Welcome everybody to the third 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, Ronnie Leten. We will follow a very common and now known format where Ronnie gives his comments on the third quarter performance, and then after that we have a question and answer session. I think we don't need any more prelude, so please, Ronnie, take it from there.
Okay. Thank you, Hans Ola, and good afternoon for all of you here present and listening in. As usually, I will go quickly through the presentation, give my viewpoints. Then we can immediately shoot the questions. Highlight: a good quarter. Very solid profitability despite the softer market. Just elaborate a bit on the market. We see definitely for equipment, a softer market in Q2 already, as you've seen in the figures, also when you look to Q3, sorry. When you look to our outlook, you see also that we are expecting somewhat softer demand for the period to come. Solid profit, orders up, price volume 1%, weaker in equipment. 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 Ola will elaborate further on that, even if we take away that part, it's still a good cash flow. When you calculate the value creation, this company still creates value. Here you see, and we put this slide in just to show you why it make me saying it is a solid quarter. You see orders received, orders invoiced. If you look over the last four quarters, it's rather the same level. We had, and you all remember the quarter one, 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. 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 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 SEK 8.7. The cash flow, I'll let it up to Hans Ola later on. If we take then slide number five, 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 -2% compared to last year. All the others are slightly positive, not as we are used to be.
As I already said a couple times, we should get used to lower figures and hopefully not too many black figures. The Americans, +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. If we take away, we still see a very solid U.S. and Canada. A good industrial part, mainly also coming from compressors. A softer Mining, mainly coming from a softer coal business, that is a bit compensated. I must say, I still see good development in North America. Smaller order growth in South America, mainly a softer Mining part.
You see the Chilean, Peruvian market a bit softer because it's really Mining driven. A flat development in Brazil. Europe. Negative. Very depressing. We see that part is going down in most countries. Germany keeps up, but also we see there, as I also said in the Q2 call, that we also see they're slightly softening. 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. If we exclude South Africa, you 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, I've already mentioned a couple times when I was meeting some of you, this is a bit of a mixed view where you see Southeast Asia, South Korea, strong. Good development going on in that area. China, we call it here at a good level, but I will 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 sequentially flat to slightly lower development. India is soft. If you take these four blocks together, you come still with a slightly positive one. Australia continues to develop well because this is the whole Mining part and of course, also the good work, what we do there. If you see, last time we had a minus, now we have a small plus.
Let's see what that will bring us in the next quarter. Let's go immediately to the sales bridge, where you see currency -3%. All the movements going on with the Swedish krona and then the dollar and the real and others, it makes it a rather complex comparison, but it came out as a -3% for us. Price volume +1%. We still see that our pricing keeps up. I think 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. That goes on. The currency plus minus the volume, we come up to a +1% in orders received.
Revenue, we know we still have the pipeline to come. A book to bill, a bit less than one now. Let me go to the different business area to start with Compressors, the largest one. We had a healthy level of order take for Compressors. A bit different mix, but a good gas and process demand. That is energy driven. That part of the world is still investing a lot and of course, we go together in that slipstream. A good development on parts and service, what it also says here on the aftermarket. We continuous see good development all over in the world. Even in markets like Italy, we succeed to increase for Compressor our aftermarket. That's definitely the hard work, what we are doing. Operating margin 24%. Held by the currency, remember.
If the EUR gets a bit softer, that is a good sign for Compressors because we produce still a lot in our largest plant in Belgium. That has helped a bit. 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. Of course, we continuous to extend our product offer with the acquisition of the small Danish company of the nitrogen and oxygen generator. Which allows us to really have our own product portfolio and to develop further from that platform. We go Industrial Technique, a bit weaker than recent quarters, but still at a good level. Of course, we all know that MVI with all the models, it cannot go on all the time.
We get a bit of cycles there. 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. Because we are model driven. 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%. This is just the opposite what I just told about CT. Here we have much more exposure to the Swedish krona because we are manufacturing our core tools in Sweden. Of course, when Swedish krona strengthen, you cannot eat the cake twice. Then we got a bit negative affected by this currency. Sorry. Now I go to Mining and Rock Excavation.
