Welcome everybody to the 3rd quarter conference call and conference that we have here in Stockholm for Atlas Copco. I'm very pleased to be here together with our CEO, Ronny Lettin. We will follow a very common and now known format where Ronny gives his comments on the Q3 performance. And then after that, we have a question and answer session. So I think we don't need any more preludes.
So please, Ronny, take it from there.
Okay. Thank you, Hans Ole, and good afternoon to all of you here present and listening in. As usually I will go quickly through the presentation give my viewpoints and then we can immediately shoot the questions. Highlight, a good quarter, very solid profitability despite the softer market. Just to elaborate a bit on the market, we see definitely for equipment a softer market in Q2 already as you've seen in the figures and also when you look to over Q3 sorry.
And when you look to our outlook, you see also that we're expecting somewhat softer demand for the period to come. Solid profit, orders up price volume 1%, weaker in equipment, but our service and parts keep up and we see good development in that part of the business. Strong cash flow, yes, helped by a sell off of financials, which boosted the cash flow a bit more. Hans Ole will elaborate further on that. But even if we take away that part, it's still a good cash flow.
And when you calculate the value creation, this company still creates value. And here you see and we put this slide in just to show you why it made me saying it is a solid quarter. You see orders received orders invoiced. If you look over the last 4 quarters, it's rather the same level. We had and you all remember the quarter 1 that myself I was positively surprised.
It's always better to be positively surprised than the opposite where we saw a very strong mining at that time. But if we take away that part you see a still good continuation of orders. How come? I think hard work from all the collaborators being with the customers, working hard on service and yes, being a little bit better than some others in the market. Also profitability, you see also we keep on the say continuous plus 20% EBIT level.
Figures, I don't think I should take more maybe the earnings per share to 8.7 and the cash flow I'll add it up to Hansula later on. If we take then slide number 5, the regions. You see there is Europe. There's a lot of talks we're living also here in Europe. There's a lot of talks about weakening demand, weakening outlook.
Also we get that part. You see a minus 2% compared to last year. All the others are slightly positive not as we are used to be. So as I already said a couple of times, we should get used to lower figures and hopefully not too many black figures. The Americans, plus 7, healthy demand in North America.
And if we would take away the comparison and you remember Mexico last year was very strong. If we would take away that part because by the way Mexico was very strong last year due to a big order from the mining. But if we take away, we still see a very solid U. S. And Canada.
A good industrial part mainly also coming from compressors. Softer mining mainly coming from a softer coal business. So that is a bit compensated. But I must say, I still see good development in North America. Smaller order growth in South America, mainly a softer mining part.
So you see the Chilean Peru market a bit softer because it's really mining driven and yes, flat development in Brazil. Europe, yes, negative very, yes, a bit depressing. We see that that part is going down in most countries. Germany keeps up, but also we see there as I also said in the quarter 2 call that we also see there slightly softening. But there's still a good demand for compressors.
So that also kept the business at a good level construction soft. Africa Middle East very solid. If we take away South Africa, which you all have read also has an impact on our figures and also slowed down the business there. But if we exclude South Africa, you really have a we really have a good development in West Africa, North Africa and the Middle East. Middle East mainly coming from oil and gas, which then also helps the compressor business to develop well.
Asia and I've already mentioned a couple of times in when I was meeting some of you. So this is a bit of a mixed view where you see Southeast Asia, South Korea strong good development going on in that area. Where China, we call it here at a good level, but I would say it is flat. And we don't talk it as we were used to talk it up. And then also got good development here.
I see, yes, sequentially flat to slightly lower development. India is soft. So if you take these 4 blobs together, you come still with a slightly positive one. And Australia keeps continues to develop well, because this is the whole mining part and of course also the good work what we do there. So if you see, yes, last time we had a minus.
Now we have a small plus. Let's see what that will bring us in the next quarter. But let's go immediately to the sales bridge, where you see currency minus 3. All the movements going on with the Swedish krona and then the dollar and the real and others. So it makes it a rather complex comparison, but it came out as a minus 3 for us.
Price volume plus 1. So we still see that our pricing keeps up. I think the work, the hard work in design and development driving always for innovation, It still keeps up and I think it will keep up because we create sustainable productivity for our customers and they see the real value proposition when they go with Atlas Copco. So that goes on. But yes, the currency plusminus the volume we come up to a +1 in orders received.
