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, Ronnie Leten, who will make a few comments around the results of the second quarter, and then we will move into Q&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 two, because sometimes it runs out to three and four, and that shuts out other people from posing their questions on the call. If I can ask you to do that, I would be more than pleased. With that, I hand over to Ronnie.
Thank you, Hans Ola, and good afternoon to all of you. Before I start to do my presentation, I would like to congratulate you, Hans Ola. 75 times quarter results. It is really 75 times he has been doing this, so I think this is a warm applause. I don't think there will be any CEO who will make that so many times.
Well, Ronnie, when you ambush me like that, I have to be able to respond. I can say that you can take it two 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, all this. You choose, whatever.
I choose the last.
Thanks anyway, Ronnie.
I'll start with the last one.
Okay.
Let's then immediately go to slide number three, where I will comment on the highlight. We really see a healthy demand in the market, although you will say the organic order intake has slightly declined. That's a fact. We see still good, stable demand for the small to medium-sized equipment. If you make a comparison with quarter one and quarter two, 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. I will comment during my presentation several times on that. We see a 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 a sequential improvement in Asia.
We compare with quarter one and included China. We read a lot in the press these days, we see a slight improvement. I'm very pleased to also say that also this time we have a record. We have actually two records. We have record revenue, but also a very solid operating profit above SEK 5 billion. We keep, as we have said many times, keep continue to develop a strong value. Slide number three is this. That's the figures in summary. What's wrong with the numbering? Nothing more. You can read the figures. Maybe there's one thing which I like to stress, is the increase of profit, 20% up to last year, so above SEK 5 billion, and a very solid operating cash flow, almost around SEK 2 billion, and also an earning per share, which is also almost three SEK.
We look to the orders received side. Year-to-date, we are up 7%. Sequentially, we see here and there a softening. I will explain you a bit of the red figures when I'm going to the different regions. I start with Americas, and I'm now on slide number five. We see a still robust development in North America. 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 five. 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, if I remember, around SEK 40 million-SEK 45 million from this we had not. The rest, I think it's still at a good level.
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. 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. 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 Fuel Gas Boosters, and we also landed a very large order in South Africa for mining. That made the comparison also tough here. 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 feels 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. From that point of view, we should know that we are comparing with a very strong first six months last year.
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, which is also nice to see. Organic growth, we had nine positive quarters, we didn't make 10 in a row. This time we had a minus two price volume, and now I'm on slide number nine on the bridge. 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 yielding good results, stable results on that part. Volume is a minus four. Currency positive. We have all seen that part. Structural is mainly the SCA Schucker acquisition, which has given us an extra 3%. If you look here to the book-to-bill, you see more or less that we are in sync, so almost 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, yeah, but the order intake declined with 7%.
Again, don't forget, last year, China, the first three to six months were very strong, and also this time we didn't land large equipment orders in this case. I see a still good development, say, for the small to medium size compressors. The normal installations go very well. A good development, continuous good development on the aftermarket. Operating margin, 22%. We keep investing in presence and presence. We really push hard on the organic growth part, you also know that I think market share is extremely important for us in this business. We also keep investing a lot in product development and really stretch that part more and more. You see also here we have this time, this quarter, also launched a full range of vacuum pumps. We have done the same for low pressure.
We all know cooking costs money, of course, that's also an investment which goes immediately to the P&L. We also signed an agreement to acquire a Turkish company, Turkish compressor company, which 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 decrease, it says here, on general industry. On the other hand, we see a good performance on the aftermarket. 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 and Rock Excavation, the champs of this quarter, continue to be strong on the mining side a bit less.
You remember also what I said quarter one, that I was surprised to see such a big swing up on the mining side because at that time we landed a couple bigger orders, which all come together in one quarter. Of course, we accept these orders for sure. That is when you go to compare 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. The last business area, Construction Technique More or less flat, unchanged. A good order intake in North America. That America continues to develop very well. We see also a more positive development in Brazil. Remember also that that was mentioned several times.
We see a bit of a weakness with Asia and Europe. What I want to say, that it's not that it's really now comes back in Asia, although I said there'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. Every activity which we do can yield good results. The operating margin is around 13% coming from the low 10% we had in the first quarter. We are on the right track on the Construction Technique business area. The Group total, the figures, nothing more to say which I've already said. 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.
From the currencies, they have helped us this quarter. You see the price volume part, which is around 20% in the flow through. If we go to the business area, profit bridge, the 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. We also should say, when we've made the comparison quarter-to-quarter, year-on-year, also had an 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 read and understand. Balance sheet, there is nothing special beside one, and you also have read that in the write-up where it says the assets classified as held for sale.
