Ladies and gentlemen, welcome to the Atlas Copco Q1 Report 2013. Today, I am pleased to present CEO Ronnie Leten and CFO Hans-Ola Meyer. For the first part of this call, all participants will be in listen-only mode, afterwards there will be a question and answer session. Speakers, please begin.
Thank you, very welcome to all of you participating in this telephone conference call. My name is Hans-Ola Meyer. I am the CFO of the group. With me here is also Ronnie Leten, our CEO, whom I will hand over to in a few seconds. We will do the usual format, that Ronnie makes his own comments on the quarterly results, we take the Q&A session. Today, we have to be rather strict on the time, unfortunately, because we have the annual general meeting after this call. Ronnie will have to leave sharp at 1:30 P.M. latest, 2:30 P.M. latest Stockholm time. Thank you for that, I will hand over the word to you, Ronnie.
Okay. Thank you, Hans-Ola, good afternoon and good morning to all of you. As Hans-Ola said, I will go through the presentation I will try to refer to the numbers so that you know at which slide I will be. If I summarize the start, I am going immediately to slide number two. We can say that it was a solid profitability level for the group coming from, I will use the word again, solid service business and a weaker equipment. One other point what I would like to remember you all is when you look to the figures and go to compare the quarter, you would see that all the three figures almost are negatives. This comes that we are comparing with the best quarter we ever had, last year.
At that time, we were still in the, can say maybe the mining boom, the first quarter and the second quarter of 2012. Now, of course, we are we better focus on this quarter. What I see now is that service business continues to develop very well. We have solid development. On equipment, we saw somewhat lower sequential development, but reasonable stable industrial equipment. I will elaborate a bit later on that. I think it is not a surprise that we also saw a slight negative development on the mining equipment when we look sequential. I already mentioned solid profitability level, given the output level we have.
Of course, in money terms, it is a bit lower, also a bit lower than I had expected myself because I had also expected a little bit more revenue, so that we will have a bit more money at the bottom of our P&L. We landed also during the quarter, a couple of nice acquisitions. Also here we have strengthened our future, also our product portfolio. That is good to see. This quarter, we also celebrate Atlas Copco 140 years. If I go now to slide number three, where you have the figures, I already mentioned it. Last year it was on orders received. It was a record quarter. This time we landed at 21, at a solid 21. On the revenue side, like I already mentioned, I would have liked to see a little bit more on that, so giving it a bit more money.
Operating margin, I elaborated a bit. I think it is solid, and I think on the cash flow, we come back later on that, and then Hans-Ola will take that part. Let me go then immediately to the geographical slides, which are slide number five. Go immediately to the Americas. What we see is, of course, mainly if I am talking now, it is mainly U.S. here. We see a healthy demand for manufacturing and construction industry in the U.S. Of course, we see a lower development, if we do quarter-over-quarter, on the mining equipment. Sequentially, it is more or less on the same level. Of course, that makes also the minus eight of the quarter. Service continued to be solid, good development, and that is good to see. There is still some good development, if we take exception for the mining in North America.
South America, more or less the same picture. Of course, when Peru and Chile, which are really mining countries, are down, you really get, also here, a negative figure, because also last year, Chile was extremely high. What we see is a reasonable, good, solid Brazil. If we, again, if we take away mining, we see Brazil developing good. Coming to Europe. Here, it may be a surprise maybe for some of you, but we see sequentially a positive sign. Of course, we got a couple of good solid orders, bigger orders, and that, of course, they are also part of our company, so that has helped the situation. On the other hand, it is still tough in Europe, and then I am really hinting to Spain, Italy, and France. It is still tough business there. All in all, we had a good compressor business in Europe.