Lower demand for equipment, I assume that is not a surprise for many of you here present. All over we see that there's a bit of waiting to come to larger orders. 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 two or three quarters of equipment. It's not falling fully down, but it is lower. We all know that when the mining is moving, it's not moving with one up, one down. It's really going with a couple of 5% and 10%. This is the way it works in this business. We see still a strong demand for service and parts. That continues to be at a good level.
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, what does he first? Okay, make sure he reduces inventory. That we also have seen as a symptom in 2008, 2009, that the consumable first dropped and then to come again. 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 even negative affected by the currency. A very strong profitability from the mining guys. Construction Technique, weak demand in Europe. You know also that is one of our biggest market we have.
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 helped us, of course, to make a bit of 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 reason why it is a bit lower on that part. 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 Karlskrona. The figures, I think you all know them, and I would suggest that I hand over now to Hans Ola.
Thank you, Ronnie. 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. 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 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. 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 for a single quarter, it can be rather significant revaluation of Long-Term Incentive Program provisions. That is entirely moving up and down, not entirely, but to a large extent with the valuation of the Atlas Copco share price.
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 it was not big, but it was still negative this quarter. Otherwise, a 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. 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. 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 second quarter and the third quarter if you strip out the effects of different currency rates. 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. When we say operating cash flow, the only thing that is not included is acquisitions and divestments and dividends.
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 1.4 billion in the quarter, and that has, of course, helped to show this very strong quarter cash flow. Even without that, I think that the SEK 3.2 billion cash flow in a quarter, remembering that we have not had any help yet from reducing working capital. I think our assessment is that it was a very strong cash flow for the quarter. With that, I think I hand the word back to you, Ronnie.
Yeah. We come to our long outlook. We try to make it shorter, but we didn't succeed this time. As I already said in the beginning of my presentation, we expect compared to quarter three, we expect that the demand will decrease somewhat, so that it will softening somewhat. With this, I would say that we are ready for the questions.
Yeah. We are ready for the Q&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 two questions at a time maximum, because otherwise we will not let so many people ask questions as we would have liked to. I ask the moderator on the telephone conference, please repeat the procedures for the questions, please.
Thank you, sir. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please note that it's a limit of maximum two questions per person allowed. If you wish to cancel your request, please press the hash key. Your first question comes from Andreas Willi. Please ask your question.
Good afternoon, gentlemen. Two questions, please. The first one on your investments in terms of R&D feet on the street. I think you've slowed that a little bit earlier this year, and we've 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? Should we use current levels as the normal rate? 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? What's your outlook there in terms of how long these very high levels of investment in some of their end markets? Thank you.
Yeah. The part of where to invest for sure, like I mentioned also during my presentation here when I was talking about price, of course, Atlas Copco will keep investing in design and development. In research, in innovation, because that is the core of Atlas Copco. If you remember also during the tough 2008, 2009, 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, yeah, I'm not too sure that will be the best moment to invest there.
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. To summarize R&D, it gets a triple plus on investment. In feet in the street, we will definitely be selective and be looking for efficiency. On compressors, 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.
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, 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. It will not only the gas and process mix, it will also be the aftermarket mix. If I generalize, I see more little bit softer equipment, higher aftermarket mix going forward.
Thank you very much.
Your next question comes from Alexander Virgo. Please ask your question.
Hi, good morning. Two questions, please. One, 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. 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 have been pointing out that there is quite a lot of inventory in the channels, particularly in the Construction business. Perhaps you could give us some color on that. Thank you.
I think on the consumables, that is what we see. That, 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 lasted that time two to three quarters, we saw already a positive development. How long will it be now? I don't know. It's also a bit of a mixed view. It's not geographically equally spread. When it comes to the inventory across the divisions, our model is primarily a direct model. Even if we go indirect, we don't want that our distributors, our indirect channel, 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 Technique and in Industrial Technique. 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. It's not in the channel, it's in our pipeline as such. Yeah. I hope that gives you-
Flavor
enough on that part.
Thank you.