And revenue, yes, we know we still have the pipeline to come. So a book to bill a bit less than 1. Let me go to the different business area and to start with compressors, the largest one. So we had a healthy level for of all the take for compressors. A bit different mix, but a good gas and process demand.
So that is energy driven. So that part of the world is still investing a lot and of course we go together in that slipstream and a good development on parts and service. So what it also says here on the aftermarket. So we continuously to see good development all over in the world. You see even in markets like Italy, we succeed to increase for compressor over aftermarket.
So that's definitely the hard work what we are doing. Operating margin 24%, yes, okay, helped by the currency remember. If the euro gets a bit softer that is a good sign for compressors, because we produce still a lot in our largest plant in Belgium. So that has helped a bit. But I think on the other hand the hard work of the guys on adapting their cost structure and at the same time keeping investing in the right part of the market has yielded a good profitability.
And of course, we continue to extend our product offer with the acquisition of the Danish small Danish company of the nitrogen and oxygen generator, so which allows us to really have our own private portfolio and to develop further from that platform. We go with industrial technique, a bit weaker than the recent quarters, but still at a good level. Of course, we all know that MDI with all the models, it cannot go on all the time. So we get a bit of cycles there. So also we will see that I think especially with some of the European manufacturers, which will not have the same boom of new models as they had before.
So because we are model driven. But of course, we're working hard with again also here extending our offer and going for general industry demand. Aftermarket still developed very well in that area and the operating margin 21. Yes, this is just the opposite what I just told about CT. Here we have much more exposure in to the Swedish krone because we are manufacturing our core tools in Sweden.
Of course, when Swedish grown strengthened, yes, you cannot eat the cake twice. So then we got a bit negative affected by this currency. Sorry, now we go to Mining and Rock Excavation. Lower demand for equipment and I assume that is not a surprise for many of you here present. All over we see that that is a bit of waiting to come to say larger orders.
But on the other hand, if you compare and you saw my second slide I showed you on the graph as such, you see also, of course, we're comparing with a very strong 2 or 3 quarters of equipment. So it's not falling fully down, but it is lower. So we see and we all know that when the mining is moving it's not moving with 1 up 1 down. It's really going with a couple of 5% 10%. So this is the way it works in this business.
But we see a strong still a strong demand for service and parts. So that continues to be at a good level and also our structure and our dedication that part is yielding result. On the other hand, what we see consumables is a bit softer, which we also had expected when a mine engineer or a mine owner needs to look to his cash flow, yes, what does he first, okay, make sure he reduces inventory and that we also have seen as a symptom in 2,008, 2009 that the consumers first dropped and then to come again. And that is also at least the drop we see. The increase we will see.
I will tell you hopefully next time. Margin very solid 24.5% and yeah even negative affected by the currency. So a very strong profitability from the mining guys. Construction technique, weak demand in Europe and you know also that is one of our biggest market we have. So it does not help the development, but a good development in North America and that we still see a good demand from the rental companies, specifically in North America, which helps us of course to make a better growth.
Healthy after the market, so that is working fine. And the operating margin is a bit softer than the previous quarters. Of course, we also have a bit lower revenue. So that is also one of the reasons why it is a bit lower on that part. And here also we have unfortunately, we have to do more reorganization and one which we announced a couple of weeks ago is the reorganization in Taltzkrona.
Then the figures, I think you all know them and I would suggest that I hand over now to Hans Ole.
Thank you, Ronny. Well, I think that you have covered reasonably well the operating profit performance in the various businesses. So I'll just make a few comments. Further down the income statement, if I use that expression, we have a financial net that increased compared to last year, but it was fully due to the fact that we had a positive capital gain included last year from some sale of rental service shares as you recall. When it comes to the bottom line, you can see that we had a little bit of a higher tax rate.
A tax charge this quarter compared to the same quarter last year. This is mainly due to a little bit lower than normal last year, I would say. The 26% tax rate this quarter is slightly higher than what we perceive to be the run rate of around 25%. But these variations will happen and it's not something that we can analyze in detail every quarter or we shouldn't analyze in detail in quarter. What is coming further down the road is, of course, that we have already had announced that the Swedish corporate income tax will be lower going forward and that will have an impact of course.
And we don't earn all our money in Sweden as you know, but it will certainly have a positive impact. To give a better guidance on the run rate when that is I'd like to come back to perhaps in the next meeting we have when we see a little bit how the mix of profit develops in the year in the next couple of quarters. If I move on to the profit bridge as we normally call it here, you can see that the extra growth or the organic growth since last year has produced about the same profit generation as we have a margin. So there is no major difference between that flow through and where we came from last year. The things to note perhaps here is that we have added a column here that explains that we have quite significant at least in for a single quarter, it can be rather significant revaluation of long term incentive program provisions.