I think what I mentioned also here, the strongest growth, what we saw in the quarter was coming from Germany and Turkey. In Germany, we landed a couple of larger orders, which I already mentioned. Africa, Middle East, again, a tough comparison as we had last year, record order income in South Africa for mining, and in the Middle East, we landed also a large order for compressors, so the comparison is again tough. If we look sequentially, it is at a good solid level. Also in South Africa as well as in the Middle East. I am going now to slide number seven, and I am talking about Asia. Slightly a bit better, the order intake. I am a bit more positive on China and India as I was a couple months ago. Let us see when we are a quarter older, what that will mean.
Today, at least, I see some positive signs there. We keep being strong in Southeast Asia, that's also good to see all this part and investment going on there. I've already mentioned China and India is sequentially improving. Australia, a -44%. Again, and this is already the third time I say it, we're comparing with a real record order intake in Q1 last year. If we take that away, I think it's a solid order intake in Australia. Slide number eight. You see here the minus on organic. I don't think I should say more on that. I'm going immediately to the sales bridge, slide number nine. Currency, -5%. Of course, a strong krona. Of course, the Brazilian, Russian, India, and maybe South African currencies have been weakening. That all played in the same direction, giving a -5% on currency.
Price, still solid. I'm sure some of you would have been surprised, I think also our continuous drive and strive for innovation, really creating value with our solutions, with our services. Of course, on the other hand, good discipline internally brings that we are still able to have a positive price development. Volume, you can read it yourself, -13%. Of course, on revenue, I already mentioned that the -6%. It is what it is, although I would have liked to see a smaller figure there. I'm going immediately to the different business areas, I'm now on slide number 11, talking about Compressor Technique. A stable order income for industrial compressors. That's good to see. It's more or less all over that we see definitely a good development there.
Of course, it's very good seeing that the service machine, which we build up there, keeps continue to grow. I think the guys are doing a very good job there and really also creating value for our customers. We landed a good operating margin. Just missed the 23%, I think the 22.9% giving the level of output is good, and I think it's supported by a couple of efficiency improvements of projects we started last year and yielding good results. I'm really proud also that we launched the breakthrough energy efficient compressors where people in Atlas Copco have been working since many, many years on it, at the end, we came really with that breakthrough, which gives another step up on the VSD, all known by you. I think, that will be, I'm sure a very success into the market.
It also proves again, the power of our innovation. In Compressor, we also landed two smaller acquisitions in the quarter. I'm going now to slide number 12. Industrial Technique. A bit weaker. General industry up, MVI a bit down, okay. Remember last year MVI was really booming, on the other hand, the positive thing is that general industry is a bit up. We see positive North America, it's a bit in line for what we also see in the compressor world, a bit negative in Europe. Operating margin 22.3%, I make it lower than it should be. A bit affected by lower output, I think at a good, solid level. Also here, we landed two nice strategic acquisitions for us. One, the Hightorque, the other part was the Saltus mechanical wrenches .
So that will be a nice expanding of the offer in the Industrial Technique business area. Now I am going to slide number 13, Mining and Rock Excavation. A lot of things already been written and said about the mining. I assume that it is not surprising you know also when I said, okay, the cautiousness is affecting our demand. We all know what has happened the last year. I think 16 CEOs been replaced. I am sure also that boards get more prudent when it comes to investments. I think we will see a bit of a wait and see period here on the mining side when it comes to equipment. On the other hand, we see some improvement on the civil engineering, the hydropower, and the tunneling, so that is good, and that is also a business which belong to us.
With good development in service and parts, and also on the consumable parts, I saw recently also there a good development. I think when it comes to Mining and Rock Excavation, I am pleased to see what the quarter, although you can see if the equipment is going down, that we need to look into the organization and make sure we take the right measures. Operating margin, solid 23.4%, so that is good. The guys are really doing what they need to do. Then we landed our acquisition in China for rock drilling tools. Construction Technique, page 14. A little bit organic decrease, but a good development in North America and Asia, so that is good to see. But it is very tough in Europe when you are working in this business area.
