Results. I welcome, of course, everybody here in the room in Stockholm, but also all participants on the telephone conference. We will follow a very known format this afternoon and I will soon hand over to our Chief Executive Officer, Roni Lettin, who will make a few comments around the results of the Q2 and then we will move into Q and A session as usual. This time, I already now would like to ask the persons that are going to put some questions to limit the questions to maximum 2 because sometimes it runs out to 34 and that shuts out other people from closing their questions on the call. So if I can ask you to do that, I would be more than pleased.
So with that, I hand over to Ronny.
Thank you, Hansula, and good afternoon to all of you. But before I start to do my presentation, I would like to congratulate you Hansula. 75 times quarter results. So it is really 75 times he has been doing this. So I think this is a warm CEO who will make that so many times.
Well,
Ron, when you ambush me like that, I have to be able to respond. And I can say that you can take it 2 ways. Either there is this whatever you call him without fantasy, without anything better to do with his life or you can say it's a fountain of experience and everything knowledge. So you choose whatever. I choose the last one.
Thanks anyway Ron. I'll start
with the last one. So let's then immediately go to slide number 3 where I will comment on the highlight. And we really see a healthy demand in the market, although you will say the organic order intake has slightly declined. That's a fact. But we see still good stable demand for the small to medium sized equipment.
If you make a comparison with quarter 1 and new quarter 2, which most of you have been doing? It's mainly the I can say the lack of order intake of larger orders for larger compressors and mining equipment what makes the difference. And I will comment during my presentation several times on that. We see a very, very strong development in the aftermarket, which I'm very pleased to see that the efforts, which we have taken since a while is also yielding good results. We see sequential improvement in Asia.
We compare with quarter 1 and included China. We read a lot in the press these days, but we see a slight improvement. And I'm very pleased to also say that also this time we have a record. We have actually 2 records. We have record revenue, but also a very solid operating profit above €5,000,000,000 And we keep as we have said many times, keep continue to develop strong value.
Slide number 3 is this. So that's the figures in summary. So what's wrong with the numbering? Nothing more. You can read the figures.
Maybe it says one thing which I like doing stress is the increase of profit 20% up to last year, so above EUR 5,000,000,000 and a very solid operating cash flow almost around €2,000,000,000 and also an earning per share, which is also almost SEK 3. If we then look to the orders received side, Year to date, we are up 7%. Sequentially, you see here and there a softening. I will explain you a bit of the red figures when I'm going to the different regions. And then I'll start with Americas and I'm now on slide number 5.
We see a still robust development in North America. So the order intake remains at a high level in almost all businesses we are visiting. When you look to the figures when you compare year on year, you see a minus 5%. This comes from the large order, which we had last year in Mexico. You can say unfortunately, we had not this year, but it was a big one.
So around if I remember around $40,000,000 $45,000,000 So on this we have not. But the rest I think it's still at a good level. And we see also good development on the construction equipment. South America, strong all over. Chile, Peru is really the market which is developing very well.
And we see also sequential improvement in Brazil. You remember that I said several times it is a bit softening, but there we also see some improvements. Europe, largely flat. If we have to look for the very positive spots, it is East Europe and Russia, which are doing very well, where we have tougher conditions. We all know Southern Europe.
I think that is no surprise for anyone. But I see also that the Western part of Europe is also getting tougher conditions. High level in Middle East and Africa, although you see a minus, but again here we had a very tough comparison because last year we landed a big order in the Middle East for fewer gas boosters and we also landed a very large order in South Africa for mining. So that made the comparison also tough here. But if we take this away, we also see still a positive development in Africa and Middle East.
Asia, I've already said sequential improvement and sequential improvement also in China. Year on year a good development in mining. When we compare year on year, it's still softer when we take the industrial compressors and construction equipment. I can highlight also on that part if we compare sequentially, it is improving in that area. So from that point of view, we should know that we are comparing with a very strong first 6 months last year.
So that is something to take away when it comes to Asia and particularly to China. I see good development talking about Asia in India That is this quarter. I see it also in Korea and I see it also the Singapore region, if I take it. And then I mean Malaysia, Indonesia and of course Singapore as such. We see good development in that area.
And Australia, what can I say more, it continues? Now even we landed a large compressor order for LNG, so which is also nice to see. Organic growth, we had 9 positive quarters. So we didn't make 10 in a row. So this time we had a minus 2 price volume and now I'm on Slide number 9 from the bridge.
But what is good to see is that price keeps up. I think our work on innovation, new products, all the time work on that part is also and is yielding good or stable results on that part. Volume is a minus 4 percent currency positive. We have all seen that part. And structural is mainly the Schuker acquisition, which is giving us an extra 3%.