And that is entirely moving up and down not entirely, but to a large extent with the valuation of the Atlas Copco share price. So it's not a cash item, but it does affect the operating margin. And hence, we show it as it was very positive in Q3 last year. And then it was not big, but it was still negative this quarter. So if we then move but otherwise relatively undramatic picture, you can appreciate that we have a negative currency comparison with last year.
When we look at the different business areas, you also see a more even distribution of flow through than in the previous quarter. We have, of course, the impacts that I've talked about on one time items and acquisitions and dividends that refers to the acquisitions, of course, but also here that we had some restructuring costs last year that helps in the comparison period. But otherwise, I think that most of these numbers speak for themselves. If we move on to the balance sheet, the capital that we use has increased somewhat since the beginning of the year. And you have heard us talk before that it has been a certain buildup due to the revenue increase of inventory, but it has slowed down considerably.
And there was hardly any increase at all between the Q2 and the Q3 if you strip out the effects of different currency rates. But we are of course accumulating cash. So that is basically then explaining the increase of the total assets. The balance sheet and the income statement together produces the cash flow. And here we had a very strong total operating cash flow.
And when we say operating cash flow, the only thing that is not included is acquisitions and divestments and dividends. And since we don't pay any dividends this quarter, it was only the acquisitions. However, we should also point out like we did in the report that we did sell a portion of our customer finance portfolio, roughly a value of SEK 1,400,000,000 in the quarter and that has of course helped to show this very strong quarter cash flow. But even without that, I think that the $3,200,000,000 cash flow in the quarter, remembering that we have not had any help yet from reducing working capital. So I think our assessment is that it was a very strong cash flow for the quarter.
So with that, I think I hand the word back to you Roni.
Yes. We come to our long outlook. We tried to make it shorter, but we didn't succeed this time. As already said in the beginning of my presentation, we expect compared to quarter 3, we expect that demand will decrease somewhat so that it will soften somewhat. So with this, I would say that we are ready for the questions.
Yes. We are
ready for the Q and A session. And I'd like just to before we start to ask everyone that has a question that if you have multiple, I would like you to restrain to have 2 questions at the time maximum because otherwise we will not let so many people ask questions as we would have liked to. So I ask the moderator on the telephone conference please repeat the procedures for the questions please.
Thank you, sir. Your first question comes from Andreas Willey. Please ask your question.
Good afternoon, gentlemen. Two questions, please. The first one on your investments in terms of R and D feet on the street. I think you slowed that a little bit earlier this year and we have seen some positive impacts on the margins. Where do you see investments going in the next few quarters given the uncertain environment?
Are you going to slow down investments a bit further until we have more confidence? Or are we or should we use current levels as the normal rate? And the second question in compressors, you had good growth in the process side. Should we expect a negative mix now in the next few quarters in terms of the margin impact? And what's your outlook there in terms of how long these very high levels of investments in some of their end markets are available?
Thank you.
Yes. The part of where to invest for sure like I mentioned also during my presentation here when I was talking about price, Of course, Atmos Copco will keep investing in design and development. So in research, in innovation because that is the core of Atlas Copco. And if you remember also during the tough 2,008, 2,009 we also kept investing in our product range and trying even to speed up that part and that is what we keep doing on. When it comes to feet on the street that is a bit of a different part.
That is where we have to see where we can harvest, where is the market. If you say I will densify my network today in Europe, yes, I'm not too sure that will be the best moment to invest there. But maybe as you say I do more feet in the street in U. S. Because there in certain areas we can do that we will definitely do.
So to summarize R and D, it gets a triple plus on investment. In feet in the street we will definitely be selective and be looking for efficiency. Yes, on compresses, maybe I will take your last part is how long will the investment last? Who knows? I would like to have a crystal ball and in the morning when I come to Atlas to look into that and say, okay, when to push and when to break.
If you see on the gas and process part, that part of course it's a lot of energy driven. So there's still a lot in the pipeline from that part. So that is where we keep investing and also we try to extend our product offer in that area because there we still see some growth potential. The negative mix, yes, we'll see because if time will go on and you have heard me saying that equipment sales is slightly dropping where aftermarket still grow, we will get another type of mix coming up. So it will only not only the gas and process mix, it will also be the aftermarket mix.