The margin is around just below 10%, so more or less where we had expected it to be. When you see the picture, we also have in bauma, we also have launched a fully new visual identity for our road construction equipment. Now it looks really like the Atlas Copco colors. The Dynapac and the Atlas Copco are really going joint forces to the market. Let us go immediately to slide number 15, before I hand it over to Hans Ola. I have said most of it. The revenue, -9%, a bit low, but okay. The operating margin, 20.5%, more or less in line with last year. In absolute terms, the operating profit is negative affected with some currency effect. I think it is around SEK 220 million. The rest, I think I will let it over to Hans Ola.
Thank you, Ronnie. Just taking a few more comments on the same slide. You see in the slide number 15 that the financial net was relatively unchanged compared to last year. Within the financial net, the biggest portion is always the interest net. It came in actually slightly lower than, I think, what we had given you the reason to believe. Some part is related to that indeed, the EUR has weakened compared to previous year, and we pay quite a lot of interest in EUR. Then there was also a little bit of a lower, perhaps, on the subsidiary part out in the world where the interest rates last year were a little bit higher, and that gave us the reason to expect also that 2013 will be higher.
If I look forward, I would still say that somewhere in the region of SEK 6,700 million is probably to expect for the year. As you well know, we took the advantage in Q1 of borrowing a 10-year loan in anticipation of the amortization of other leaseholds next year. That is, of course, also going to be a little bit of a negative effect in the next couple of quarters on the [financial math]. If you look at, on the other hand, on tax, there you see that the tax rate was higher this year than last year, same period, 26% versus 24%, roughly. The reason here is partly mix, which is always a factor that is difficult to predict.
We also have some tax disputes around the world related to transfer pricing, where, of course, there are countries that argue that the distribution of profits between one country that delivers goods and another one that receives and sells is not exactly what they want, but that is discussions that are difficult to say what is right and wrong. We have had a couple of surprises on that, and we believe those two reasons have compensated for the Swedish tax reduction that we talked about in the last quarter. All in all here, I believe that we will be in this range for the foreseeable future, 26%-27% effective tax rate. In the longer future, we need to come back and see where is the situation, there is a trend in many countries in Europe for lowering of the corporate tax rate.
For the time being, in the near future, that is the guidance I can see. If I go to the next slide, number 16. Sorry. We look at the profit bridge, as we call it, I think there is a so-called flow-through of 24% when we take away currency effects, when we take away one-time items and acquisitions, and other issues or other factors that oscillates between the quarter. Rather normal given the volume development, and Ronnie has alluded to that already, the revenue level in Q1. If we look at the next slide, where the business areas are listed. I just offer a few comments. I do not think that one should make long-term ranging assumptions based on one quarter. On Compressor Technique, of course, they report a volume price mix improvement on profit in spite of a revenue drop.
I think that is what we also comment in the report about cost reductions and efficiency improvement that compensates fully for the lower revenue. When it comes to Industrial Technique, perhaps the number stands out a little bit. I do not think that one should overemphasize that 22% negative flow-through. It is a bit soft on the revenue, as we have discussed before, at the same time, the business area is continuing to make significant investments in the service and the sales organization in many parts of the world, notably in Asia, that is probably the reason. On the other two, I think it is more what would be expected if you know the revenue development as you know from the sales bridge that Ronnie commented. If I move to page 18, balance sheet is not very dramatic to report anything.
I just point that what I talked about before, that we took up and took advantage of very favorable borrowing conditions. You can see that we have extra much cash for the time being, and also that the interest-bearing liabilities have increased in the quarter. Otherwise, it is a relatively stable development for the last quarter, at least. Finally, on the cash flow, I just want to highlight one thing because the numbers are rather clear. The main change, compared to last year, is that we are almost neutral when it comes to working capital in this quarter, whereas we had a negative SEK 2 billion effect last year when volumes were extremely strong, as we have said many times already. However, in the net financial items, there is a big swing, and in the report, it was commented, but without a quantity.