If you look here to the book to bill, you see more or less that we are in sync. So most as much output as we had input. Let me go then to the different business areas and I start with compressor technique on Slide number 11. We have at least that's my assessment a healthy level of order intake. You can say, yes, but the order intake declined with 7%, yes.
But again, don't forget last year China the 1st 3 to 6 months were very strong. And also this time we didn't land large equipment orders in this case. But I see a still good development say for the small to medium size compressors are normal. The normal installations go very well. A good development continuous good development on the aftermarket.
Operating margin 22%. We keep investing in presence presence and presence. We really push hard on the organic growth part, as you also know that I think market share is extremely important for us in this business. But also we keep investing in a lot in product development and really stretch that part more and more. And you see also here we have this time this quarter also launched the full range of vacuum pumps.
We have done the same for low pressures. And we all know cooking costs money. And of course, that's also an investment which goes immediately to the P and L. We also signed an agreement to acquire a Turkish company, a Turkish compressor company, which has is the majority of its activity in the Turkish region, but also in Russia. Industrial Technique keep being robust on order intake coming from the motor vehicle industry, which is very strong all over in the world.
We see a slight softening or decreases this year on general industry. But on the other hand, we see a good performance on the aftermarket. And the performance of the business area when it comes to the bottom line keeps continue at a good level coming around 22.8%, so around 23% almost. Mining rock excavation, the chance of this quarter continue to be strong on the mining side, a bit less. And you remember also what I said quarter 1 that I was surprised to see such a big swing up on the mining side because at that time we landed a couple of bigger orders, which all come together in 1 quarter.
And of course, we accept these orders for sure. So that is when you go to compare it, it will be a negative comparison. We see a slight decrease on equipment. On the other hand, we see a very strong development on aftermarket and consumables and that continues. Record operating profit in absolute terms and also a fantastic operating margin of 24.8.
And the last business area, Construction Technique, more or less flat, say unchanged. Good order intake in North America that Americas continues to develop very well. We see also a more positive development in Brazil. Remember also that that was mentioned that several times. We see a bit of weakness so with Asia and Europe.
And what I want to say that it's not that it really now comes back in Asia. Although as I said, it's a sequential improvement in China, it does not mean that it is now suddenly swinging up. There is improvement. And you also know that when it comes to construction technique in Asia, we have a lot of potential. So every activity which we do is yes, can give yield good results.
And the operating margin is around 13% coming from the low 10% we had in the Q1. So we are on the right track on the Construction Technique business area. Group total, the figures, I'm hoping more to say, which I have already said. So I will go immediately to the profit bridge, where it is all coming from. You see, we get a bit of contribution from the acquisitions.
We from the currencies that helped us this quarter. And we see the price volume part, which is around 20% in the flow through. If we go to the business area, profit base is different ones. Really you will immediately spot it on compressor technique. Like I already said, we keep investing in the presence.
We keep investing in product development. And we also we should say we had when we made the comparison quarter to quarter 2 year on year, 2 goes ahead and unfavorable mix make it a negative flow through. All the others are more or less I think in line what we can all see and we can understand. Balance sheet, there is nothing special beside 1 and you also have read that in the write up where it says the assets classified as held for sales. So there we have negotiated a sale of some part of our customer finance mainly for the mainly and only for the Australian market.
So we'll see when that really will sale will really go through. But we have already classified it that it is for sale. And it has an effect on a couple lines on the balance sheet. So but the rest I think it's not being major on the balance sheet. Cash flow, like already said, a solid cash flow, tax paid 1.3 in the quarter.
The rest is mainly straightforward. You see also the change in working capital get less and less, which I think is also the work we have been doing to be high focus on the receivables and on the inventory. So giving a EUR 1,800,000,000 operating cash flow. And then the most maybe most looked slides on it by most of you here present and listening in, it is we still believe that the overall demand for our products and services is expected to remain at this current high level. And by this, I would like to give the word to Hans Ole.
Thank you. And I will immediately pass it on if I use that expression. So we enter the Q and A session. And we will start with 2 questions here in Stockholm this time and then we will move on to the conference call. But in order to start, can we have the operator please repeat the procedure for the telephone conference questions
please. Thank you, Thank you.
So thank you very much. As I said, we start over here then and I have the question I think here. Yeah.
Please go ahead. Kennet Hall Johansson from Carnegie. A question on compressor technique. You say that the margin is held back a bit from your investments into increasing presence and product development. Now we see that in the order intake, scaling back your ambitions on increasing presence and putting money into R and D in order to protect margins going forward?
Thank you.
Of course, I have to start explaining our business model first, but I will rephrase from that. First of course, when you see sales going down, of course, one thing we need to make sure that we with our flexible setup, what we say our agile resilient business model we need to make sure we adapt on our variable part. But I think it would be wrong really to hold back on the design and development. Also these cycles along there, they are not cycles of 3 months. They are cycles of 3, 4, 5 years.