So I see it more if I generalize, I see more little bit softer equipment higher aftermarket mix going forward.
Thank you very much.
Your next question comes from Aleksander Villugo. Please ask your question.
Yes. Hi, good morning. Two questions, please. 1, just wondered if
you can perhaps expand a little bit more on that point you made in the Mining and Rock business about customers' willingness to replenish consumable inventories and how long you think that might continue to affect the demand outlook? And then the second one on the inventory levels. I wondered if you could perhaps comment on inventory levels across the divisions. Some of your peers and competitors competitors have been pointing out that there is quite a lot of inventory in the channels, particularly in the construction business. So perhaps you could give us some color on that.
Thank you.
Yeah. I think on the consumables that is what we see. And like I said it is a bit of a normal reaction that you look to cash flow and you have to reduce your inventory that you keep your safety stock a bit lower. That is what we see. How long will it last?
I don't think if I take my experience from previous crisis, it was at that time 2 to 3 quarters and then we saw already a development positive development. How long will it be now? I don't know. So it's also a bit of a mixed view. It's not geographically equally spread.
When it comes to the inventory across the divisions, we have our model is primarily a direct model. And even if we go indirect, we don't want that our distributors, our indirect channel keep stock of keep inventory. We don't want that because we want them to be also cash of inventory light. That's the way we spread the gospel. Does it work all the time?
No. Can we do better? Yes. Especially when you look on construction and the mining side, we have more inventory than we have in compressor and in industrial technique. There is a bit or should I say it different?
There is opportunities for improvement for sure on the construction side and on the mining side where we do. But it's not in the channel. It's in our pipeline as such. So, yes, that I think is what yes, I hope that gives you enough on that part.
Thank you.
If we take The next
question comes from Ben Maslin.
Sorry, I think we cut in with 2 questions from Stockholm before. Sorry to keep you waiting Ben, but you'll get your chance.
It's Guillermo Pinhe from UBS. Couple of questions. First, regarding compression technique, the incrementals are better. Can we assume that now you're normalizing the pace of the normalization is yet to be discussed, but are we normalizing to 25% which is the long term rate? Secondly, on mining quite the opposite question.
If I read you well, mining equipment probably at the moment getting there fully utilized on your plants. Therefore, the degree of fall in equipment demand plus consumables demand sort of deteriorating to some extent. Could that mean that your incrementals in mining could be a bit weaker going forward?
On the first one on the 25, are you taking that? I think first like I mentioned many times that I'm not hunting for margin records. We are hunting for value to create value and that's also in City. I want them even when there is headwind to grow to find that part. We have seen an improvement if we take that.
And you also remember my explanation partly for last time when I said, okay, hey, we're investing in vacuum in low pressure. We have a couple acquisitions here and there. We are not giving the same return. That is we keep doing. And we keep doing that in CT.
Of course, they have worked hard also to certain investments to make sure they give a return. I will not say the new is 25. I think you should position you where we are in that area. If you take a bit away say currency here and there because we also were helped by the currency part on that. So that is for me it's CT is A guys become bigger.
Then on MR, yes, of course, when we have less equipment, you get a little bit less absorption. But you also know we have our agile model. We have a lot of leverage with our suppliers outsourcing, insourcing. This is a process that is working now that is clicking in. Luckily, we have the orders on hand to lower us to slightly do that shift.
It's not that we don't have any orders on hand. So we are allowed to move around and that is happening. So we are on one hand reducing and you've seen that also on the balance sheet maybe on that. If you look deeper you see our purchasing value is going down. So that is a first sign of that part.
On the other hand, you get a better mix. You get less equipment, more aftermarket. So that part should normally compensate that part.
Another question here in Stockholm first?
Yes. Peter Fruhlyan, Handelsbanken Capital Markets. Two more city margin related questions outside the sort of organic leverage. You mentioned dilution on acquisitions. Was that mainly an effect of them reporting lower profitability?
Will the euro production heaviness Will the euro production heaviness sort of create a net positive also in the Q4 given what you see today? Or that way too optimistic?
Yes. You take the FX and then I'll take yes. Now on the acquisition, if you acquire companies in our business, it's very seldom we are we can buy companies with the same profitability level. Then you say, yes, synergies should give you of course. But these integration, these moves they take time.
