Very welcome to Atlas Copco's conference for releasing the 2nd quarter results of 2013. We are in sunny Stockholm, but we cannot enjoy the sun because we're in the Atlas Copco house in Naka for the time being. But 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 Roni Lehtinen, our CEO will give his comments in the beginning. And then from there on we take a Q and A session.
For that Q and A session not only because we are in a hurry to get into the sunshine, we will try to restrict it to only 2 brief questions per questionnaire. So please if you can respect that I would be very, very happy. That allows more people to ask their question and that I think is fair. So without further ado, I leave the word to you Roni from here.
Thank you. Thank you, Angelo. And good afternoon to all of you. As usually I will go the slides, try not to forget to refer to which slide I am so that you are still with us. If I go to slide number 2 and which is the summing up for the quarter.
A healthy demand for service, a good development on equipment and a softer mining. That's more or less I think the summary if we can say on quarter 2. Service continues to develop and that's good to see even one could think about on the mining side of stuff, but we see still potential there. Industrial and construction demand in Bruna Maruho. We see that happening.
And I think it's not a surprise a weaker mining equipment part. And maybe just for everybody to put on the mining equipment today, mining equipment is around equipment for mining is around 7%, 7%, 8% of the Apopscopco 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. But on top of that, we also had 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 €500,000,000 and Hansula will allude more on that when we look to the flow through bridge. And last but not least, a strong cash flow. If I go to slide number 3, where you see the figures and most of the figures you have seen if we take the operating profit €4,500,000,000 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 percent, of course, diluted by the currency effect, which was more than 1% and earnings per share at 2.58%. So more or less I think solid financial figures.
We take slide number 4 and look more to the geographical spread, maybe a couple of highlights before I go to the different continents. Positive Europe, very I can say dramatic drop in Australia, but once you know that we are comparing with the top, top quarter ever. So it really makes that tough comparison. And Africa, Middle East solid development. The rest I will take 1 by 1 when we go to different continents.
The Americas now on slide number 5. North America and 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 and which you'll hear me saying several times a softer mining equipment order intake and a healthy continuous development on service and parts for our business.
So North America, if you think more specific U. S. Still a good development. South America, of course, when you have a couple of big countries on the mining and then I think about Peru and Chile that is tougher, because there you see sequentially a decrease. On the other hand, when you take Brazil, you still see a reasonable good development.
And if you make a correction for the mining, you will see even an increase there. Europe, yes, like already said positive. Of course, again, we're comparing with a softer quarter last year and because I think you all remember Europe is already a while in the lower level. But on the industrial compressors and on the tools and mainly when the top tools in motor vehicle tools industry, we do very well. And 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 increased and 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. And then we have 2 other big countries there in Europe, U.
K. And Germany. They are continuously developed very well. Middle East, Africa, I think reasonable good level. Of course, when we go compare with last year, we see even plus 16% mainly coming from a good South Africa, but also some good development in Saudi.
Slide number 7, Asia. Yes, you can say minus 1, but we could say more or less flat. When you look to China, slight growth. What it says here on the slide sequential growth, I would say a slight sequential growth. So that's good to see where India on the contrary is, yes, still going down.
And as we also said here a softer demand in India. The other countries more or less continues as before. Australia, I already mentioned it minus 50, but maybe remember last year, I think we had a plus 40 or something. So we're really here. There's a it's of course a big swing as we're comparing with a very strong last quarter of last year quarter and mainly coming from the mining part.
If we look here on the perspective over the more years, see we had more or less 4, 5 quarters where we had softening. So if we repeat ourselves in from history then next quarter maybe need to be positive. But we'll see what happens on that part. The sales bridge, very condensed summarized you could say 5% currency, 4%, 5% price volume then that is more or less the picture where we are on all this receipt side. So currency is a big part.
Swedish kroner, strengthen Swedish kroner, we can say that compared to last year. But then 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. And as usual, we start with compressor technique and I'm on slide number 11 now. Industrial compressors remained at a good stable level.
I think also the launch which we did of our latest new compressors the GA PSD plus is very successful. And these type of new development, new products is what we need to really bend the trend and make sure also with that weather that we can deliver good results. Service and parts continue to be positive and the operating margin is at a solid 23% and you also then know with a bit of currency headwind. And again also here we continue to launch new products. Last time it was for the smaller entities as already just mentioned.
This time we had a real good launch of a couple of large compresses 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 from 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.