So I think we should keep going on on that part. I think it would also be wrong not to invest. And now I'm particularly thinking about Asia to keep further developing our presence to grow talent, to invest in training than to go for short term 1 quarter, 2 quarters. So I'm still a believer that there is a great future on compressed technique. When we talk like this example I gave on low pressure, the world will need low pressure compressors.
The world will need vacuum. The world will need efficient compressors. So I think it's our task to really work further on that part. So I will definitely not say balance that part. Having said that, of course, everybody would like I would like to have both.
And that is of course internally it's working on efficiency that we will do.
But you haven't initiated any extra cost out programs due to slowing orders right now or
I think the different setups of course it is always that when things happen that you must be able to adapt your costume. That is definitely we have done and we discussed that. And of course you have been looking that the last 6 months already that you feel things coming. And we have already worked on that and we are ready to do further on that. Okay.
Thank you.
Yes. Yes. Pieter Bruegelen, Handelsbanken, Capital Markets. Related topic, aftermarket growth, could you help us with that year on year growth wise to get it still also sequentially? And you mentioned on mining rock exploration technique, but also I guess in competitors that you see a rather decent aftermarket growth year on year.
Could you shed some light on those topics? That's my first question.
I think when it comes to aftermarket and I am really showing some enthusiastic reaction I think then you should read me that it is above double digit. That is double digit, let's say. That is as far as I would give the different thing. So it is a solid development.
Year on year figure, I guess. Do you see
And also sequential. I think it's still going on.
Not double digit. Yes.
Not double digit. Yes. We can giving the year growth. Yes.
And any dilution here that needs to be commented upon particularly strong or weak?
No. When it comes to aftermarket, of course, you have when you take if you take an example on composite zinc, which is industrial aftermarket that is continuous developing. There you don't get really when it comes to aftermarket on the mining side as you go in, you can sometimes get big orders, big contracts, which you get a little bit that can go sometimes faster for a while.
A question on the inventory and partly related to this. We have seen an inventory build in relation to sales during the structural reasons, the last couple of years' acquisitions and divestitures, but also given the expansion into aftermarket and service. What should we expect a couple of years down the road with the current structure of Atlas Copco? How much inventory should you actually carry? And to get to that process, is there risk here for a margin overhang in that sense that you need to make the inventory more efficient
to get the cash flow out?
1st, do we need to make the inventory more efficient? Yes. There is always a better way. I think I'm not going to take off on that part neither internally, neither externally. I think the two areas where we have the biggest improved potential improvement in on the inventory is on Construction Technique and is on the mining side.
So that is from an improvement Technique and is on the mining side. So that is from an improvement point of view. Then I think when it comes if you have seen what we have been doing the last 10 years, Skopka moves from at that time already a direct sales concept, but less than today. We are really moving more and more to a direct company. So that means our supply chain to the outbound is longer and you cannot eat the cake twice.
It's not that when the machine is leaving our factory that we already have sent the invoice to the customer. He would say, hey, wait, because before the order when the machine is delivered in Kitwe in Zambia, it takes a while. You will not accept that I will send in the invoice when it leaves Ouroboros. So these types we also should see. You cannot eat the cake twice in that part.
So that is sometimes when you make a comparison in Airbus you should see. And in Airbus, we get more sales now like to Chile, to Australia, all that it's The supply chain becomes longer, which is partly in them in the supply chain is capital tied up. But on the other hand, as we do it direct, we also have the aftermarket. And that's what I mean you cannot eat twice.
So I mean it doesn't seem that you are particularly worried about inventory to sales level in per se, but of course always working with additional improvement.
Yes, yes, yes. And I'm not worried, I'm not. If I look to it, it's not. But of course, I would definitely work. And if you will call in and people internally, you will see that is a focused area where we need, because I see it more as improving our flow and that's efficiency.
Efficiency is competitiveness and that helps on that part.
Thank you. So should we go to the telephone conference? The first question please.
Thank you. Our first question comes from Alexander Virgo. Please go ahead.
Yes. Thanks very much and good afternoon gentlemen. I just had 2 quick ones please. The first, can you give us some idea of what the underlying operational leverage was in CT, excluding the sort of the investments you've alluded to? And the second question again on CT.
You mentioned large compressor weakness in terms of the orders. Do you think that that's indicative of a change in customer outlook or behavior? Or how would you how else would you interpret that? Thank you very
much. I suggest the first one Hans will take and I will first do the second one.
But it will be very short answer. Of course, this is dissecting the micro parts of the result and I'm not going to get into that trap. The operational underlying leverage then we're really talking about the 3rd derivate of the slides that we normally show. But as it's impossible to even if we wanted to eliminate that type of an effect because it appears in very different shapes and forms. It deals with product development.