The swing is almost explaining the whole difference there. It is SEK 900 million between first quarter 2012 and first quarter 2013, relating to cross-currency swap, cross-derivative transactions that are there to hedge our internal capital situation in different currencies. In this case, it relates to USD versus EUR, and it gave a very positive cash flow effect last year and a similar large negative cash flow in this quarter. Over time, these hedges are rolled every six months, and they do give, at those rollover moments, a cash flow effect. However, for the purpose of the hedges, the whole period, which is several years, will be neutral in terms of this effect. In the separate quarter, the impact is either positive or negative. I will comment every time that that has a significant impact, which was the case this time.
If you compare the SEK 1.6 billion operating cash flow with SEK 1.4 billion, in reality, I would say that it is a much better improvement than what meets the eye. With that, I hand it back to Ronnie for comments on the outlook.
Thank you, Hans Ola. Yeah. You have seen that we changed our outlook, and maybe also to preempt one of the questions why we have done that. I have a better positive view on U.S. and China than I had when we did the outlook of the first quarter on the 31st of January. With that positive view on U.S. and China, but a positiver view on U.S. and China, still remained tough in Europe, it means that we changed the outlook to expect it to remain on current level. By this, I hand over to.
Yeah, the operator. I think we are ready for the Q&A session. If you repeat the procedures, perhaps, and then we go on from there.
If you have a question for the speakers, please press zero one on your telephone keypad. The first question comes from Mr. James Moore at Redburn. Please go ahead.
Yeah, good afternoon, everybody. Hi, Ronnie. Hi, Hans Ola, Mattias. I have got some questions on the mining business. I wonder if you could say what the current lead times for the key product categories are and how that is changed. Secondly, I wondered if you could help. You say in the annual that around 75% of the product cost is purchased in the mining OE business. Could you give us a feel for how much is purchased in the aftermarket and consumable side, where I assume you add more value?
That last one is a difficult one just to know, James, I will try. On the lead time and the change, you see, and I hinted a couple times during the call here that I was not so pleased with our output. On the lead time, when it comes to the factory output, we still have a significant orders on hand situation, and we have not eaten really in our order book, due to the fact that, okay, the output was not really coming out as we expected. Like I expected. When it comes to the service, I don't know the figure, I don't have it by heart, but I will try to describe a bit so that you'll see how we work.
If I take on the consumable side, you can see that there is a lot of added value because you do all the hardening, the machining, all the manipulation is done in-house. That is a vertical integration. That's maybe one of the most vertical integrated organizations we have in Atlas Copco that's on the consumable side. When it comes to service, I think you should make a split between the part and the service, where the service it is people, and that, of course, that's internal. Then you have on the spare parts, okay, we buy them, almost all of them, except when it comes to our core elements, our rock tools, which we do sell as replacement, or drills. That is what we do internally. It is, I think, a bit different, but still you get a good flow-through in that area.
That's very helpful. Can I just follow up and I wonder if you can help us with a sense as to how your utilization is in the consumables, the rock drill side of the business, and whether it's changed much over time and whether you expect it to have an impact in the current environment?
I think, again, it's a good question. You remember that with the single largest investment, two or three years ago, we started to do that, and before even we had another investment. We really increased our capacity on the consumable side. For the reason that we still see some growth potential in that area, I think we believe that we can take more out of the market also by launching new products. From that point of view, utilization is definitely not gone down, although because we had the possibility to do some insourcing also here, as we worked together with external parties. From that point of view, it's more or less the same over the last four or five months.
Of course, I should make a bit of an exception when you talk about the last quarter last year, when we had a bit the de-stocking taking place. What meant that the consumables, and I think we also reported that when we reported quarter four, that the consumables was a bit down, where we now say that the consumables is more or less at the same level. I see a bit positive trend coming back to that level.
Very helpful. Thanks.
On the utilization thing, I'm not so worried. You see, I don't think that is the major issue. Maybe to just elaborate on that, James, I will get the question anyhow, so I will answer to you. When it comes to the mining part, if you take our Mining and Rock Excavation part, I think when it comes to equipment, we can say equipment, if I do a calculation, it may be around maybe at 25% of the total revenue there when it comes to real mining.