So it's good in these three areas, what the biggest markets are that we're also very successful. We see some sequential improvement in general industry that is a little bit tougher especially in China where it's a bit tougher there, but it is gradually coming back. And back at also said we see some growth in Europe and Asia. Margin 21.5 percent a little bit lower invoice invoicing, which makes it a bit affected. And of course, currency has majority of that business is produced in Swedish grown here in Sweden.
And 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, yes, weak demand. And as already mentioned, it's around now when we take it around 6%, 7% of our business is coming is mining related when it comes to the equipment. The other one is more civil works. So in that part is reasonably stable.
We still see a good development in parts and service and on the consumable level. So that's good. So that means there is production. There is production for copper. There is production for iron ore.
And we see that also when you look after. We look to the statistics. You see that 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 raised 22.1%.
So that is good. And we know that we are adapting the organization to lower volume. And 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 this. Construction Technique, also here we saw some organic growth of course only at 2%.
We would like to see a bit more, but it would be nice to get a little bit tailwind there. So Brazil, Western Europe, India, they are the markets where we see some improvement. Parts and service, so that remains good. And the operating margin is around 11.2%. Of course, again, negative effect by currency and volume.
But again also here and you see the picture here of our new favor fully branded Aposco, the Dynavac favors, which is really the ones we want to we are launching and also make sure we will get more share of the market. So then on the profits, I think you have seen all the figures more or less. And I think, Hamzula maybe you can elaborate more when it comes below operating profit, yes? I'll
come back to Roni soon. But 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 €500,000,000 in comparison with 2nd quarter negative currency effect in comparison with Q2 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 has 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.
But from an interest net point of view, I would say that about 1 100 and financial exchange differences related both to internal and external situation is not something that we predict will continue. So somewhere in the region of 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 Q1. 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. So there is a little bit
of
precaution on that one. But 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 we put in the that has not affected the profit at any way. But 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.
So we have appealed that verdict which is representing about SEK 200,000,000 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. If I then move on to the next slide, I don't know how I do it on this one, but there I found it, yes. And that's slide number 16. It's the usual way of looking at what has changed from last year to this quarter's profit. And you can immediately see that the currency is the dominating factor here.
And it really relates to what it gives the result that Ronny 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 1 percentage point negative on compressor technique similar on in the On Field Technique and about 1.5 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 like 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 buildup which didn't yield so much result last year. And now we see that coming through in a better way. So hence a very nice flow through on the profitability in 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 aftermarket in those numbers than last year as a percentage. Otherwise the flow through would have been more negative I would say in 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.
But this slide number 18, just want to point out that you remember that between December June, we have borrowed €5,000,000,000 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 in to 2014 if I use that word. Then of course between December June we also have €6,500,000,000 roughly in dividend payment as you know. If we go on into the cash flow commenting a little bit more on balance sheet items, You can see 2 one very dominating point in this bridge is that the net financial items and 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 €400,000,000 versus minus €800,000,000 and 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.
And sometimes we have these effects when we close a swap contract and we roll it off over into a new period. Taxes reflects a slightly lower profit level as we saw before. And then change in working capital. The main reason for building more working capital in the Q2 is that the revenue, the invoicing is much higher than in the Q1. So that explains why we tie up a little bit more receivables in that's the main thing.
Between inventory and trade payables, it's actually 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, but ends up at a very healthy €3,300,000,000 in cash flow for the quarter compared to €1,900,000,000 last year. So I think with that, I invite Roni back and just comment on the outlook before we start the Q and A session for is it not so much so much
to comment on?
No, much to say. I think everybody can read it. So I suggest that we go immediately to yeah the Q and A session.
Q and A session. We will have questions also from the telephone conference participators. Perhaps before we take the first two questions here, we take we ask the operator to give the instructions for the questions on the telephone Thank you very much. And I just remind everybody that let's try to keep it at the 1 or 2 questions maximum to allow more people to put questions. Then we start here first.
And Guillermo please?
Good afternoon, Guillermo from UBS. Two questions. First regarding your outlook statement, can you give us a little bit more granularity with regards to regions, divisions and aftermarket versus investment? And then the second question regards to mining equipment. And I'm wondering and I'm scratching my head trying to think of what happened over the last quarter.
A lot of your a lot of the subcontractors to the mining industry which sometimes actually buy your products to sell efficiency to the mining players have been told that during the second half this year are going to have lower volumes. But more importantly, they're also being told that they're going to have lower prices. And I cannot think of that conversation being different with you when it comes to the pricing of your equipment. And 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. So then I hope this is the last question I get on that part. To remind you, it's 7% of our business. And I think I hope to get question on the 93%.