And when you do 10, I like to talk about 23 every time. 6 or 7 are okay and 1 or 2, yes, we need to use a bit more push to get that. So if you take that that is so to say our performance on that. But in a mix point of view they bring the margin a bit down just when they click in in the quarter.
I'd just understand that. Just is there any sort of extraordinary item there? No. Maybe just this quarter as
we discussed. No. Then you will then it would be published.
As you refer to yourself, the compressor technique business area has out of the 4 the strongest base in euro costs. So the recent development as you could see also from the profit bridge is helping on the margin even though translating into Swedish krona means that there are lower values. But from a cost versus income point of view, they are getting help. If we look ahead, I think it will be the same if you look quarter 4 to quarter 4. But as the deterioration temporarily or not have sort of stalled now for a few weeks or a few months at least, Of course, what happens, happens and we don't know that.
But if you take on a sequential in the sequential meaning from Q3 to Q4. But yes, it is still at levels that are better than last year. Yes, that's right. So if I move over to I think was it Ben Masland that was in line for a question on the conference call? Operator?
Your next question comes from Klas Bergelind. Please ask your question. Okay.
Hello. It's Klas Bergelind from Nomura. I have two questions please. First on the aftermarket again being a bit weaker in mining and rock. What do you think of the margin impact from this?
Is this likely to hit next quarter? Or was that already impacting your margins this quarter given that aftermarket is typically higher margin than equipment? So that is my first question. The second question is really on your incremental margin in CT relative to return on capital employed. Incremental margin has improved here to 14%, but return on capital employed is still down some 10% year on year and that's the same development as we saw in the Q1.
So could you please explain that disconnect? Yes.
I can start from the bottom there. I don't think that you can do perfect mathematical model to understand that, because I think that the return on capital employed year on year is actually spending over averages of the balance sheet and the income statement over a period of 24 months since we use an average calculation of the capital. And we have seen the balance sheet increase as we have commented over the last couple of quarters, not in this particular quarter. And that has brought the returns a little bit down. But the incremental margin is you say it's better, yes, compared to the previous quarter.
That's true. But obviously with a 24% profit margin business in a normal stable situation, we would expect that the incremental profit would be higher than the 14%, of course. I don't know if I got your question 100% correct, but I don't see that it's a total mismatch between the two observations you made. Then I think that Can I Yes, if you would like to
Yes, clarify a little bit? What I mean here is that you're obviously still investing in the business. But my question is given that the incrementals are now improving is that your assets that you have invested, your salespeople, your engineers, are they getting more efficient? I'm just trying to sort of understand what is the delta here on the incremental margin sequentially? I mean, is your investments getting more efficient?
That's the question really.
I think what one should normally aim for that the incremental margin of contribution at the end when you do all these investment is at least at the same level as the average of the businesses, especially when it comes to incremental organic part. That is no doubt. But okay some of these comparisons are difficult to read for you and some of them like I mentioned if you take the vacuum the low pressure, this takes a little bit longer than say 1 quarter. And this can go on for to take on the low pressure. Like I elaborated also last time, I think this could be a journey for a couple of years.
Okay. But you can expect you should expect, let's say, this way at the end, we should expect the same level as the business area does.
I'm happy to continue to discuss it with you, because I think that you are still a little bit puzzled. So we can perhaps elaborate more after the call on that one. But I noticed you referred to the return on capital employed going from 72% to 62%. Quite nice returns by the way, but I understand your question that it's still 10% lower. But I don't see the exact mathematical connection between the 2 as you do.
So perhaps we can do that later. Is that okay?
Yeah. That's absolutely fine. Perfect. But only if you answer my first question on the aftermarket.
Yes. I will try to come in with that. We tried to fool
you there, but we couldn't
No, no, no, no. No, I think on the aftermarket NMR, I still expecting that that will develop in a positive way. What you see of course the consumer part is a bit softer, but that part like I said within a couple of quarters we will see again there a positive development that is or there must be something else happening at a different magnitude that people stop drilling and all that part. But giving our product portfolio our presence, I believe that that part will come back to where it was before. So again, it's a mix part if equipment over a certain period will be softer and then eventually it will also hit revenue.
I believe that the mix will be go positive for aftermarket. So I think when it comes to the profitability, the theoretical profitability giving that there is not more under absorption that that will be a positive mix effect.
And just to underline, Roni, I think I said it twice already that it's not the full non equipment part of MR that we referred to. It's primarily the consumable side that had this effect of replenishment of stocks, etcetera, that we referred to. So we don't see it as a general negative trend on aftermarket. I just want to underline that.
