Ladies and gentlemen, welcome to the Atlas Copco Q1 Report 2013. Today, I'm pleased to present CEO, Roni Lehthen and CFO, Hans Ola Maier. For the first part of this call, all participants will be in listen only mode. And afterwards, there will be a question and answer session. Stiggers, please begin.
Thank you, and very welcome to all of you participating in this telephone conference call. My name is Hans Ulla Mayer. I'm the CFO of the group. And with me here is also Roni Werten, our CEO, whom I will hand over to in a few seconds. We will do the usual format that Ronny makes his own comments on the quarterly results.
Then we take the Q and A session. Today, we have to be rather strict on the time unfortunately because we have the Annual General Meeting after this call. So Ronny will have to leave sharp at 1:30 latest 2:30 latest Stockholm time. So thank you for that. And I'll hand over the word to you, Ronny.
Okay. Thank you, Hamzahls and good afternoon and good morning to all of you. And as Hans Ole said, I will go through the presentation and I will try to refer to the numbers so that you know at which slide I will be. If I summarize the start and I'm going immediately to slide number 2, 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 figures are almost are negatives.
And this comes that we are comparing with the best quarter we ever had last year. At that time, we were still in the I can say maybe the mining boom in the Q1 and the Q2 of 2012. But now of course we are and we better focus on this quarter. What I see now is that service business continues to develop very well. So 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. And I think it's not a surprise that we also saw a slight negative development on the mining equipment when we look sequential. I already mentioned solid level, given the output level we have. Of course, in money terms, it's 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 and L.
We landed also during the quarter a couple of nice acquisitions. So also here we have strengthened our future also our product portfolio. So that is that's good to see. And this quarter, we also celebrate Apascopco and 40 years. If I go now to slide number 3 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 21,000,000 at a solid 2021,000,000. But on the revenue side, like to see a little bit more on that, so giving it a bit more money. Operating margin, I elaborated a bit.
I think it's solid. And I think on the cash flow, we come back later than that and then Hans Ole will take that So let me go then immediately to the geographical slides, which are Slide number 5. We go immediately to the Americas. What we see is and of course, mainly if I'm talking now, it's 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 to quarter on the mining equipment, sequentially, it's more or less on the same level. But of course, that makes also the minus 8% of the quarter.
Service continued to be solid, good development and that is good to see. So 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 companies of mining countries down, you really get also here a negative figure because also last year Chile was extremely high. But what we see is a reasonable good solid Brazil.
So again, if we take away mining, we see Brazil developing good. Coming to Europe. Here, yes, 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're also part of our company. So that has helped the situation.
But on the other hand, it's still tough in Europe. And then I'm really hinting to Spain, Italy and France. It's still a good business there. But all in all, we had a good compressor business in Europe. Then yes, and I think what I mentioned also here, the strongest growth what we saw in the quarter was coming from Germany and Turkey.
And 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. But if we look sequentially, it's at a good solid level also in Africa, in South Africa as well as in the Middle East.
I'm going now to slide number 7 and I'm talking about Asia. Slightly a bit better, the order intake. I'm a bit more positive on China and India as I was a couple of months ago. So let's see what when we are quarter older what that will mean. But today at least I see some positive signs there.
We keep being strong in Southeast Asia. So that's also good to see all this part and investment going on there. And as I already mentioned, China and India is sequentially improving. Australia, minus 44%. But again, and this is already the 3rd time I say it, we're comparing with a real record order intake in Q1 last year.
But if we take that away, I think it's a solid order intake in Australia. Slide number 8, yes, you see here the minus on organic. I don't think I should say more on that. Then I'm going immediately to the sales bridge, slide number 9. Currency minus 5.
Of course, a strong krona. And of course, the Brazilian, Russian, India and maybe South African currencies have been weakening. So yes, that all played in the same direction giving a minus 5% on currency. Price, still solid. I'm sure some of you would have been surprised, but I think also our continuous drive and strive for innovation, really creating value with our solutions, with our services.
And of course, on the other hand, good discipline internally brings that we are still able to have a positive price development. Volume, yes, you can read it yourself minus 13%. And of course, on the revenue, I already mentioned that, yes, the minus 6%. It is what it is, although I would have liked to see a smaller figure there. Then I'm going immediately to the different business areas and I'm now on Slide number 11 talking about compressor technique.