Now I think first on the pricing, because that is and this is not a new story. This is of course now more highly 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. And we need to have short term money here and there. And they debate all this.
Now one thing is it's very easy to give different prices if you don't get any volume. So that is a part first one. I think when you don't buy and you get price reduction, so there is not much. But I think in this and that's another discussion what we also get with the same owners is about productivity. And you have heard me saying in the summary what I did also.
We keep investing in new equipment. We keep investing in research and development because that at the end will give real, 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. And that is where the story still go.
Of course, okay, it will be a bit more tougher because people fight for the same order that can happen. Then will it be softer? And then I'm heading to my outlook statement also. I don't see and 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 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 and a couple the volume there.
But the uncertainty on pricing is a bit, yes, make it more difficult to really let's go for it. So I think we will need to wait a couple of quarters. Hopefully, it's maybe 1, it's maybe 2, but at the end of the day something will land. What we also see is that the bigger players the Anglos, the Vale's, the BHP's 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 goes even up.
But what you see is that smaller players, smaller companies and that's also where our cancellations are coming from that they are tougher and because they have to see that the project is not coming and they cannot really hang in for a while and they have to be very careful. So 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 or maybe on the industrial part. Service, I think that continues to develop. So depending a bit where the mine is and then you have the construction with this maybe the different. So that made us when we were debating it becomes very yes here and there.
So but that is because to say, okay, it's sequentially flat or not.
Next another question here in Stockholm or we go straight? Yes. Yes. Andrey Adkoski 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?
Yes. I think and you have heard us at least from myself 4.5 years now preaching I think the result already today from this business area with headwind of currency and they have taken really cost reductions. We don't have the habit to announce this, but we take as they can come. So that is in that part. There is when it comes to the equipment side, there is really a lot of agility.
But 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. So I will keep the feet on the street and we keep where we need to invest we keep investing.
And second on design and development. Of course, we will revisit certain projects and see on that because it's always good. We should never miss a good crisis to do that. So that these are the things what really, yes, will hang in and I will not create certain agility. But the other parts are rather flexible and that either with in sourcing and reducing workforce, which unfortunately will take place more in the months to come.
That unfortunately I have to say. Yes, I think one could say when it comes to the mix, because you have consumables and aftermarket, that you can make the calculation yourself. You know that how that will work out.
Thank you.
So we turn to the telephone conference then for 2 questions.
The first question comes from Mr. Claus Bergelin at Nomura. Please go ahead.
Yes. Good afternoon, gentlemen. It's Klas Bergelin from Nomura. I have two questions, please. Firstly, on your service business, Ronny, in mining, so this is not a question on equipment.
We are getting some evidence of miners now considering more in sourcing of service contracts to do more work themselves. So 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. So 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 and 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 we listen to my guys they will definitely say that we take market shares. There is maybe a bit of self help part and maybe it's an understatement a bit of NFE a bit. They do work a good work. You remember that on the road construction part that we have done a lot of work and that is yielding some result not at the level where we would like it to have, but it's coming.
So on that part, I cannot be disappointed. Of course, we are not there where we want to be. So the trend is already there where we would like it to be, but not the level with it. When it comes to in sourcing and service, yes, I think these discussions are always coming when there is a crisis because you have the social partner and the mine and let's go for our own people and this part. But 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 machine is proprietary service, proprietary parts. So once you have really outsourced, it's not so easy to do the insourcing. You see that these discussions going in going on, but I think it's not the main activity what takes place for us take place for us in that. I think on the service side and mining, we still 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 from the other firm.
The next question comes from Mr. Aaron Ibbotson at Goldman Sachs. Please go ahead.
Hi, there. Good morning. Well, actually, it's after lunch now. So good afternoon. I have two questions, if I may.
The first one was just on Compressor Technik and you alluded to some payoffs from previous investments. I'm trying to understand how we should think about this going forward. If I look at the margin, sort of underlying margin improvements 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? And how much is driven by this payoff from your investments or lack of repeat maybe of investments?
That's my first question. And then my second one is actually just a clarification. So 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%. And 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.
Yes. I suggest when it comes to the details on these numbers that you give later a call to Matthias. He will then give you the right after the comma. But when I mentioned on the 7% that is meant on the orders received when we take this quarter. And you remember around that we always said 2 third is mining and 1 third is more civil works.
So that is more or less at
Yes. No, that it makes total sense. I got to that number. I just want to clarify it. Thank you.