It deals with the market investments really the flow through from the pure comparable. If we look at this way of talking about incremental profit generation from increased sales, of course, we sell sometimes more of exactly the same. But sometimes we sell more of the examples that also Roni alluded to. It's not just product development. We also sell more of course of these.
But to know exactly in what phase and what is the underlying leverage coming from those increased sales, we only know perhaps if we look back 5 years from now and try to understand what really was the composition. So this is an impossible task. I'm sorry about that.
Yes. Then the second question you had put forward is on the large compressors. 1 should know and that's the comparison we are making. We compare with the 1st 6 months last year where we had a very strong Asia where primarily you'll see when you in a mixed part more larger compressor orders than you see in Europe or you see in U. S.
So that is from a comparison point of view what you should take into account. Now I think of course what is also playing and okay, Noah put me on an area which you can debate on. Of course, a certain uncertainty maybe more difficult financing, maybe making it sometimes more difficult that these orders are lending lending. So that is another thing what I take into consideration. But I didn't see any besides the China Asian, I didn't see any pattern in our ordering take that this so it is specific this or that reason.
Okay. Thank you very much. Another question from the telephone line please.
Thank you. Our next question comes from Sebastian Gutter. Please go ahead.
Hi. Good afternoon, gentlemen. Two questions. The first one will be on your guidance of stable demand in the near term. And I just wanted to have a bit more color on the outlook for the different end markets.
I guess given the weaker demand for mining exploration, you tend to have a rather cautious view on mining equipment. It's usually a good leading indicator. So does it mean that you expect other end markets to outtake that? And my second question would be about the small industrial compressor, your yellow canaries in China and the sequential development you've seen in Q2 versus Q1 and what is your view for Q3? Thank you.
Yes. I think when it comes to the mining part then of course that is an area which has been in the press a lot. And I will comment only what I see because I'm not I think call to talk for someone else in this case. I see that on the equipment side, we still see a healthy demand. On the exploration side, we see it's definitely it's not really booming or whatever.
It's really on the flattish side, I think when it comes to exploration. There are still some spots, geographical spots we're doing very well on the exploration being there is a couple others where you see some, yeah, hesitations to go ahead on that. Is that really an indicator if I'll see on the orders for copper, what is going on there in Chile, in Peru, I see also in Africa then I see still I'm still positive on the mining side when it comes to equipment. When it comes to the yellow canaries, I think they still do their work. I see if I go a little bit deeper than only to take it general, I see still a good development in North America for this part of our business.
And surprise, surprise, I see still a good development, a good level for the small to medium size compressors in Asia. So it's not definitely not falling off the cliff neither in China. You don't hear me saying that I see it going up like that. And then that's also what these type of businesses never do. They really listen very carefully on that.
But it's not that I see a real drop in that business. A really positive flat positive I can say on this one, yes. Try not to sell it. Yes, an invention, yes, new vocabulary. Very good.
Thank you.
Excellent. We move back to Stockholm and we have 2 more questions here please. Go ahead.
Hi. It's Guillermo Pinheur from UBS. A couple of questions actually. First regarding mining equipment through the quarter, is there any particular month that you've seen a particularly weaker demand I. E.
Is the trend one off a deteriorating demand for equipment in mining or it's been just flat around the quarter? And then second question regarding weak incrementals in compressor technique. When do you expect those weak incrementals to normalize in a way? I understand that the volumes are somewhat weaker. But if on a normal volume environment, when would you sort of expect those 25% incrementals to come back?
Yes. First on the large orders that's the way I would like to answer this first question. So it's when you look to when you take sales figures month on month, I think you always especially on the mining side, you really can have big swings and that you need really to look with the big orders. And some of these big orders you sometimes work for 1 year, 2 years. So then suddenly they get.
And SPF seen if you take quarter 1, I remember my surprise, because then we got much more larger orders, which maybe I would have preferred them to get instead over 2 quarters. Yes. So and that is so but if I take again and that's I tried to comment also during my presentation, we see still a good base development. You see that on the consumable parts that it still runs. So you see there is still quotation levels going on
all over. Not a particular month.
No, no, no. If I take away, I have to clean it from Yes. Yes. When it comes to CET on the incremental part, I think of course these investments we do on the vacuum, these investments in low pressure and other because they should yield because otherwise we have a we're developing a business with a low profitability and that's not the case. So I think we should expect that in the whatever quarter in the near term quarters we get back to a good level that one.
Because if I say the 22% is not a punishment, we should really calibrate this. I think the 24% because this is a bridge where we compare the figures with the flow through. The 24% is a very solid level. Maybe the 22 is with currency we say, yes, you need to look a bit. It could be better.