Stable order income for industrial compressors. So that's good to see. It's more or less all over that we see, yes, definitely a good development there. And 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 very good job there and really also creating value for our customers.
And we landed a good operating margin just missed the 23%, but 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. And I'm really proud also that we launched the breakthrough energy efficient compressors where people in Arthroscopka have been working since many, many years on it. And at the end, we came really with that breakthrough, which gives another step up on the VSD, all known by you, I think and that will be I think I'm sure a very success into the market. So it also proved again the power of our innovation.
And in compressor, we also landed 2 smaller acquisitions in the quarter. And going now to slide number 12, Industrial Technique, a bit weaker, general industry up, MBI a bit down. But okay, remember last year MBI was really booming. But on the other hand the positive thing is that in general industry it's a bit up. We see positive North America.
So it's a bit in line for what we also see in the compressor world and a bit negative in Europe. Operating margin, 22.3 percent and make it lower than it should be. A bit affected by lower output, but I think at a good solid level. And also here, we landed 2 nice strategic acquisitions for us, 1 the High Torque and the other part was the Seltos, the mechanical ranges. So that will be a nice extending of the offer in the Industrial Technique business area.
Now I'm going to slide number 13, Mining and Rock Excavation. Yes, a lot of things already been written and said about the mining. I assume that it is not surprising caution is affecting our demand. We all know what has happened the last year. I think 16 CEOs been replaced.
I'm sure also that boards get more prudent when it comes to investments. So I think we will see, yes, a bit of a wait and see period here on the mining side when it comes to equipment. But on your hand, we see some improvement on the civil engineering, the hydro powers and tunneling. So that's good and that's 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.
So I think when it comes to the mining and rock organization and make sure we take the right measures. Operating margin, solid hitting 23.4 percent, so that's good. So the guys are really doing what they need to do. And then we landed our acquisition in China for log drilling tools. Construction Technique, Page 14, a little bit organic decrease, but a good development in North America and Asia.
So that's good to see. But it's very tough in Europe when you are working in this business there, yes. And the margin is around just below 10, so more or less where we had expected it to be. And when you see the picture, we also have in Bauma, we also have launched a full new visual identity for our road construction equipment. Now it looks really that like the Atlas Copco colors.
So the Dynapack and the Atlas Copco are really going joint forces to the market. Let us then go immediately to slide number 15, before I hand it over to Hans Zula. I have said most of it. The revenue minus 9%, a bit too low, but okay. The operating margin 20.5%, more or less in line with last year.
Because in absolute terms, the operating margin of the operating profit is negative effect as there's some currency effect. I think it's around SEK 220,000,000. Yes. The rest, I think I will let it over to Hans Zola.
Thank you, Roni. 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. And the 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 euro has weakened compared to previous year and we pay quite a lot of interest in Europe. And 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 would be higher. If I look forward, I would still say that somewhere in the region of €600,000,000 to €700,000,000 is probably to expect for the year. As you well know, we took the advantage in the Q1 of borrowing a 10 year loan in anticipation of the amortization of other loans next year. And that is of course also going to be a little bit of a negative effect in the next couple of quarters on the financial net.
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. And the reason here is partly mix which is always a factor that is difficult to predict. But 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's discussions that are difficult to say what is right and wrong. We've had a couple of surprises on that.
And we believe that those 2 have or we believe those two reasons have compensated for the Swedish tax reduction that we talked about in the last quarter. So all in all here, I believe that we will be in this range for the foreseeable future 26% to 27% effective tax rate. In the longer future, we need to come back and see where is the situation because there is a trend in many countries in Europe for lowering of the corporate tax rate. But for the time being in the near future that's the guidance I can see. If I then go to the next slide number 16, we look at the profit bridge as we call it.
And 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 Ronny has alluded to that already, the revenue level in the Q1. If we look at the next slide where the business areas are listed, I just offer a few comments. I don't think that one should make long term ranging assumptions based on 1 quarter. But on Compressor Technique, of course, they report a volumepricemiximprovements on profit in spite of a revenue drop.