Rest is service, it's consumables, and it's civil engineering. With people, when you really look and you start thinking about, okay, what is going on on the gold? What is going on in the copper? What is going in the iron ore? Of course, I would like to see a positive big orders coming in, because that will bring us back to Q1 2012, but it is not so much a real effect for us in under that talk. That makes it also that we are able to come to this profit level 23%, 24%.
Thank you very much, Ronnie. Thanks.
We have a question from Mr. Aron Ebbidson at Goldman Sachs. Please go ahead.
Aron, you're on.
Yes. Hi there. Good afternoon. I've got three questions, if I may. First of all, just a very simple question, I guess, on the FX, which your effect coming quite a bit lower than I had anticipated. Just wondering what the reasons for the sort of basically no transaction impact as far as I can tell. Is that something we should expect to come into the second quarter with reinforced vigor? Is it driven by some hedging, or is there anything else going on there? That's firstly. Secondly, if I could just ask a little bit big picture, I guess, on sort of the operating leverage on the downside. Obviously very impressive operating leverage in the first quarter here, when I got to 22%, I think Hans Ola got to something close to that.
Is that something you expect to be able to, for the group, roughly keep, if we continue to see sort of 5%, 10% volume declines in the second and third quarter? Finally, just on the favorite topic of your 25% of revenues in Mining and Rock Excavation, which is the mining equipment. Is it fair to assume that, reading between the lines, that it was down some 15%, 20% in the first quarter? And I was just hoping if you could give us some idea of where profitability on that sort of sliver of your earnings stream came in, if it was still sort of in the teens, double digits, or if the operating leverage took you down to single-digit profitability in the mining equipment specifically. Thank you.
I will start maybe first with the last one, because that makes it easier, too, and then I give the word to Hans Ola about the transaction effect. I think when it comes to the profitability level of equipment, I think this is more or less at the same level as we have with other equipment. There is not a big difference. Now, when you talk about that it goes down 10, 15%, I was looking around the room here. I think I've not seen that. Maybe you look, of course, if you compare quarter-to-quarter, Aron, then of course, that you get that, because you know that in Chile we got a big order, in South Africa, big order. We got a big order in Australia. There we get definitely quarter-to-quarter, last year, quarter, last year.
Of course, we have more than a 15% drop on that one. I think if you look sequentially, I think it's slightly lower.
Just to clarify, I was looking at the revenue line, actually, just for the equipment side, where you have 8% for the Mining and Rock Excavation.
Yeah. That could be, yeah. I don't have that here in front of me because I was looking on the other sheet.
You're in the right neighborhood.
Yeah.
That's about to say.
You know, on that part, you know we have been preaching since many years about our agile, resilient part, and we have the possibility to absorb these drops, so to say. Of course, when it really drops in over 50%, we talk another one. These drops, we were able to absorb.
Okay. Thank you.
You asked about FX. The reason why you might have expected more of a negative is primarily that the EUR to the USD in terms of a transaction exposure is rather important. That has been not at all the negative impact on Compressor Technique as for the more Swedish-based activities. The translation is there for everybody to suffer, but from a transaction point of view, it's different. That is mainly the reason why it was kept neutral on the margin effect.
Your second question when it comes to the big picture and the downside and the leverage on that. Of course, what I'm working with is first to make sure that we don't produce for stock, that our inventory stays under control. You have seen it has gone slightly up, but that is mainly, it's in transit, and also you know that on the construction side, it is in Q2. That is normally the period when we should get the invoicing. They're producing already now for getting it all out, and these orders are on their way out. That's the reason why inventory is a bit higher, but as we already mentioned many times, it should go down over time, for the whole group.
If we would see a drop from top-line revenue, in profitability-wise, I'm not so sure that, of course, it will always have great under absorption on the equipment side. On the other hand, you also know that we have a positive mix which come in play then, when it comes to our service part or our aftermarket part. Of course, every drop on equipment will have a negative effect, but it will not be, say, a 5% or 10% will not be a dramatic profitability drop.