Then when it comes to CT and when you remember last year around this quarter when we talked about CT and looked to the profitability and people were asking what is going, I think we had done a lot of investment in product and that part. And sometimes this cost hit in that quarter and we take as it comes we got. And so that is an area and Anzula I think you have already said in the flow through. It is some payback we get. And of course also we should not be afraid to say that we also have efficiency improvement in when it comes to service and in other areas.
And even we got the negative currency effect in that part. So I think it's good to work what they have done over the last 12 months in CTS and in CT, I should say, which yield this type of result where they are today with their EBIT level between 23%, 24%.
But there's no chance you can sort of give us any steer on what the aftermarketing compressor technique did? Are we talking low, mid to high single digits? Any type of indication on the year over year development there?
But they keep growing. I think they keep growing at more or less at the same level of contribution. Okay. So there is no dilution on profitability when we talk about the service business in Compressed Techniques.
Okay. Thank you.
We have a question from Mr. Andreas Willi at JPMorgan. Please go ahead.
Yes. 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 7,900,000,000 this quarter, what's the share of mining equipment in that? And how much backlog do you have?
And 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? And the second question on compressed searches. 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. So what have you seen in emerging markets? And is basically Europe and the U. S. Up enough to offset the emerging markets in Q3?
Thank you.
Yes. I will let the first question to answer by Hansula. 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. I didn't really look it was for me no change as such.
And I'm trying to look to the yellow canaries I obviously use as a good indicator. I didn't see a trend difference in that part. So for me, it I didn't see that. When it comes to the U. S.
There we still see a good development, but the growth is not at the same the sequential growth is not at the same level as it was 7, 8 months ago because okay you also get tougher comparisons. But there is still some growth to yes that we see.
Yes. On the question of I understood the question Andreas as the revenue number on mining equipment right?
Yes. Yes.
Yes. Not the order. And it's a little bit more than 40%. And consequently, it's lower than 40% when you take the orders received the equipment part.
So out of
the SEK 7,900,000,000 about 40% you're invoicing now is still mining equipment?
Yes. That's exactly what I said, yes.
So, yes. And in terms of the provisions taken for these measures you have mentioned earlier?
Yes. We don't disclose exactly. I mean that's what 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.
So it's constant work. It's continuous work. When we have big restructurings like we close a plant or we move a plant, yes, then we will give you an indication of how much it is. But it's taken. We see it as something we have to do and we do it continuously adjustment.
And 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. And if it's a clear one time cost then we will tell you how much it is.
But it is affecting somewhat the profit margin.
And on the 40% you said in mining and equipment, if aftermarket 60% and we have civil, mining equipment can't really be 40%. It would then include civil equipment as well, the 40%.
But if you say 60% for service, then we include consumables in that if that is what you mean?
Yes. Basically if 60% of the SEK 7,900,000,000 is consumables and service at least SEK 40,000,000,000 for equipment, which breaks down into civil equipment and mining equipment.
Yes, yes, yes. So it's
about 30% maybe or just below 30%, which is pure mining equipment still.
I talked about MR, sorry. You're right. You asked about mining equipment. We don't follow it to the But what you can say
is more or less, okay, this is now you can say more or less is onethree is civil and twothree is market.
In this type of the cycle. Yes.
Thank you very much.
Okay. So we move back here I think. So perhaps we had too many questions, but is there any more question in Stockholm here? We have too many people enjoying the sunshine, so we have more participants on the telephone line. I think look, yes, we have a follow-up here from Guillermo.
Go ahead since there were no one else raising their hand. Yes.
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 is up less than that? I aftermarket is 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. But then again, it varies a little bit between the different business areas. But it's not up double digits, no. We go to the conference call again.
Another question please.
We have a question from Mr. Fil.
Sorry. No. Okay. We yes, go ahead. Sorry, sorry.
We'll take the telephone conference and then we go back to Stockholm.
We have a question for Mr. Fid.
Now I'm confused here. I'm blinded by the light as Song said somewhere in the lyrics. But should I I take it back then. I give a second question in Stockholm first. Sorry for that.
We come back. No, they are. So when we look at Europe, Mr. Leighton, do you think we are getting close to the bottom here in Europe? You're talking about the difference between the north and the southern parts.
But 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? Are they just getting slightly more optimistic? It's a very difficult it's an easy question, but
a very difficult answer. And I have already I think mentioned that I think 2 months ago when I was in one of the conferences that I got sense that I think maybe Europe is bottling out. And when you look to our figures and I'm just trying to stick what I see, I must say yes, I think it is but there is still a big mix. We've also got to be political and have used it. Northern part of Brussels is doing well.