And 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 don't think that one should overemphasize that sequentially 2% flow through negative flow through from it's a bit soft on the revenue as we have discussed before. And at the same time, the business area is continuing to make significant investments in the service and sales organization in many parts of the world, notably in Asia and that's probably the reason. Then on the other 2, I think it's more what would be expected if you know the revenue development as you know from the sales bridge that Ronny 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. So 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. But otherwise, it's a relatively stable development for the last quarter at least. And then 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 Q1, However, in the net financial items, there is a big swing. And in the report, it was commented that without a quantity, the swing is almost explaining the whole difference there. And it's €900,000,000 between Q1 2012 and Q1 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 dollar versus euro 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 6 months and they do give at those rollover movements 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. But in a separate quarter, the impact is either positive or negative. And I will comment every time that that has a significant impact that which was the case this time. So if you compare the €1,600,000,000 operating cash flow with €1,400,000,000 in reality, I would say that it's a much better improvement than what meets the eye. So with that, I hand it back to Ronny for comments on the outlook.
Thank you. I'm Zula, yes. And you have seen that we changed our outlook and maybe also to preempt one of the questions why we have done that. I see if I have a better view or positive view on U. S.
And China than I had when we did the outlook of the Q1 in the 31st January. So with that positive view on U. S. And China positive view of U. S.
And China, but still remained tough in Europe, It means that we change the outlook to expect it to remain on current level. So by this, I hand over
to the operator. I think we are ready for the Q and A session. So if you repeat the procedures perhaps and then we go on from there.
The first question comes from Mr. James Moore at Redburn. Please go ahead.
Yeah. Good afternoon, everybody. Hi, Ronny. Hi, Angela and Matthias. I've 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's changed? And then 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 difficult one just to know Jens, but I will try.
But one is a difficult one just to know, Jens, but I will try. But on the lead time and the change, you see and I hinted a couple of times during the call here that I was not so pleased with our output. So on the lead time, when it comes to the factory output, we still have significant orders on hand situation, and we have not beaten really in our order book due to the fact that the KDD output was not really coming out as we expected, like I expected. When it comes to the service, and I don't know if I take it, 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.
So that is integrated. That's maybe one of the most vertically integrated organizations we have in Atlas Copco that's on the consumable side. When it comes to service, yes, within the service, I think you have you should make a split between the part and the service, where the service is, it is people. And that, of course, you that's internal. And 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 over drills.
So that is what we do internally. So it is, I think, a bit different, but still you had a good you get a good flow through in that area.
That's very helpful. Can I just follow-up and I wonder if you could 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?
Yes. I think again it's a good question. You remember that with the single largest investment, we 2 or 3 years ago, we started to do that. And before even we had another investment. So we really increased our capacity on the consumable side.
And 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. So from that point of view, utilization is definitely not gone down, of course, because we had the possibility to do some in sourcing over here as we work together with external parties. So from that point of view, it's more or less the same over the last 4, 5 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 destocking taking place.
So what meant that the consumables and I think we also reported that in when we report quarter 4 that the consumables was a bit down, where we now say that the consumables is more or less at the same level. And I see a real a bit positive trend coming back to that level.
Fair. Yes.
So 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, it may be if I do a calculation, it may be around 25% of the total revenue there when it comes to real mining. The rest is service, it's consumables and it's civil engineering.
So with people, when you really look and you start thinking about, okay, what is going on, on the gold, what is going on, on the copper, what is going on in the iron ore, Of course, I would like to see positively big orbit coming in because that will bring us back to quarter 1 2012, that it is not so much a real effect for us in under absorption. And that makes it also that we are able to come to this profit level of 23%, 24%.
Thank you very much, Ronny. Thanks.
We have a question for Mr. Aaron Ebitson at Goldman Sachs. Please go ahead. Aaron here.
Yes. Hi, there. Good afternoon. I've got three questions, if I may. So first of all, just a very simple question, I guess, on the FX, 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 Q2 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. So obviously, very impressive operating leverage in the Q1 here. I got to 22%, I think Hansoula 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 2nd and third quarter? And then 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 you 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 you were the operating leverage took it 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 Hanzula 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. So there is not a big difference. Now when you talk about that, it goes down 10%, 15 percent.