There we have negotiated a sale of a part of our customer finance, mainly and only for the Australian market. We'll see when that sale will really go through. We have already classified it that it is for sale. It has an effect on a couple lines on the balance sheets. The rest, I think it's nothing major on the balance sheet. Cash flow, like I already said, a solid cash flow. Tax paid SEK 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 price-focused on the receivables and on the inventory. Giving a SEK 1.8 billion operating cash flow.
The most looked slide 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. By this, I would like to give the word to Hans Ola .
Thank you. I will immediately pass it on, if I use that expression. We enter the Q&A session. We will start with two questions here in Stockholm this time, then we will move on to the conference call. In order to start, can we have the operator please repeat the procedure for the telephone conference questions, please?
Thanks, sir. Telephone participants, if you'd like to register a question, please press star followed by one on your telephone keypads and the hash or pound key to cancel. Once again, that's star followed by one to register a question and the hash or pound key to cancel. Thank you.
Thank you very much. As I said, we start over here then. I have the question, I think here. Yeah. Please.
Yes, go ahead.
Kenneth Oljeqvist 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, the volumes are falling a bit and the macro outlook is a little bit more uncertain. Are you thinking anything about scaling back your ambitions on increasing presence and putting money into R&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 with our flexible setup, what we say our agile, resilient business model, we need to make sure we adapt on our variable part. I think it would be wrong, really, to hold back on the design and development. Also these cycles are long there. They are not cycles of three months. They are cycles of three, four, five years. I should keep going on that part. I think it would also be wrong not to invest. 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 one quarter, two quarters.
I'm still a believer that there is a great future on Compressor 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. I think it's our task to really work further on that part. I will definitely not say balance that part. Having said that, of course, everybody would like, I would like to have both. That is, of course, internally, it's working on efficiency, that we will do.
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 these things happen, that you must be able to adapt your costume. That is definitely we have done, and we discussed that. Of course, you have been looking at the last six months already that you feel things coming. We have already worked on that, and we are ready to do further on that, yeah.
Okay. Thank you.
Yep. Pierre from Handelsbanken Capital Markets. A related topic, aftermarket growth, could you help us with that year-on-year growth-wise, to get a feel also sequentially. You mentioned on Mining and Rock Excavation Technique, but also I guess in compressors that we 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, I'm really showing some enthusiastic reaction. I think you should read me that it is above double digits. That is double digits, let's say. That's as far I would give differently. It is a solid development.
Year-on-year figure, I guess. Do you see?
Also sequential. I think it's still going on.
Not double digits. No.
Yeah, not double, yeah. We can, giving the year growth. Yeah.
Growth. Yeah. Any division here that needs to be commented upon, particularly strong or weak?
No, when it comes to the aftermarket, of course, if you take an example on Compressor Technique, which is an industrial aftermarket, that is continuous developing. There you don't get the 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 due to 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? 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?
First, 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 potential improvement in on the inventory is on Construction Technique and is on the mining side. That is from an improvement point of view. I think when it comes, if you have seen what we have been doing the last 10 years, Atlas Copco moved from, at that time already, a direct sales concept, but less than today. We are really moving more and more to a direct company. 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, who will say, "Hey, wait," because before the order, when the machine is delivered in Kitwe in Zambia, it takes a while. He will not accept that I will send him the invoice when it leaves Örebro. These types we also should say, you cannot eat the cake twice in that part. That is sometimes when you make a comparison in Atlas, you should see. As we get more sales now, like to Chile, to Australia, and all that, the supply chain becomes longer, which is partly in the supply chain is capital tied up. On the other hand, as we do it direct, we also have the aftermarket. That's what I mean, you cannot eat twice.
It doesn't seem that you are particularly worried about inventory to sales level per se, but of course, always working with additional improvements.
Yeah. I'm not worried. I'm not, no. If I looked at it's not. Of course, I would definitely work, and if you will call in and people internally, you would see that is a focused area where we need. I see it more as improving our flow, and that's efficiency. Efficiency is competitiveness, and that helps on that part.
Thank you.
should we go to the telephone conference? The first question, please.
Thank you. Our first question comes from Alexander Virgo. Please go ahead.
Thanks very much, good afternoon, gentlemen. I just had two quick ones, please. The first, can you give us some idea of what the underlying operational leverage was in CT, excluding the investments you've alluded to? 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? How else would you interpret that? Thank you very much.
I suggest the first one, Hans Ola take, and I will first do the second one.