I must say it's Actually, you're all a
small area, northern part of Brussels. No, no. Sorry.
Is really doing well. I think when you take Spain, Italy and the other part is still tough, still tough. So if you take it maybe in total, you can say more or less it may be bottom now. But there's still a big difference between Spain, Italy and if
you take Germany, Pinalux or So if we summarize, so North America industrial demand is doing fine. Europe, we are bottoming out. China is coming back. So basically the world is doing fine. And we are step by step doing we'll increase from there.
Let's hope yes you are right. Okay.
Perhaps as a final comment on Europe, when you hear the countries Germany, U. K. And to a certain part other parts of the northern parts of Europe these are rather export strong countries. And 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.
But nevertheless, I mean that is just an add on comment on that. So now we go back to the telephone conference.
We have a question from Mr. Phil Wilson at Redburn. Please go ahead.
Yes. Good afternoon, everyone. It's Phil Wilson at Redburn. I have two questions please. I'm afraid they are both on mining.
But going back to your early comments Ronny, can you help us understand Ron, 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 to be a source of future negative mix pressure. That's the first question.
And the second question is for your mining sales outside of the West, so Australia, Chile, South Africa, etcetera, 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. But 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. So 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 that that's fixing it. But the majority is done with an adapted local currency and people at the scope of people are used to that.
When you see the drop of South African rand, of course, local prices will go up to adapt on that. When it comes to sales, I think the majority is of course for majors. That's for sure that we have that. And margins are mainly they are not a big significant difference. And margin is sometimes also depending on what type of machine it is.
It's a lot of adaptations. How is the competitive landscape at that time? But there is not a significant difference in that part that you certainly see that the margins are 10% to 15% digit differences that we don't have that type of difference.
Okay. Thank you.
Another question from the telephone conference please.
Next question comes from Mr. Ben Maslin at Merrill Lynch. Please go ahead.
Yeah. Good afternoon, everyone. Hi, Ronny. Hi, Hanzola. 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? And just what you'd expect maybe in the second half of the year as you deliver the what's left of the order book? Would you expect a big inflow as we saw in 2,009? And then secondly on M
and A, just a bit
of a color maybe on how the pipeline is market valuations look right now? And just divisionally what are your priorities? Thank you.
I
can go first. On the working capital, yes, absolutely we 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. And we will exactly as you said, we will still continue to invoice at a higher level than what we receive orders currently. And that everything else equal is reducing the inventory level.
So it will have a positive. That component isolated at least will have a positive impact on our working capital. So in size or in amount, I cannot compare with 2,009, but the direction is absolutely that's what will happen.
Okay. Thanks.
Yes. When it comes to M and A Ben, we have been hunting constantly and we keep hunting. And now so in quarter 2, we landed 4 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, I don't what I've seen and especially if I just take this 4 as a reference, I think they are, yes, normal, normal valuation. I think when they are too expensive, I think we you will not see them and I will talk about that. They will not land. And it's I don't cut the impression that what we are looking for that price will be the deal breaking. You always have a couple here and there cases where people are very opportunistic and when Apple start to talk that prices go up.
But 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 BNP. Please go ahead.
Yeah. Thank you very much. Good afternoon, Ronny and Hans Ola. In mining and 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? And it wouldn't be the right to assume that gold will have a very challenging second year sorry, yes, second half year ahead of it from again from an order perspective? Thanks.
Yes. I don't think there are many new gold equipment orders lending for the time being. So that's an easy answer. And then I think when you look to our order intake from mining and I think I mentioned also when I think the same question came more or less also from Aron where he was hinting to that. I think it is already at a very low level.
So when and the majority of these orders are underground and then smaller surface drilling machines. So that is where we see still some activity going on. When it comes to the bigger surface mining equipment that is today very, very soft.
And on your base metals and coal exposures, again, would you first assume that we are starting to level off there on a year over year comparison perspective?
But coal today, coal in the world, I think you only see more or less 2, how can I say, components investing and that is India where we still see some orders coming in for coal? And 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.
And we are not in the underground.
And we are not in underground.
Demand at all as you probably know since before.
So coal is for us a minority. And I think if you take coal and in Australia, I think it's very weak for us.
If I could just get out one follow-up question on the capacity adjustments. I mean, you'll continue to make gradual capacity adjustment here recently in South Africa back in November in April. To the earlier question, I mean, 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 20 14?