No, I understand that. And consumables is obviously sort of a little bit lower margin than the total service business.
Correct. Yes. Do we have thank you, Claus. Is there another question on the telephone conference?
Next question comes from Ben Maslin. Please ask your question.
Yeah. Good afternoon, Ronny. Hi, Hans Ola. Two questions, please. Firstly, if there's any way you could give a bit more color on your sequential demand outlook for Q4, a sense of maybe the magnitude of the drop and which divisions do you think will weaken the most?
I guess there's a lot of focus on what you expect sequentially in mining. And then maybe on China, just a little bit more color around what you're seeing there. Looking into next year, we hear a lot of companies expecting improvement based on a new regime coming in to kind of govern. What's your view and what are you planning for? Thank you.
Yes. I think when it comes to the sequential demand, I think if we start with the areas where I think we will have the most significant drop, if we can use that word. I think it's on construction. That is where our biggest exposure is in Europe. It's also more seasonal.
It is softer. That is where I believe we will see in relative terms on equipment the biggest drop.
On mining,
giving say all the signals we read and we hear and all that. So I'm a bit more careful there where we are saying, yes, likelihood that equipment will go down is significant, is there. So also that is my second business area, which I believe will go down with substantial amount in equipment. Then Industrial Technique, especially due to the MVI part, the models, we see that, yes, we come in another cycle now and that is also what we had expected. Of course, we try to extend our offer.
You remember, we are going with Schucker. We are in another business. So maybe we can have more part there we fight back. But if you take it purely from a demand point of view Ben then I should say the MBI. And on CT, compressor side, I see there my yellow canaries being slightly negative, if I make that part.
And then you have of course the turbo compressors which is mainly it's a Chinese because the biggest market is China. And you remember also there we compared with last year which was a very high level that also I expect that it will hang in so to say. I don't expect it much more going down, but who knows. So there I'm a bit more alert on that. So and that gives me the entry to China.
Yes, who knows what the new regime will bring. I also like to read positive news and stimulus package and opening up. So that gives people more confidence and confidence gives more decisions. What I see today is that it is not dropping, but it's hanging in. Even when I look to our construction business, We although we are small there, we're creeping up.
It's not standing still anymore. So there is activity. And the same is on the mining side where we see a lot more mechanization going on and activities where people want to do further development in their minds. So these activities are going on. But it's not a plus market.
It's still a flat market.
Thanks very much. Very clear. Thank you.
So we have 2 questions here in Stockholm again. Over here.
Thank you. That's Anders El Boriat, ABG. When you look at the compressor business in China, the aftermarket proportion has historically been lower there. And the idea of course has been that once the new equipment sales starts to decelerate and the installed base is there that will catch up. So I was just wondering if you could give an update what is the proportion now?
What are you doing to catch the opportunities from the large installed base that you put in place in 2,007, 2,008?
Yes. One thing for it's today already our single largest service organization in the world. Just to calibrate everybody there for CT. So we have already a lot feet on the street. What we do more is definitely to work hard on our logistics, salespeople who are upselling our service, getting overhauls, getting contracts.
It's a bit what we have been doing for many, many, many years in Europe and which is generally accepted also to do in China and it works. You can sell service in China. People 10 years ago thought it was not possible. Atmoscorpico started that to do that And yes, this is also the result. Of course, if you look to the ratio, we have not the same installed base say the older installed base as we have in Europe.
So we don't have the historical legacy of our machines. If you compare China with Europe so that will take time. So the ratio over time will definitely improve.
Do you think it will reach the level of Europe and North America? When
will that? There is no I think there is I think I cannot find any intellectual reason to not believe it can be. But as a matter of time, If you see some of the machines in Europe they are there for 15 years. And you have many of that. I think that we don't have many in China.
So a machine of 15 years gives more of the market than a machine of 2 years. You can one can say, why not replacing it? Yes, I agree. That's what we try to do in Europe as a replacement market.
But I take it you don't want to give the exact proportion right now of
No, no, no. But yes, we'll just don't like it.
Another question here in Stockholm or otherwise we pass over to the telephone conference. Operator, please can we have another question?
Your next question comes from Markus Almerud. Please ask your question.
Hi, Markus Almerud here from Morgan Stanley. Two questions. First of all, on compressor. Just the good demand that we're seeing, could you just elaborate a little bit on exactly where we see? Is it just a process in the aftermarket?