But there I try to explain that it is with more investments we are doing on the organic partner. But you should expect a positive trend on this flow to There is nothing really what you should say that that is special or whatever.
We have another question here in the room perhaps. Yes please. I just saw that Compressor Technic had launched certain types of vacuum pumps. My question is, is Atlas Copco going to be a wider pump company with a broader radio pumps?
I think when you take compresses when that is then we talk about gas. When you talk about pumps, people now I'm starting to explain aerodynamica and fluid technology. That's different when you talk pumps than you talk liquids. Here we talk really and vacuum is still a gas, air or whatever we do. So that is an area where I think which is the pitotope of arthroscopco.
And we have the vacuum part we used to have that yes not the full range. We have never been talking about. Now we really put more focus on this because there's a potential for us which is close to home for us when it comes to technology, when it comes to the same customers, when it comes to the same people what we'll do it and also understanding the theory of aerodynamica. So that is what we really explore. Will we be successful because we are small?
So it will take a while before we are with the larger players, if we ever come to that.
Thank you. So we go to the telephone conference again. Yes.
Thanks, Stefan. Our next question comes from Klas Bergelind. Please go ahead.
Yes. Good afternoon, gentlemen. It's Klas Bergelin from Nomura. I have two questions, please. And sorry to get back on mining, but I'm really interested in the split between the aftermarket and equipment and civil engineering.
Given that aftermarket and civil engineering is basically up year on year, is it then fair to assume that mining equipment orders are down, let's say, 20% year on year or maybe 30% to 40% sequentially? So that is my first question. And the second question is really a follow-up on that. If you could help us help me understand if this weakness was purely driven by a difficult comp or if you see any underlying weakness in mining currently?
[SPEAKER SEBASTIEN DE MONTESSUS:] Yes. On the first one, I'm not taking We cannot give you I can we can take it together, Roni. The exact distribution we have never disclosed because it is not really numbers that lends itself to follow on even on a quarter basis in that way. You're right of course in the that one is growing and the other one cannot be growing because the total was down in volume. So obviously that is the case.
But we are focusing on the aftermarket and we are growing that piece. We are very happy with the consumables development and the aftermarket development. Whereas on the equipment, I will come back to what Ronny has been commenting many times already that the flow of large orders is not very steady and it doesn't come like a pearl of strings like that. And that is one of these things that we have to take let's say into consideration when we compare 1 quarter with the Q1 or even with the Q2 last year. So it's and on the underlying situation, I think, you can repeat almost what you have said before on if there is an underlying weakness in the mining demand for equipment, Roni.
And I have a question
I already mentioned where I see where is our biggest exposure on the mining side. It is iron ore. It is copper. That is the majority of and then you can say gold and you part that. And there we still see some development going on.
But I'm and so I'm sorry to follow-up, but I'm hearing from some other guys that iron ore orders in equipment actually down year on year. And I was just you are basically confirming that that's still holding up?
Yes. I think because year on year, I think when you look I think on the equipment side, some of the we are really running at a high level. And I don't see unless I'm talking now, I'm not talking in the future because that I don't know. That that would be like I would like to know. If I see now, it's more or less on the same level.
That is what we see.
Yes. And a very quick follow-up and then I'll leave it over to the next question. But when you're looking at that inventory build obviously up €700,000,000 on the group level, are you taking down inventories in mining given the weak orders? And or is that inventory build actually happening in mining?
[SPEAKER JEAN FRANCOIS VAN BOXMEER:] I mentioned in another question, I think the majority of our inventory today is on constructions and technique and is on the mining side. And then when it comes to on the mining side, these are machines which are on their way to customers. That is you should see our inventory. Our inventory, all our machines which we produce wherever in the world got already a customer order. So they are on their way to be delivered.
And so of course, sometimes it takes a bit more time to get it installed because we only get it when it's up to when it's delivered so to say and working and commissioned then really it clicks in from inventory to accounts receivable side. So that is the way it works.
So you are effectively
Perhaps to really, really stress that last point. As Roni says, it's a flow. There is an order to the equipment that is produced and that triggers the purchase of components, etcetera, etcetera. So it's a flow. It's not that we are trying to estimate what is the right level of inventory.
So when we say we can do better and drive down inventory, it's only that we can shorter the lead time of our chain by being more efficient. That's what we always are coming back to. That's the way we work with inventory, not saying that let's get rid of 30% of the inventory. It doesn't it's not the way it works with the present setup
that we have.
And if you make a benchmark between CT and mining rock excavation when it comes to the level, I would make the statement here you will never be able to make the same ratio in the mining as you make in compressor never.