I was looking year around the room here. I think I have not seen that maybe you look of course, if you compare quarter to quarter, then it's, course, then you get that because you know that in Chile, we got a big quarter in South Africa, big quarter we got a big quarter in Australia. Yes, there we get definitely quarter to quarter, last year quarter, last year, last year, last year. Then of course, we have more than 15% rock on that one. But I think if you look sequentially, I think it's slightly lower.
But yes.
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.
Yes, yes. That could be yes, yes. I don't have that here in front of me because I was looking on the other situation.
But you're in the right neighborhood, yes.
That's about the same. That's about
the root of that.
But you know, on that part, we have a rather and you'll know we have been preaching since many years about our agile resilient part on that. And we have the possibility to absorb this drops of the sale. Of course, when it really drops another 50%, yes, then we talk another one. But this drops, we were able to absorb now.
Okay.
And then you asked about FX. And the reason why you might have expected more and of a negative is primarily that the euro to the dollar in terms of a transaction exposure is rather important. So that has been not at all the negative impact on compressor technique as for this more Swedish based activities. The translation is there for everybody to suffer. But from a transaction point of view, it's different.
And that is mainly the reason why it was kept neutral on the margin effect.
And then your second second question when it comes to the big picture and the downside and then the leverage on that. Of course, what I'm working with is first to make sure we 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 quarter 2 that is normally the period when we should get the invoicing. So they're producing already now for getting it all out and these orders are on their way out.
So 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. I think also when if we would see a drop from top line revenue in profitability wise, I think I'm not so sure that, of course, it will always have great under absorption on the equipment side. But 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. So 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 top.
So I think you and that is what Anzula and I hear simulating several times when it comes to the agility and resilience, how does it play? And for the time being, we still are strong and believing in that, that can play in that.
Okay. Perfect. Thank you very much.
The next question comes from Mr. Ben Marcellen of Bank of America. Please go ahead.
Thank you. Afternoon, Ronny. Afternoon, Hans Ola. Two questions, please. Firstly, Ronny, on the group outlook, where you say demand will be at 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 much lower figure is now mining equipment. So we get a sense of how much that has fallen. And then finally just you mentioned that revenues were 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.
Yes. I will start to answer the last one first. And I don't want to blame the weather and the working days because I don't have a real good, good, good one single answer on that. So there's a little bit here and a little bit there. It is in more or less in all business areas and 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, so people are a little bit more careful to take it. So all these small things and then you easily come up a couple of working days less, a bit weather here and people are not pushing. At the end of the day, you get it a bit lower on that one. So that's but I don't have a real, real good answer and that's also what annoys me in this.
So I think the orders are still there. It's what it is not and that is good and I have no 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 the mining guys are really dropping out or whatever, but that we don't see. So that I think is maybe a positive sign on this part.
But the orders are still there. So what gets in, what gets out. So at the end, we should see it. Then when it comes to when you asked outlook, where I'm giving a little bit of geographical outlook, if I translate it 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, I would see slightly up. And on construction, I would see a bit how the play will be a new rollout. Europe is stubborn in construction. We see reasonable positive signs in China, but we are not so big. So that's then it does not play so much.
But we see good development on the U. S. Side. So from that side, I must say equal to a little bit positive. But 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.
That is what we missed. Then your second question is on the mining side. It's around 25%, 30%.
Of orders?
Yes. Total. Yes. Total. Yes.
Got it. Thanks very much. Thank you.
Construction, yes, the total.
The next question comes from Mr. Andreas Willi at JPMorgan. Please go ahead.
Yes. 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? And if you look at 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? And the third one just on your investments. To what degree are you willing to cut back R and D feet on the ground in terms of improving margins
First, I think I'm not thinking about really reducing from the contrary the investment in R and D. I think we should keep going on because that is the future of Atlas Copco. That's the strength and we should keep going and we should do it only quicker and 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.
Of course, where we are adapting our presence is in areas where we see difficulties. If you think about Italy, Spain, France, of course, we are debating the presence there. But when you can think about Africa, when you think about China, when you think about the U. S, I think we keep going 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 and D and in presence.
Then I think I'm not doing my job. When it comes to the balance sheet, I think normally I think I have not heard any Board member to ask any questions about that. But 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. And I personally just don't see any reason to do with now. But okay, maybe some with these questions, maybe you have triggered some of the Board members who knows what will come.