That is what Hans Ola and I hear simulating several times when it comes to agility and resilience, how does it play? For the time being, we still are strong and believing in that it can play.
Okay.
Thank you.
Perfect. Thank you very much.
The next question comes from Mr. Ben Mason of Bank of America. Please go ahead.
Thank you. Afternoon, Ronnie. Afternoon, Hans Ola . Three questions, please. Firstly, Ronnie, on the group outlook, where you say demand will stay at the current level. You've given us some kind of directional thoughts in terms by geography. Can you give us a sense of what you expect sequentially for the different divisions, if possible? Secondly, on Mining and Rock Excavation, can you just give us a sense of what % of your orders received, which is obviously a much lower figure, is now mining equipment, so we get a sense of how much that has fallen. Finally, you mentioned that deliveries were below expectations. Just a bit more color on why that was, and is there any impact from the timing of Easter, not getting products out of the door that will kind of reverse and make Q2 stronger in compensation?
Thank you.
I will start to answer the last one first. I don't want to blame the weather and the working days, because I really, I don't have a real good one single answer on that. There's a little bit here and a little bit there. It is in more or less in all business areas. You can see that when you look to that. I'm sure also when you compare your own expectations.
I think it's maybe a little bit that the market is really not pulling. People are a little bit, more careful to take it. All these small things. You easily come up, a couple working days less, a bit weather here. Then people are not pushing. At the end of the day, you get it a bit lower on that one. I don't have a real good answer, and that's also what annoys me in this. I think, the orders are still there. It's what it is not, and that is good. I should have maybe mentioned it before. It's not that we see a lot of cancellations or whatever.
I think we don't see that. Because one could think, yeah, the mining guys are really dropping out, whatever, but that we don't see. That I think is maybe a positive sign on this part. The orders are still there. What gets in must get out. At the end, we should see it. When it comes to, when you asked the outlook, where I giving a little bit of geographical outlook, if I translated a bit in, say, industrial segments, I think on the mining equipment, I think I still believe it will slightly lower. I think, that's what I believe. On the Industrial Technique, I would see slightly up. On Construction Technique, we'll see a bit how the play will be in Europe. Europe is tough on the construction.
We see reasonable positive signs in China, but we are not so big, so that's then, it does not play so much. We see good development on the U.S. side. From that side, I must say equal to a little bit positive. On the mining side, and on the bigger tickets, because on the other hand, what we can see is the yellow canaries are, in some regions coming up, are really positive, but we're missing a little bit the bigger orders.
Yeah.
That is what we miss. Your second question, is on the mining side. It's around 25%-30%.
Of orders?
Yeah.
Yeah. Of total. Yeah, of total. Total equipment.
Yeah. Got it. Thanks very much. Thank you.
Yeah. Construction, yeah. The total.
The next question comes from Mr. Andreas Willi at JP Morgan. Please go ahead.
Yeah, good afternoon. I have a follow-up question first, on Mining. To complete the picture here, the 25%-30% of the Mining division's orders, which are mining equipment, how much were they down year-on-year? If you look into the commodities, did you already see an effect there on copper and gold, or would you expect that still to come now that these commodities have also come off a bit? The second question is on your balance sheet. Maybe you could just say whether this is something in terms of special dividend, which is for you an annual review or whether there's also an opportunity to do something during the year, if your plans change. The third one, just on your investments.
To what degree are you willing to cut back R&D feet on the ground in terms of improving margins or stabilizing margins, as the top line is weaker? Thank you.
Yeah, I will start, as a common practice to answer the last one first. I think, I'm not thinking about really reducing, on the contrary, the investment in R&D. I think we should keep going on because that is the future of Atlas Copco. That's the strength. We should keep going. We should do it only quicker. We should spend definitely what we need to spend. The same is on presence. We are keeping increasing our presence, of course, in grow areas. Where we are adapting our presence is in areas where we see difficulties. If you think about Italy, Spain, France, we are debating the presence there.