So you are effectively saying that, Duarte, when you are getting the sort of well, when the drill rig, for example, is someplace in Australia being shipped out from Europe, that is when you get sort of the revenue recognition that is lowering the inventory sales. It's a function of lead times rather than an internal sort of inefficiencies.
Yes. Yes. And of course, you always find some inefficiency because you have local adaptations and okay people are not starting immediately on this part. So I can give you 100 reasons why I believe it should be lower and why it is on this level. And that is also what we are working on because as I said guys we can do better on that part because when you travel in the world you see this and say okay why we have not invoiced this order.
Yes, but we have to do this and this and it hangs here a week and it hangs there 2 weeks and yes it stays on the balance sheet.
Okay. Thank you.
Thank you. So we have another question on the conference call, yes?
Thank you. Our next question comes from Andre Kukhnin. Please go ahead.
Hi. It's Andre from Credit Suisse. Thank you for taking my questions. Firstly, I wanted to check on the labor inflation in emerging markets, especially China. That was one of the issues the beginning of the year that we talked about a lot.
Can you just comment on that how that's evolved? And what are you doing to deal with it at the moment?
Yes. I think we had some salary increases there, which were a little bit below 10%, if you take it all over the company in China. So that is what we had in the beginning of the year. We'll see I think we do it once a year. We'll see what happens in when we are back after Chinese New Year next year so whether it will come.
Today, of course, you see the inflation is compared to last year a big difference. So I would the likelihood giving lower inflation, the likelihood that the labor market will most likely be less depressed that we will have labor cost inflation, I think that will be, yes, very remote. Way. Right.
Perhaps it could be to add on to that that what we can do as Atlas Copco in that scenario is not really to make the market have 8% salary increases. They become what they are so to speak. However, we are very focused on reducing, for example, the turnover rate of our people because you can have you might have to accept the salary increase, but the cost if you have a very high turnover rate is of course much more difficult to handle. And that we are very pleased that we are running at actually a much lower turnover rate of our employees than the benchmarks that we see for international and Chinese companies for that matter in China.
I think our focus when it comes to labor force in China is to make sure we develop our talent and we keep our talent. And second, we improve our efficiency. These are the 2 areas where we are constantly working on. And like Hans Ul already said, when it comes to the labor inflation, of course, you can do something. But if the whole world if the whole China is doing 10 and you don't do anything, I don't think your talent will stay with you.
Right. And second question I have is on CT. Would you say you've taken market share in CT in the second quarter?
I'm always very careful to make any public statement when it comes to share. I think we're working hard to see as much customers as we can to really also convince them that they had the lowest life cycle cost with us. We invest in presence and we keep doing that. So from that maybe you can deduct that yes, we have a positive development. But if you're going to ask me, do you gain market share in Czechia or do you gain market share in Canada?
Yes, I will yes, that will be another answer then.
Fair enough. And lastly, I just wanted to ask maybe a slightly strange question. But just hypothetically, if we imagine a year of no capital equipment sales growth
like 2013, I think might prove to be.
Would you say your aftermarket would still grow in that environment? And what kind of rate should we think of the kind of high single digits that you've achieved, say, on average over the last 10 years? Or should it be better or worse?
I think when it comes to the aftermarket and when you read back about our strategy, I think we have 2 areas which where we work in the aftermarket where we climb the service ladder, so to extend our offer product offer or service offer to our customers, so to help them to reduce their life cycle costs. And there I can tell you that we still have a lot of potential. 2nd, do we service all our equipment when it comes from mining equipment, when it comes from tools or it comes from whatever construction or compression? I can tell you not. There is still a lot to take.
So and that is where we need to work and to develop products and to develop and train our salespeople. So to convince our customers that we can do a better job than they do it themselves or one of our competitors can do. So I'm rather confident that I think we can keep going on with growth. And if you look back 2,009, if you take the crisis, which was one of the deepest one really, then you saw also that we kept up a reasonable level on the aftermarket.
Thank you. Right.
Thank you.
So I look around here in Stockholm, if we have another yes, we have another question here
as well. Guillermo from UBS. One follow-up on China. When you say sequentially improving, is that seasonally adjusted for both Construction and Industrial Compressors?
When it comes to construction, I think when it's sequential, you saw last quarter now I say last quarter of last year quarter 4 and quarter 1 were very soft in construction and what you have been reading is also what we have experienced. I see some positive signs on that part. You see some orders landing on that one. But as already said, when it comes to construction in China and Asia, Agnusco is a smaller player. So all the efforts and focus what we do is a gain.
So if you ask me to make a quote on demand, you should be very careful to what I say and then to pre it.
And could you put like maybe an indication not a number, but an indication of whether we're talking sequentially low single digit, medium single digit? Single digit. Single digit, yes. On average.