Your next question comes from Ben Maslen.
Sorry, I think we cut in with two questions from Stockholm before. Sorry to keep you waiting, Ben, but you'll get your chance.
It's Guillermo Peigneux from UBS. Couple of questions. First, regarding Compressor 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, 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. It's to create value, and that's also in CT. I want them, even when there is headwind to grow, to find that part. We have seen an improvement with that. 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 getting the same return." That is, we keep doing. 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 it, you were aware 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. That is, for me, it's CT is, hey, guys, become bigger.
On MR, yeah, 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 allow us to slightly do that shift. It's not that we don't have any orders on hand, we are allowed to move around, and that is happening. We are on one hand reducing, you have seen that also on the balance sheet, maybe on that.
Yeah.
If you look deeper, you see our purchasing value is going down. That is the first sign of that part. On the other hand, you get a better mix. You get less equipment, more off the market. That part should normally compensate that part.
Another question here in Stockholm, perhaps?
Yes.
Yep.
Peter Frölén, Handelsbanken Capital Markets. Two more CT margin-related questions outside the organic leverage. You mentioned dilution on acquisitions. Was that mainly an effect of them reporting lower profitability, or do we have any short-term issues like PPAs and others that will go away? That is the first question. The second one on the CT margin and the effects. Will the euro production heaviness sort of create a net positive also in the fourth quarter, given what you see today, or is that way too optimistic?
Yeah. You take the FX, and then you take
Yeah.
Yeah?
Yep.
On the acquisition. If you acquire companies in our business, it's very seldom we can buy companies with the same profitability level.
You say, yeah, synergies should give you, of course. This integration, these moves, they take time. When you do 10, I like to talk about two and three every time. Six or seven are okay, and one or two, yeah, we need to use a bit more push to get them. If you take that is so to say our performance on that. In a mix point of view, they bring the-
Dilution
yeah.
Value.
They bring the margin a bit down. Just when they're clicking in the quarter.
I understand. Just is there any sort of extraordinary item there-
No
just this quarter as opposed to constantly seeing that?
No. No. It would be published then.
As you refer to yourself, the Compressor Technique business area has, out of the four, the strongest base in euro costs. 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. From a cost versus income point of view, they are getting helped. If we look ahead, I think it will be the same if you look quarter four to quarter four, 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, and we don't know that. If you take on a sequential, in the sequential meaning from Q3 to Q4. Yes, it is still at levels that are better than last year. Yeah, that's right.
Right.
If I move over to, I think, was it Ben Maslen that was in line for a question on the conference call? Operator?
Your next question comes from Klas Bergelind.
Aha, sorry we missed you.
Please ask your question.
Okay. Go ahead.
Yeah, 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? 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. That's the same development as we saw in the first quarter. Could you please explain that disconnect?
Yeah, I can start from the bottom there. I don't think that you can do a perfect mathematical model to understand that, because I think that the return on capital employed year-on-year is actually spanning 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. 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. The incremental margin is, you say it's better, yeah, 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. I think that.
Can I--
Yeah, if you would like to.
Clarify a little bit. What I mean here is that you're obviously still investing in the business. My question is, given that the incrementals are now improving, is that your assets that you have invested, are your salespeople, your engineers, are they getting more efficient? I'm just trying to understand what is the delta here on the incremental margin sequentially? 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 this 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. 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, one quarter. This can go on for, if you take on the low pressure, like I elaborated also last time, I think this could be a journey for a couple of years.
Okay.
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. We can perhaps elaborate more after the call on that one. 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. I don't see the exact mathematical connection between the two as you do. Perhaps we can do that later. Is that okay?
Yeah. That's absolutely fine.
Perfect.
Okay.
Only if you answer my first question on the aftermarket.
Yeah
Yeah. I will try to come into it.
We tried to fool you there, but we couldn't.
No. I think on the aftermarket NMR, I still expecting that will develop in a positive way. What you see, of course, the consumable 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. Given our product portfolio, our presence, I believe that part will come back to where it was before. Again, is a mixed part. If equipment over a certain period will be softer and then eventually it will also hit revenue, I believe that the mix will go positive for aftermarket. I think when it comes to the profitability, the theoretical profitability, given that there is not more under absorption, that will be a positive mix effect.