But it's not on the agenda for the time being. Then your first question, of course, year on year, it has dropped enormous. If I take equipment that 30%, 50% to see I'm listening here to some people who just need a quick calculation. If you do year quarter on quarter year on year, it really has come down.
It's of course important. And you know that Andreas, of course, I mean that as Roni has started the conversation, we are comparing with something that is not the normalized number. So 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. And that's over. And I think we should I think the new level more or less came in June, July. So 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.
And you know that we are growing a bit more in service. Of course, in consumables, it was a bit lower, but now it's more or less at the same level. And the level is more or less the same, then you know that equipment is still going down slightly somewhat. I think what we will see happening okay, I know I'm taking the crystal ball and maybe I should not do that. But 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 would see no small incremental investments coming on. And that is what we should yes, 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 and the world will need copper. So we need to do automatization. You need to do further mechanization on that part. And gold is the question. You would see I don't know either what will happen on that area.
Thank you very much.
The next question comes from Mr. Martin Prozeski 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? And 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 the opportunities you see over the next kind of few quarters to accelerate the growth in service? First question. And then second question, totally different topic on construction. I mean 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? And if not, kind of 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. It's easier. I think there is no plan to dispose. I think we had done a lot of fundamental good work. Now we have a dedicated business area for almost, yes, one and a half years.
We have done a lot of the back construction in that area. When we will get a little bit tailwind, I think you would see a good return. So 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 have seen that how down they were. I think now you see Brazil coming back a bit.
We see also China coming back Europe not yet. So I'm rather convinced that the time of harvesting, if we get a little bit tailwind, we'll be there. So I'm not thinking about any divestment on that one. So we will get still a good future there, I promise you. But of course, you will ask that question back within a couple of years, I'm sure, if I ever miss it.
Yes. Yes, yes, that's okay. Yes, yes. It's one big. Then on service side, was it mainly on the mining side or was it in the mining side?
Yes.
Mining side, yes.
Yes. I think we still have a lot of areas where we can increase our penetration and also extending our buffer. And especially now what we see all the mining companies have a productivity challenge and that how can they improve their productivity is 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 several desks to do that. And of course, one big advantage for them is that to let or to make sure that the equipment is available. And I think we as the provider of this equipment, we are much better equipped to provide the service.
And 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. And that's also what we are doing. But 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. That's what I believe in it. And 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, yes, then I'm also gone. But as long as the world will need copper and the equipment is utilized, service will be needed.
Just one follow-up on that. So 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?
Yes. Yes. Okay.
And do
you see continued upside there? Just give us a sense for
Yes. I see. Yes. I see. Yes.
That's for sure. But of course, the biggest competitor in that is not the competition, it's the owner. And that's also our ability to do that because some of the places is in the middle of Africa, yes, we also have to show our capabilities there. We need to convince the mine that we can do it. So that is hard work from the guys from our mining rock excavation service guys.
Great. Thank you.
The next question comes from Mr. Andreas Koskier, 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 Q1 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?
Yes. That's a good question. Of course, we do price management constantly in Aposkopko. And 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 6 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. And that we do every 6 months as a that's a common practice for me as long as I'm more or less in Apascopco and more outspoken maybe the last 6, 7 years. When it comes to equipment, that's another thing that this goes together with the engineering innovation because you need to do upsell and you need to really make sure that it's not just a matter of increasing the price because that would be too easy. But the other side of the table will never accept that.
So 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. And you know and I even can't follow anymore, we are releasing every week, every second week, we're releasing new products. So 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. And then a question for Hans Ubla. Because you had a non cash item in the cash flow of €303,000,000 Can you please explain what is included in this number?
Yes. These are just you can see them as adjustments to the reported operating profit number. And sometimes there are various financial derivatives sometimes that will affect the result, which is not reported for various reasons in the line financial items. So it's but it's not only that. It's it can be pension assets 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. So 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.
But these are the type of items.
Perfect. Thank you.
With that, I think we just need to close and draw a line. Ronny has an AGM to take care of. And I'd 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. But unfortunately, we have to close the telephone meeting right now.
I think the questions were rather broad and I hope that you have gotten Roni's comment on most of the interesting areas at least. So with that, thank you very much and I hope to hear and see you back if not before in July for the Q2 results. Thank you. [SPEAKER JEAN FRANCOIS PRUNEAU:]
Thank you.