Or is it very broad based that you're seeing demand holding up? That's my first question. Secondly, on China, it sounds like on your comment that you think that it's been troughing. What is that a fair interpretation or not at all?
Yes. On China, of course, you and I we can think what it is. So I'm only commenting what I see today. And of course, I need to be in my position, I need to be ready when it go up and also ready when it go down. So that is the way you should read me.
On China, I'm only commenting what I see. So sorry for that. When it comes to CT, of course, aftermarket is in CT is still developing at a good level. That is one thing what gives this positive effect. If you look to a bit more countries, okay U.
S. Is doing a good development that I'll elaborate a bit on that one. And I contraditionally of what we said in other business area, I had seen in quarter 3 a reasonable good level on Europe. So I'm not talking it up here, but I didn't see a big drop in that area. This was rather on a flat development.
So and other areas are a bit here and there.
And why do you think this is?
I think you still have in Europe, you have one big country called Germany, which is had in quarter 3 a reasonable development. I think also when you make a comparison, we are already 3 quarters, 4 quarters in Europe low. So we start to compare with low quarters. We should not if you take really the one who has really done the reconciliation per continent and per business area And you can see that Europe is still not on the level where it was pre crisis. That's the only continent which was not there.
So we are and even now the last 4 quarters it had even going down if you take Spain, if you take Italy, take France, if you take Benelux, which was I think this year and at the end of the year soft. So I think we are comparing with also with softer periods.
Thank you.
I think we continue on the telephone conference please.
Your next question comes from James Moore. Please ask your question.
Good afternoon, everyone. I wondered if I could follow-up on the orders questions in CT and MR. In compressor, it looks like you've done double digit order growth in North America. And most other industrial and construction, I suppose, companies just aren't seeing that. So I hear the answer about the aftermarket.
But can you help us a little bit by end market? Is there any particular or a bunch of end markets that are causing that extra growth? And in mining, can you help us a bit by commodity and compare coal and iron ore versus copper and gold? Because you're pretty resilient compared to what we're hearing from some other companies in the mining space. And secondly, I wondered if I could ask about surplus cash.
I think you got about EUR 10,000,000,000. You said you're not a bank. I suppose the question is timing of returning that. Should we think about you recommending to the Board sooner rather than later?
Yes. These were more than 2 questions. I'm just reading my notes here. When it comes to orders and specific U. S, I think we see if I take which type of compressor is going on, I think it is an oil and gas.
It is an industry. There you where we see a good further continuation, good development. So that is on the U. S. Side.
Is it demand driven? Is it offer driven? Who knows? I suggest you ask that some other people. When it comes to MR, yes copper and gold are commodities who are still are in when it comes to investments still on the high level of the list of investments for mining.
So that's also our yes, more our natural beer top. And I think also there is where I trust we will get some more activities in the period to come. When it comes to coal, I have already mentioned that this softer that is where we see the majority of the drop. And of course, when it comes to iron ore for the time being we have not seen much, but I think that will soften when the period is yes, when the year is to come. Then I think on the cash, I suggest Hans Zulek can as you are at the bank Hans Zulek.
Well, no, I probably take it just because I have an
even longer history on these questions than you have.
But you're right. We history on these questions than you have. But you're right, we are accumulating some cash. I like the way you try to change the perennial question of that you always asked before when can we expect distribution of cash? And now the question, when can we expect you to propose to the Board an extra distribution of cash?
And I think the answer will be the same that we cannot comment on that timing. We make the observation of course that we are a cash generative company. We have an asset light business model and we are very profitable when it comes to the operating profitability. So obviously, over a business cycle at least, we should generate nice cash returns. When those are distributed to shareholders, I leave without commenting.
I just want to repeat what we have said before that looking back at history is probably the best answer you can get. And we have made extra cash distributions three times in the last 6 or 7 years. And hopefully that will continue. But on the timing, I will leave that question unanswered for the time being.
Thank you very much.
Thank you. We have some questions still. We have I think 5 minutes we can go. We have one question here in Stockholm by the way. So if I ask the operator to hold the question on the conference.
Just a follow-up. I think at the beginning of the presentation you mentioned Chile as one of the end markets that were somewhat sluggish or more sluggish. Chile is copper mainly and then copper seems to be having better fundamentals. Can you explain why the temporary situation in the copper Chile situation? Thank
you. Yes.
