use the word hope in this. I think it's hard work, but should come. But I think we get more and more competitive with our products where we were weak. We extending our offer.
We penetrate deeper into the market. All these things is coming in, if the market, like the construction market in China, as an example, would have been really at the same level as 2010, 2011, you would see a totally different volume. But okay, it's not. We need to The same is on Europe. If we would seen a better Europe, we would have also seen a bit better result. Yeah, I would like to hang in a bit. That I also said to the guys. Let's keep investing on design and development, getting the products ready. One day it has to come because I believe fundamentally the world will need this type of equipment.
With that, I think we have to take the final question, and it goes to Stockholm here now. I know that there are more questions waiting on the telephone conference, but unfortunately, we have to defer them to conversations after the common call here. I hope that's fine. Please.
Håkan Filipson from Adrigo. I have a question on Compressor Technique. If you could discuss a little bit about your new innovative products, and, A, talk to us in the coming few years, how we should expect them to impact your sales, i.e., how much they will grow in % terms of CT sales, and also what risks you see or impact you may see already on your existing sales when you bring in the new ones.
Thank you for asking question about Compressor Technique. That's always nice. I think I launched the product, what was it now? four, five months ago or four months ago. I see good development. I think people are very enthusiastic, also salespeople. That's the first thing. That works. Of course, that we have always had in compressors, we do cannibalization. That's good thing. Really make sure you get the state-of-the-art, and we really make sure you replace it with a more efficient compressor. We try to, as a customer, to convince you, okay, let us convert your electricity bill into equipment sales and in services. That is the whole concept, what we do. That I think with this GA VSD+, it's even easier because it has more efficiency and electricity price go up.
That makes it easier to sell also on the small range. This product, what we had done, launched.
The one you mention now, yeah?
The GA VSD+, what we have done now is really, I think a small range of products. You cannot expect that that will create suddenly a growth of 10% in the whole Compressor Technique. It's really a good sign that again, these areas, we mastered the technology. We do a quantum leap. What makes it, again, the business more robust and we find again, an area, a slight area which is self-help for growth. Same as what is happening on the largest compressors, which we have been launching now, mainly in Asia, but also have a much more efficient product range coming on. Which makes it easier also for a salesman to sell. We are again, more competitive, and that gives you also the pricing power. That is the whole innovation machine, what is running in Compressor Technique.
It would be very difficult to be not enthusiastic about Compressor Technique, especially from my side. I see a lot of these things, what makes that a lot of self-help business development taking place.
Very significant impact immediately, but looking two, three, four years ahead.
I think one is, if you take the whole world of compressors, there is not a good argument why the world will not be maybe 80% variable speed. There is no good rationale. The only good rationale is that you need to convince the customer to see the benefit of that. It is more that we lead with our salespeople, the transformation, and that is, of course, is training for our salespeople, but also training for the market.
Thank you very much, not only for that question, but for all the questions and the participation, coming here today and listening in on the telephone conference or participating on the telephone conference. We wish you the best for whoever has now holiday yet to take. Hope to hear and see you back, if not before, in October for the third quarter results presentation. Thank you very much.