But I don't think we adjust as we go. And I don't like this really revolutionary one off adjustment because I don't think it's needed for our business. I think also does not create the right atmosphere in the company and we really adapt where we need to go. And I think also I have to be respecting the people in the organization. If they come up with 22.1 percent EBIT giving a currency effect of more than 1.5%, I think they do their job.
And then I have to back off. And I say, okay, you guys should adapt and I wait.
That's all. Thanks, Ryan.
Thank you.
We have
a question from Mr. Markus Almerud at Morgan Stanley. Please go ahead.
Hi, Markus Almerud here, Morgan Stanley. My first question is on China. Could you talk a little bit about what you're seeing underlying? So you say you see sequential growth, but there was a new year. So could you just give a feeling of what we're seeing there?
And my second question is on aftermarket, the Olsen Mining. Is it what kind of growth are you seeing there at the moment? I think you've said in press articles that you expect somewhere low to mid single digit growth in coming years. Is that something that you're still looking for? Thank you.
Yes. And I made that statement maybe I should when it comes to grow. No, I mean, I still confirm that I think giving the potential, giving our customer share what we have today in service and 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% 10% giving okay when you have more tailwind it goes a little bit easier than when you have headwind. But that I think the self helped business development further feet on the street getting more connectivity, more products for service I think that should be our ambition.
And I don't think that we are not yes, we are 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 pressure. Maybe lately we have not been talking so much about that and maybe I didn't talk so much about feed industry and really entering deeper into the Asian market.
But 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. So and that is yielding some results.
Then a second one, one should know that was it 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. So that also is giving us more competitiveness in this market. And that is yes a couple of self help remedies which now come and give some results. So I think we are beating a bit the got the trend, which but okay, I'm talking only about the figures I see.
So I'm not a macroeconomist.
But if you look at the compresses in particular and you look at underlying demand and what you're seeing down there, is it it kind of a sequential improvement still if you would take the news into account? What's your feeling? I know it's subjective and just a feeling, but still just
I think it is when it comes to compresses when you take the big takers, the big takers is still difficult in China. We just take the larger air separation compresses. You hardly sell anything today in China because there is no investment going on in air separation. So big ticket for the oil and gas for the gas division as we used to go. 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 compresses. 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 compresses, I think that is okay that level. So 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 yes.
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?
Yes. I think with the work we're doing in Construction Technique, we have done over the last 2, 3 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 that also one of the pictures in the slides. We have opened last year, I think is it 10 or 11 new real estate companies dedicated construction techniques.
So we have done that. And of course time of harvesting is coming close and 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, what should it come. But I think we get more and more competitive with our products where we were weak.
We're extending our offer. We penetrate deeper into the market. All these things is coming. And 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 it a totally different bit better result. But yes, I would like to hang a bit better result.
But yes, I would like to hang in a bit and that's 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 take 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. So please.
Hakan Eliksson from Adrigo. I have a question on Compressor Technique. If you could discuss a little bit about your new innovative products and they 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 percentage 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?
Yes.
So thank you for asking question about compressor technique. So that's always nice. No, but I think we launched the product what was it now 4, 5 months ago or 4 months ago. I see good development. I think people are very enthusiastic also salespeople that's the first thing.
So that works. Of course and that we have always had in compresses we do cannibalization And that's good thing. Really make sure you get state of the art and we really make sure you replace it with a more efficient compressor. So we try to as a customer to convince you, okay, let's convert your electricity bill into equipment sales and in service. That is the whole concept what we do.
And that I think with this GA VSD Plus it's even easier because it has more efficiency and electricity price go up. So that makes it easier to sell also on the small rig. This product what we had done launched
The one you mentioned now yes or
No, no. The GA DSD Plus what we have done now is really I think a small range of products. So you cannot expect that that will create suddenly a growth of 10% in the whole compressor technique now where we need to be. But 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 is 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 base, which makes it easier also to for salesmen to sell. And we are again more competitive and that gives you also the pricing power. And that is the whole innovation machine what is running in compressor technique. So I'm I will be very difficult to be not enthusiastic about compressor and especially from my side.
I see a lot of these things, but makes that okay a lot of self help business development taking place.
Very significant impact immediately, but looking 2, 3, 4 years ahead.
Yes. 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 yes, the benefit of that. So it's more that we lead with our sales people the transformation.
And that is, of course, is training, training from 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 teleconference. We wish you the best for whoever has now holiday yet to take and hope to hear and see you back if not before in October for the Q3 results presentation. So thank you very much.