When you think about Africa, when you think about China, when you think about the U.S., I think we keep going on investing in presence because I think if you come out on a profitability level around close to 21%, I think it will be corporate obstruction not to invest in R&D and in presence. I think I'm not doing my job. When it comes to the balance sheet, I have not heard any board member to ask any questions about that. I think we will bring that up at the end of the year, beginning of the year. That is normally the period where we discuss. I personally just don't see any reason to do it now. Okay, with these questions, maybe you have triggered some of the board members.
Who knows what will come. It's not on the agenda for the time being. Your first question, year-on-year, it has dropped enormous. If I take equipment that 30%, 50%, let's say, I'm listening here to some people who have just made a quick calculation. If you do quarter-on-quarter, year-on-year, it really has come down.
It's of course important, and you know that, Andreas, of course. Ronnie has started the conversation, we are comparing with something that is not the normalized number. This particular looks put almost out of place, comparing with any other quarter, it's more of a downturn, but it's not a catastrophe.
If you see what has happened in the whole mining segment, I think at the end of 2011 and the beginning of 2012, I think it was really an investment CapEx boom for all companies. That's over. I think the new level more or less came in June, July. If you look to our figures, of course you don't have the monthly figures, but if you take the quarterly figures, that's more or less where we have been cruising. You know that we are growing a bit more in service. Of course in consumable it was a bit lower, but now it's more or less at the same level. The level is more or less the same. You know that equipment is still going down slightly, somewhat.
I think what we will see happening, okay, now I'm taking the crystal ball, maybe I should not do that, I believe when it comes to the mining, that for the time being, knowing that so many CEOs have been replaced, boards are very reluctant to take extra risk. There is high volatility. I don't think we will see these big projects. I think we will see now small incremental investments coming on. That's the new level, like what we will have. I think I see iron ore demand is still there. We see that also in the consumables. Copper, we also know that the grades are lower and lower, the world will need copper, we need to do automatization. You need to do further mechanization on that part. Gold is the question. We will see.
I don't know either what will happen on that area.
Thank you very much.
The next question comes from Mr. Martin Prozesky at Bernstein. Please go ahead.
Good afternoon, everyone. Martin from Bernstein. Just another question on mining, please. On the service business, can you give us a sense for what is the current attachment rate or penetration rate within the OEM equipment sales? I think previously you've mentioned that one of the things holding back your service growth in mining has been service engineers. Can you give us a sense for any opportunities you see over the next few quarters to accelerate the growth in service? First question. Second question, totally different topic, on construction. Longer term, this business, compared to the rest of the group, remains low margin, low return. I think it's about 200 basis points dilutive to the group. You've done a lot to try and improve it. Can you give us a sense for how much further margin upside you can see in construction?
If not, strategically, when will you look at disposing this unit, if that's on the agenda at all?
I think, again, I will start with the last one. This is easier. I think there is no plan to dispose. I think we have done a lot of fundamental good work. Now we have a dedicated business area for almost one and a half years. We have done a lot of the construction in that area. When we will get a little bit tailwind, I think you will see a good return. Let's see what is going to happen. You also know that if you, and you know very well, if you look to the construction statistics from China, you take also Brazil, and you take Europe, you've seen how down they were. I think now we see Brazil coming back a bit. We see also China coming back. Europe, not yet.
I'm rather convinced that the time of harvesting, if we get a little bit tailwind, will be there. I'm not thinking about any divestment on that one. We will get still a good future there, I promise you. Of course, you will ask that question back within a couple of years, I'm sure, if I miss it.
In years?
Yeah. Okay. One day. On service side, was it mainly on the mining side, or was it
Yeah.
In the mining side, yeah.
Mining side, yeah.