It would 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, we're really talking about the third derivative of the slides that we normally show. 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 that Ronnie alluded to. I don't have an indication for you or any answer to give you on what is 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 Ronnie alluded to.
It's not just product development. We also sell more, of course, of these. 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. It is an impossible task. I'm sorry about that.
The second question you put forward is on the large compressors. One should know, and that's the comparison we are making. We compare with the first 6 months last year, where we had a very strong Asia, where primarily you also see in a mixed part, more larger compressor orders than you see in Europe or you see in U.S. That is from a comparison point of view, what you should take into account. I think, of course, what is also playing, and okay, now I put me on an area which you can debate on, of course, a certain uncertainty, maybe more difficult financing, maybe make it sometimes more difficult that these orders are landed. That is another thing what I take into consideration.
I didn't see any besides the China-Asia, and I didn't see any pattern in our order intake that 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 Kuenne. Please go ahead.
Hi. Good afternoon, gentlemen. Two questions. The first one will be on your guidance of stable demand in the near term, 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 is usually a good leading indicator. Does it mean that you expect other end markets to offset that? My second question would be about the small industrial compressor, your yellow canaries in China and the sequential development you have seen in Q2 versus Q1, and what is your view for Q3? Thank you.
Yeah. I think when it comes to the mining part, of course, that is an area which has been in the press a lot. I will comment only what I see because I'm not, I think, called 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 not really booming or whatever. It's really on the flattish side, I think when it comes to exploration. There are still some geographical spots who are doing very well on the exploration. There is a couple others where you see some hesitations to go ahead on that. Is that really an indicator?
If I see on the orders for copper, what is going on there in Chile, in Peru, I see also in Africa, 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 a general, I see still a good development in North America for this part of our business. Surprise, I see still a good development, a good level for the small to medium-sized compressors in Asia. It's definitely not falling off the cliff, neither in China. You don't hear me saying that I see it going up like that. That's also what these type of businesses never do. They really listen very carefully on that.
It's not that I see a real drop in that business. A really positive flat part, I can say on this one, yeah.
An invention.
Yeah, an invention. Yeah. New vocabulary.
Very good.
That's it.
Thank you.
Excellent. We move back to Stockholm. We have two more questions here. Please, go ahead.
Hi, it's Guillermo Peña 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? Is the trend one of a deteriorating demand for equipment in mining, or it's been just equipment flat around the quarter? 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?
Yeah. First, on the large orders, that's the way I would like to answer this first question. You say it's when you take sales figures month to month, I think you always, especially on the mining side, you really can have big swings. That you need really to look which are the big orders. Some of these big orders you sometimes work for one year, two years. Suddenly they get, and as we have seen, if you take quarter one, I remember my surprise, because then we got much more larger orders, which maybe I would have preferred them to get instead over two quarters. But if I take again, and that's I try to comment also during my presentation, we see still a good base development. You see that on the consumable parts, that it still runs.
You see there is still quotation levels going on all over.
Not a particular month?
No. If I take away, I have to clean it.
Yes.
When it comes to CT on the incremental parts, I think, of course, these investments we do on the vacuum, this investment in low pressure and other, because they should yield, because otherwise we developing a business with a low profitability, and that's not the case. 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, you need to look a bit, it could be better. There I try to explain that it is with more investments we are doing on the organic part .
You should expect a positive trend on this flow through. For sure. There is nothing really what you should say that is special or whatever. Nothing.
We had another question here in the room, perhaps. Yes, please.
I just saw that Compressor Technique had launched certain types of vacuum pumps. My question is Atlas Copco going to be a wider pump company with a broader array of pumps?
I think when you take compressors, we talk about gas. When you talk about pumps, people, now I'm starting to explain aerodynamics and fluid technology. That's different when you talk pumps, you talk liquids. Here we talk really, vacuum is still a gas, air or whatever you do. That is an area where I think, which is the BO talk about Copco. We have the vacuum part. We used to have that, 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 will do it, and also understanding the theory of aerodynamics. That is what we really explore. Will we be successful?
We are small, it will take a while before we are with the larger players, if we ever come to that.
Thank you. We go to the telephone conference again. Yep.
Thank you. Our next question comes from Klas Bergelind. Please go ahead.
Yes. Good afternoon, gentlemen. It's Klas Bergelind from Nomura. I have two questions, please. Sorry to get back on mining, I'm really interested in the split between the aftermarket and equipment and civil engineering. Given that the aftermarket and the civil engineering is basically up year-over-year, is it unfair to assume that mining equipment orders are down, let's say, 20% year-over-year or maybe 30%-40% sequentially? That is my first question. The second question is really a follow-up on that. If you could help me understand if this weakness was purely driven by a difficult comp, or if you see any underlying weakness in mining currently?