Just to underline, Ronnie, I think you said it twice already, that it's not the full non-equipment part of MR that we refer to. It's primarily the consumable side that had this effect of replenishment of stocks, et cetera, that we referred to. We don't see it as a general negative trend on aftermarket. I just want to underline that.
No, I understand that. Consumables is obviously sort of a little bit lower margin than the total service business.
Correct.
Yeah.
Thank you, Klas. Is there another question on the telephone conference?
Next question comes from Ben Maslen. Please ask your question.
Yeah, good afternoon, Ronnie. Hi, Hans Ola. 2 questions, please. Firstly, is there any way you can 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. 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 govern. What's your view, and what are you planning for? Thank you.
Yeah. I think when it comes to the sequential demand, if we start with the areas where I think we will have the most significant drop, if we can use that word, I think is 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 all the signals we read and we hear and all that, so I'm a bit more careful there where we are saying, yeah, likelihood that equipment will go down is significant, is there. That is my second business area which I believe will go down with substantial amount in equipment.
Industrial Technique, especially due to the MVI part, the models, we see that 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 there, so maybe we can have more part there. We fight back. If you take it purely from a demand point of view, Ben, I should say, the MVI. On CT, compressor side, I see there my yellow canaries being slightly negative if I make that part. Then you have, of course, the turbo compressors, which is a Chinese. The biggest market is China.
Yeah.
You remember also there, we compared with last year, which was a very high level. There also, I expect that it will hang in, so to say. I don't expect it much more going down, but who knows? There, I'm a bit more alert on that. That gives me the entry to China. Yeah, who knows what the new regime will bring? I also like to read positive news and stimulus package and opening up. 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, although we are small there, we're creeping up. It's not standing still anymore, so there is activity.
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 mine. These activities are going on, but it's not a plus market. It's still a flat market.
Okay. Thanks so much. Very clear. Thank you.
We have two questions here in Stockholm again. Over here.
Thank you. That's Anders Idborg at 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. 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 2007, 2008?
One thing for you all. It's today already our single largest service organization in the world, just to calibrate everybody there for CT. 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 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. Atlas Copco started to do that, and 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.
We don't have the historical legacy of our machines if you compare China with Europe, so that will take time. The ratio over time will definitely improve.
Do you think it will reach the level of Europe and North America? When would that be?
I think I cannot find any intellectual reason to not believe it can be. It's a matter of time. If you see some of the machines in Europe, they are there for 15 years I have many of that. I think that we don't have many in China. A machine of 15 years gives more of the market than a machine of two years. One can say, "Why are you not replacing it?" Yeah, I agree. That's what we try to do in Europe, is the replacement market.
I take it you don't want to give the exact proportion right now.
No.
All right.
Mattias will 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 compressors, just the good demand that we're seeing, could you just elaborate a little bit on exactly where Is it just the 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. Is that a fair interpretation or not at all?
On China, of course, you and I, we can think what it is. I'm only commenting what I see today. 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. That is the way you should read me. On China, I'm only commenting what I see. Sorry for that. When it comes to CT, of course, aftermarket 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, U.S. is doing a good development that I elaborate a bit on that one. I contradictionally of what we said in other business area, I had seen in quarter three a reasonable good level on Europe. I'm not talking it up here.
I didn't see a big drop in that area. This was rather on a flat development. When other areas are a bit here and there.
Why do you think this is?
I think you still have, in Europe, you have one big country called Germany, which has had in quarter three a reasonable development. I think also when you make a comparison, we are already three quarters, four quarters in Europe low, 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. We are in an even now the last four 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. I think we are comparing also with softer periods.
Thank you.
Your next question-
I think we continue on the telephone conference, please.
Your next question comes from James Moore. Please ask your question.