Yeah, I think we still have a lot of areas where we can increase our penetration and also expanding our offer. Especially now what we see, all the mining companies have a productivity challenge. That's how can they improve their productivity? It's for sure that to make sure that the equipment runs top-notch, that they do further automatization, looking for the right equipment, all these things are now on the agenda, and we are called in at several desks to do that. Of course, one big advantage for them is that to let or to make sure that the equipment is available. I think we as the provider of this equipment, we are much better equipped to provide the service. That means for us, high investments in people, in competence, not so much in utilities, but it means that we need to speed it up.
That's also what we are doing. You cannot, and I've mentioned that several times in previous calls, you cannot expect in service that the service business is growing with 20%, 30% in a year. You cannot do that. I think if we can run, and that is my personal target here, we should be able to have a double-digit growth on the service side. If we can get that, I think then we are state of the art. It's what I believe in. That is what the guys also in the mining is believing in. The products are still there, so that's for sure. As long there is drilling taking place, because if the drilling stops, really, of the usage of the mine is closed, yeah, then I'm also gone.
As long as the world will need copper, and the equipment is utilized, service will be needed.
Just one follow-up on that. If you can grow that service business double-digit, does that then mean you will be increasing your penetration rate, if you want, of the existing fleet that's out there?
Yeah.
Okay. Do you see continued upside there?
I see. That's for sure. Of course, the biggest competitor in that is not the competition, it's the owner. That's also our ability to do that, because some of the places is in the middle of Africa. We also have to show our capabilities there. We need to convince the mine that we can do it. That is hard work from the guys, from our Mining Rock Excavation service guys.
Great. Thank you.
The next question comes from Mr. Andreas Koski. Andreas, please go ahead.
Yes, hello. I also have a question on the Mining and Rock Excavation. On pricing, you had a year-over-year price increase of 3% in this quarter compared to 2% in previous quarter. Have you made any price increases during the first quarter that will give support during the remainder of the year, or should we expect the year-over-year price increase to fade away as the year progress?
That's a good question. Of course, we do price management constantly in Atlas Copco. You should make maybe a split between, say, equipment price management and parts and service price management. When it comes to price, parts, and service, I think we are more or less doing this every six months, where we are really working on it and see where we need to adapt positively or negatively. Of course, in total aggregate, hopefully it's positive. On service also, you have the part of inflation, which gives you that possibility. That we do every six months. That's a common practice for me, as long as I'm more or less in Atlas Copco, when more outspoken, maybe the last six, seven years. When it comes to equipment, that's another thing. This goes together with, say, engineering innovation, because you need to do upselling.
You need to really make sure that it's not just a matter of increasing the price, because that would be too easy. The other side of the table will never accept that. You really need to sell productivity, and this goes together that when you improve your equipment and you create more value for your customers, that you can do that. You know, I even can't follow anymore, we are releasing every week, every second week, we're releasing new products. It's a constant price update, price management going on in the group for all business areas, and that's the way it works.
Okay, thank you. Then a question for Hans Ola, because you had a non-cash item in the cash flow of SEK 303 million. Can you please explain what is included in this number?
You can see them as adjustments to the reported operating profit number, sometimes there are various financial derivatives that will affect the result, which is not reported for various reasons in the line financial item. It's not only that. It can be pension asset related and any other topic that is included in the operating profit, but is delayed or is not having an effect on the cash flow result. I don't have the specification. I don't think it's very helpful to go through in detail the specification of this quarter, because if you follow backwards every year, you will see that sometimes it's a bit positive, that specific line in the cash flow statement, sometimes it's negative. It's very difficult to say because of this, it will always tend to be slightly negative or slightly positive. I can't do that, unfortunately.
These are the type of items.
Perfect. Thank you.
With that, I think we need to close and draw a line. Ronnie has an AGM to take care of. I say it more firm than ever, you know that we are here, and the questions you didn't have a chance to ask, please don't hesitate to call us. Unfortunately, we have to close the telephone meeting right now. I think the questions were rather broad, and I hope that you have gotten Ronnie's comment on most of the interesting areas at least. With that, thank you very much, and I hope to hear and see you back, if not before, in July for the second quarter results. Thank you.
Thank you.