Okay. I think we have still a few questions on the telephone line. We've been very kind to Claus and Andreas. So I repeat perhaps we go back to having 2 questions per caller.
Thanks, sir. Our next question comes from Arren Ibozzon. Please go ahead.
Hi, there. I'll be counting to you. I only got one question. It's a favorite topic of contribution margins. Disregarding sort of the details within the various divisions, As we're seeing equipment sales grow or like sales in general grow sales growth in general slow, should we expect contribution margins to tick up for the group as I believe previous communication is that contribution margins needed from aftermarket is substantially higher.
And if I look at the group, you've sort of gone from double digit last quarter up to 18%, 19% this quarter. Do you expect this to continue to increase through the year because of stronger aftermarket? Or is there something else at play that we should be aware of?
I think, of course, we would agree that if nothing grows except for the aftermarket that is normally a good sign for the margin development because it is significantly more profitable for krona so to speak. It but at the same time nothing is static. And depending on what phase we are in adjusting the let's say to a slowdown of order intake or whether we are in a phase where revenues per equipment are falling, but actually the orders received are stable. That will also affect the load of the factories etcetera, etcetera. So it is a very difficult question.
Normally what we have seen is that we have seen an aftermarket that is stable even in 2,009 or can even continue to grow And we have seen falling equipment sales. In that scenario, of course, you lose something of the contribution, let's say, the absorption of fixed cost in the factories. And even if Atlas Copco is not a very leveraged operational company as you know there is of course some effect of that. And so it's very difficult to say, yes, you will see that in that scenario. But your basic underlying question, is it still so that the aftermarket will yield a better operating margin?
Yes, definitely.
But if I'm just trying to understand how you're expanding or contracting your sort of equipment cost base call it. So if we go back to the previous question, I believe suggested a scenario where equipment sales is roughly flat and aftermarket is up call it high single digits. Would you still expect to have a sort of should we call it normalized contribution margin? Or would you still expect that to be weaker because of not increasing equipment sales?
We'd probably be normalized in that very hypothetical or let's say theoretical as you said yourself theoretical example. But again, the phase that we happen to be in that quarter when we are standing here analyzing can look differently. And that is what I mean that it's very difficult to talk have an opinion about that before we are actually there. So I just suggest that we keep on reporting every quarter and we try to keep very transparent how the result is coming out. And that is probably the best indicator for what will happen also in the future.
Okay. Thank you.
Thank you.
Another question on the telephone conference call.
Thank you. Our next question comes from Andreas Willi. Please go ahead sir.
Good afternoon, gentlemen. Andreas from JPMorgan. I have just one question as well. It's regarding outlook visibility and large orders. For Q2, you were looking for flattish demand.
Orders then were down on Q1 because of the weaker larger orders. How much visibility do you have on some of these larger orders that didn't happen in Q2 happening in Q3? And kind of what's been baked in your guidance or expectations for flattish demand in Q3? Did some of these orders just slip a quarter? Or is this a general change in trend and maybe benefiting from Hanzola 75 quarters?
What historically happens if you basically have weak large orders across most businesses across most regions? What happened in the quarters afterwards it normally? Is it just a leading indicator for the smaller orders?
Even with 75 quarters of experience, your question became more and more difficult to answer. The longer you asked, gives his correct answer to the question, Remember that we are only talking about what we see in the demand development from our customer development from our customer segments. That's what our customer centers around the world are trying to explain to us as we are in this phase of looking forward 1 quarter. We are not making a projection about our order intake. And that's again because of the situation that Ronny has alluded to that we have large orders, we have chain, we don't know exactly the timing.
And so our outlook is never, how should I say, tainted by the fact that we know that we didn't get it now, but we it in 2 weeks so to speak. That you should not read into it Andreas. But I'll leave the difficult part to Roni.
So I think first I think when you compare quarter 1, quarter 2 and when you say that I think you should of course, 1st, recalibrate quarter 1 when we were trying to explain it because quarter 1 was and I got here one of the question I think you asked me. What about the real order? Because sometimes we get larger orders which really make the quarter either look bad or look good. And that I think you should when you look to an outlook, you should take that away. When it comes to what is our visibility and how does it work and how do we work on that or is it just Hanzula and myself who sits together and say, Hanzula, what are we going to say this time?
And how consistent can we be? I think we talk to all the different businesses and the businesses are all talking to their people. And you know we have a whole roll up system, which we do every month, every quarter and every year. So that works up and then we see what comes out of that. And that's where really when we come to the figures.
2nd is when listen also to the market what are the leading indicators which we use And we see, okay, are these consistent of what we see. And that is the try what we try to do and see we ended. So that's the type of visibility we have. And some of the businesses have reasonable good visibility because they have their quotation level. The only thing is when it comes to a large order and I can tell you sometimes I would like to have the large order ended the 31st March come in, but it comes the 1st April because it just come in.