I think this is I think that is when you come out with a month of a period. So I think you should not read anything from a trend point of view, because that was also immediately my reaction when I saw the figures and say, well, what's going on? But there was no significant reason that say okay now we suddenly stop all these investments. It's just a matter that this happens in the period. But of course, if you compare to try to read the figures of the quarter you need to know that.
Okay. So we'll take another question from the telephone conference please.
Your next question comes from Sebastian Groetter. Please ask your question.
Hi, good afternoon. Two questions. The one sorry to come back on that, on the marketing and R and D from Andreas. But the if we take marketing and R and D as a percentage of sales, it declined by 50 bps Q2 Q3 versus Q2 at the margin in the Q3. I would like to know if you are happy about the current level and you don't expect a further decline in these expenses going forward into the next quarter?
Or do you or is there anything extraordinary in Q3 we should know about? And my second question is about have you seen like other industrial companies, a significant deterioration in demand in September versus August or July, which drive your cautious outlook for Q4? Thank you.
Maybe I can take first the September because one all know that September was a shorter month when you compare year on year. So it was 2 working days less. So that is an explanation of a softer September as you have seen in many businesses. I think for us, I think September, October September, August were I think more or less I must say I didn't see significant differences in that if we take it as a total company. And also we all it's always difficult to interpret also August September in Europe.
As you know, there are southern countries who have longer holiday and decisions taken, especially when business climate is difficult, you have to, yeah, interpret that a bit. But there's not a significant difference on that for September. When it comes to marketing and R and D, I think of course we because there's two difference. When it comes to marketing and that is also the message I've been spreading in the organization is, hey guys, let's harvest things because we have been growing since 2009 increasing in our investment in the market. Let's now as the demand is flat or even somewhat lower, It's time for efficiency of more efficiency.
It's time for harvesting. So we are a bit more careful on further expansion on this marketing part of it. Where in R and D, we go on. I think if you take one quarter to another it could be capitalization, it could be other thing. But I have I'm not aware that I've given instruction to limit R and D investments.
And I deliberately use the word investments because it's not expense. But of course it is expense, but it is an investment for me.
Okay. Thank you.
And then I think we have time for one final question on the telephone conference then.
Your final question comes from Eirijn Ebertson. Please ask your question.
Hi there. Good afternoon. I've got a couple of questions both sort of on the mining and some of them have been answered. But first of all, is there any chance you can give us an idea of your rough total backlog of around SEK 26,000,000,000 for you guys, which I assume more than half is on the mining side. And then secondly, just because I got somewhat confused by some of the previous questions.
So if we look over year over year basis in aftermarket versus equipment, did you undergrow? And if so, how did you manage to get your margins so high ex the FX? And maybe related to that, I would assume that you're expecting aftermarket to outgrow equipment over the following few quarters. Should that drive margin potentially even higher? Thank you.
Can I ask you to repeat the final question a little bit because I didn't catch you the first part of that question?
The final question was basically if aftermarket outgrowth equipment, if that's why, for instance, because equipment is flattish as you mentioned, should we expect margins to increase Or is there are we approaching a level where they can't go up any further? Because I think ex currency you reported record margins in the Q3.
Well, on that, I mean, you're it's obviously mathematically correct. And we say that many times. When equipment slows down the aftermarket slows down much less or not at all and that helps the margin everything else equal. But of course, the under absorption that the slowdown of equipment gives at the same time is working in the other direction. So hence, it's very difficult to make projections without having a perfect scenario on how much equipment will be affected and so on and so forth.
But the mathematical relationship is, of course, true that it supports the margin when that happens. There was also a little bit Yes.
On the backlog on equipment what I can say on that part is that construction, mining and CT more or less have the same type of backlog when it comes in say the orders on hand situation where IT has a smaller portion of backlog. If you take it in total and you exclude aftermarket where orders received is equal to orders invoiced, you can and you can calculate yourself. You would see that we are more or less have 2 quarters orders on hand for equipment.
So
that is but that you can calculate easily mathematically. So you can say aftermarket is equal to orders received or is invoiced. Equipment is 2 quarters.
Okay. Thank you.
So with that, I might have a few more questions on the telephone conference, but I hope that you can find answers directly to our Investor Relations department or myself after the call. Since we don't have time to take more in this, I thank everybody here present and on the telephone conference, of course, for participating. And I hope that we have you back at least next time we report on the Q4 31st January, if not before.
And the Capital Markets Day.
And then of course, you're quite right. I tend to forget that we have a Capital Markets Day in the middle of November on the 15th November and some of you I definitely hope to see there. Thank you very much.