Yeah, good afternoon, everyone. I wondered if I could follow up on the orders questions in CT and MR. In Compressor Technique, it looks like you've done double-digit order growth in North America, and most other industrial and construction exposed companies just aren't seeing that. 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? In Mining and Rock Excavation Technique, 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. Secondly, I wondered if I could ask about surplus cash. I think you got about SEK 10 billion. 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?
Yeah. These were more than two questions there, James. 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 where we see a good further continuation, good development. 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, copper and gold are the commodities who are still in, when it comes to investment, still on the high level of the list of investments for mining. That's also more our natural biotope, 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 is softer. That is where we see the majority of the drop. 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 year is to come.
I think on the cash I suggest Hans Ola can, as you are the bank, Hans Ola.
Yeah. Well, no, I probably take it just because I have an even longer history on these questions than you have. 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 a further extra distribution of cash? Now the question, when can we expect you to propose to the board an extra distribution of cash? 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. 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. We have made extra cash distributions three times in the last six or seven years, and hopefully that will continue. 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 five minutes we can go. We have one question here in Stockholm, by the way. If I ask the operator to hold the question on the conference. Yes.
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. Then copper seems to be having better fundamentals. Can you explain why the temporary situation in the copper Chile situation? Thank you.
Yeah. Comparisons. I think you know that is when you come out with a month of a period. I think we should not read anything from a trend point of view, because that was also immediately my reaction when I saw the figures to say, "Well, what's going on?" 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. Of course, if you compare to try to read the figures of the quarter, you need to know about that.
Okay. We take another question from the telephone conference, please.
Your next question comes from Sebastian Kuenne. Please ask your question.
Hi, good afternoon. Two questions. Sorry to come back on that on the marketing and R&D from Andreas, if we take a marketing and R&D as a percentage of sales, it declined by 50 basis points Q3 versus Q2 at the margin in the third quarter. I would like to know if you are happy about the current level, you don't expect a further decline in these expenses going forward into the next quarter. Is there anything extraordinary in Q3 we should know about? 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, it was two working days less. That is an explanation of a softer September as you have seen in many businesses. I think for us, September, October or September, August were more or less, I must say I didn't see significant differences in that if I take it as a total company. Also it's always difficult to interpret also August, September in Europe. As you know, there are southern countries have longer holiday and decisions taken, and especially when business climate is difficult, you have to interpret that a bit. It's not a significant difference on that for September. When it comes to marketing and R&D, I think, of course 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 harvesting 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 more efficiency. It's time for harvesting. We are a bit more careful on further expansion on this marketing part of it. Where in R&D, we go on. I think if you take one quarter to another, it could be capitalization, it could be other thing. I'm not aware that I've given instruction to limit R&D investments. I deliberately use the word investments because it's not expense. Of course, it is expense, but it is an investment for me.
Okay, thank you.
I think we have time for one final question on the telephone conference.
Your final question comes from Aaron Jacobson. Please ask your question.
Hi there. Good afternoon. I've got a couple questions, both sort of on the mining, some of them have been answered. First of all, is there any chance you can give us an idea of your backlog in mining and sort of the timeframe? I get to sort of a rough total backlog of around SEK 26 billion for you guys, which I assume more than half is on the mining side. Secondly, just because I got somewhat confused by some of the previous questions. If we look over year-over-year basis in aftermarket versus equipment, did you undergrow? If so, how did you manage to get your margins so high ex the FX? 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 outgrows equipment, if that's why, for instance, because equipment is flattish, as you mentioned, should we expect margins to increase? Or are we approaching a level where they can't go up any further? Because I think ex currency, you reported record margins in the third quarter.
Well, on that, 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. Of course, the under absorption that the slowdown of equipment gives at the same time is working in the other direction. 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. The mathematical relationship is, of course, true, that it supports the margin when that happens.
Yeah, 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, and you can calculate yourself, you would see that we are more or less have two quarters orders on hand for equipment.
That you can calculate easily mathematically. You can say aftermarket is equal to orders received, orders invoiced. Equipment is two quarters.
Okay. Thank you.
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 fourth quarter, the 31st of January, if not before.
The Capital Markets Day.
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 of November, and some of you I definitely hope to see there. Thank you very much