So then we also have to take it when it comes in. So that is the way it works. So our visibility is, I think is reasonable. Can it be better? It's not exact science, but it's based on all the different sensors we have in the business, which look to it and we roll it up and then we see okay does it match with some general indicators that we can't be at.
I think we have time for another question from the telephone line.
Our final question comes from Bed Madsen. Please go ahead sir.
Yes. Good afternoon, Ronny. Hi, Han Solo. Just one question for me please on mining and rock excavation technique. Han Solo you mentioned factory loading.
I think in the past you used 3rd parties to assemble some of your drill rigs and loaders and so forth. Can you just talk a bit about whether you still do that? How the relationship works? And then just maybe how much of your overall assembly capacity, if you can measure it like that, is with 3rd parties? Thank you.
I actually don't have a number.
Yes. I can answer on that one. It's still a significant
the
assembly work with the partners outside of our operations which really do that work because otherwise I think we should really have extended the assembly floor space enormous. This happens mainly in U. S. And in Sweden. We don't do that in China, we're in India.
So but that's also the majority of the work is done for MR is done in Sweden and is done in U. S. But we still do it at I think at the higher magnitude as we were doing that in 2,007, 2,008.
Great. And what kind of is there any way of measuring what kind of volume drop you could suffer in mining and rock excavation and still have your own factories relatively full?
It can go to no, because you will come back to that, Ben.
But I
think it is significant we can drop. It's a significant drop, but because we know from history that because I hope it will not happen, but we know that suddenly these things can come to a stand still. Because on the mining side, it can all be sunshine every day. But at the moment, you get a stop and then it's a stop for a quarter or 6 months or a year. These things can happen.
And we are built or we have made our concept like that. I don't allow them to invest in more floor space, more roof. I think they should look for other alternatives.
Okay, great. Thanks very much. Thank you. I seem to have one final question on the telephone line or perhaps not.
Thanks. Our next question comes from Jonathan Mounsey. Please go ahead. Yes. It's Jonathan Mounsey from Exane Capital Goods team.
Just a question on capital allocation. So obviously, we see a strong balance sheet, there have been questions about special dividend or significant acquisitions, I think you've talked about in the past. Could you give any comment on whether you're considering perhaps a special dividend at the year end or alternatively whether the pipeline for acquisitions is looking particularly strong right now?
The sequence of capital allocation is of course to support our business, our organic growth. That I think is first priority. I think the second priority what we have is acquisitions. It can be small, which we for sure I can promise you we will have some more to come on that part we are hunting and the like you land smaller ones is much larger than you will land a bigger one. But we are exploring the market.
When it comes, we will take it. And then that is the 2nd priority. And the 3rd priority is the shareholders which is either dividend or something else. Who knows what will come out. But that I think will be a subject which Anzuel and I we will debate and then also discuss it with the Chairman and the Board, I think, at the end of the year when we see the reality coming.
[SPEAKER JEAN
FRANCOIS VAN BOXMEER:] If it is, I would underline as well the sequence that Roni said, well, we both would like to say that shareholders are not coming 3rd, but they're coming very high up on our agenda. But in this capacity, yes, we go for organic growth of capital allocation acquisition and then see if we have still capital enough then of course we have no problem like we did in 2,005, 2,007, 2011 to look at do we actually have too much capital in relation to our plans and still being a conservatively leveraged company. Yes, I think that is more looking look in the history and I think that will tell you that there are perfect possibilities that that will also be repeated in the future. But everything comes in that order that Roni said. So
And one thing is also maybe Antsolo we can elaborate. I think when it comes to more CapEx investments going for expanding capacity, I think that there is not much for the think
we did a couple
in India which we will I think we did a couple in India which we will open very soon and the same is in China. We believe that given the present volume we need, I think we have a reasonable good
capacity. Absolutely. We don't foresee any further growth in those type of investments.
So and knowing that this company makes 20% EBIT plus and you see what the flow through is then you can calculate yourself. [SPEAKER JEAN FRANCOIS VAN BOXMEER:] Yes.
So that sounds like acquisitions or capital return? [SPEAKER JEAN
FRANCOIS VAN BOXMEER:] Well,
it doesn't lead you don't get much left so
to speak because the organic growth we seem to be able to satisfy without having a big capital need. That's why we're so cash generative. And again, as a final note, I think the priority of organic acquisition and then distribution is quite okay with a 38% return on capital employed. So that's a little bit how we like to see the shareholders still being well taken care of. So with that, I think that we have reached the end.
Of course, as usual, we meaning myself and the Investor Relations team at Atlas Copco, we are happy to respond to more questions following this. But I thank you for participating both here and on the telephone conference. Thank you very much.