Yeah, on the first one.
We can take it together, Ronnie. The exact distribution, we have never disclosed because it is not really numbers that lends itself to follow even on a quarter basis in that way. You're right, of course, in that one is growing and the other one cannot be growing because the total was down in volume. Obviously that is the case. We are focusing on the aftermarket, and we are growing that business. We are very happy with the consumables development and the aftermarket development. On the equipment, I come back to what Ronnie has been commenting many times already, that the flow of large orders is not very steady, and it doesn't come like a pearls on a string like that.
That is one of these things that we have to take, let's say, into consideration when we compare one quarter with the first quarter or even with the second quarter last year. 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, Ronnie.
I already mentioned 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 part of that. There we still see some development going on.
I'm sorry to follow up, I'm hearing from some other guys that iron ore order is in equipment actually down year-on-year. You are basically confirming that that's still holding up?
Yeah, I think because year-over-year, I think when you look, I think on the equipment side, we are really running at a high level. I'm talking now, I'm not talking in the future, because that I don't know.
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.
Yeah. A very quick follow-up, I'll leave it over to the next question. When you're looking at that inventory build, obviously up SEK 700 million on a group level, are you taking down inventories in mining given the weak orders? Is that inventory build actually happening in mining?
I mentioned in another question, I think the majority of our inventory today is on Construction Technique and is on the mining side. When it comes to on the mining side, these are machines which are on their way to customers.
Yeah.
That is, you should see our inventory. Our inventory, all our machines, which we produce wherever in the world, got already a customer order. They are on their way to be delivered. Of course, sometimes it takes a bit more time to get it installed because we only get it when it's delivered, so to say, and working and commissioned, then really it clicks in from inventory to accounts receivable side. That is the way it works.
You are effectively-
Just to perhaps to really stress that last point. As Ronnie says, it's a flow. There is an order to the equipment that is produced, and that triggers the purchase of components, et cetera. It's a flow. It's not that we are trying to estimate what is the right level of inventory. 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 is what we always-
Yeah
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's not the way it works with the present setup that we have.
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.
You are effectively saying that when you are getting when the drill rig, for example, is someplace in Australia being shipped out from Europe, that is when you get the revenue recognition that is then lowering the inventory to sales. It's a function of lead times rather than an internal inefficiencies.
Of course, you always find some inefficiency because you have local adaptations and, okay, people are not starting immediately on this part. I can give you 100 reasons why I believe it should be lower.
Why it is on this level. That is also what we are working on, because I said, "Guys, we can do better on that part." When you travel in the world, you see this and say, "Okay, why we have not invoiced this order?" But we have to do this and this, and it hangs here a week and it hangs there two weeks, and it stays on the balance sheet.
Okay. Thank you.
Thank you. We have another question on the conference call.
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 at 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?
I think we had some salary increases there, which were a little bit below 10% if we take it all over the company in China. That is what we had in the beginning of the year. I think we do it once a year. We'll see what happens when we are back after Chinese New Year next year, whether it will come. Today, of course, you see the inflation is, compared to last year, a big difference. The likelihood, given lower inflation, the likelihood that the labor market will most likely be less pressed, that we will have labor cost inflation, I think that will be very remote. Let me say it this way.
Right.
Perhaps it could be, to add on to 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 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. 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 in make sure we develop our talent and we keep our talent, and second, we improve our efficiency. These are the two areas where we are constantly working on. Like Hans Ola already said, when it comes to labor inflation, of course, you can do something, but if the whole China is doing 10% and you don't do anything, I don't think your talent will stay with you.
Right. The 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 market share. I think we're working hard to see as much customers as we can, to really also convince them that they have the lowest life cycle cost with us. We invest in presence, and we keep doing that. From that, maybe you can deduct that, we have a positive development. If you're going to ask me, do you gain market share in Czechia or do you gain market share in Canada? That will be another answer then.
That's fair enough. 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? 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 two areas where we work in the aftermarket. We have this climb the service ladder, so to extend our product offer or service offer to our customers, so to help them to reduce their life cycle cost. There, I can tell you that we still have a lot potential. Second, do we service all our equipment when it comes from mining equipment, when it comes from tools, or it comes from whatever construction or compressors? I can tell you not. There is still a lot to take.
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. I'm rather confident that I think we can keep going on with growth. If you look back 2009, 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.
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 with sequential, you saw last quarter of last year, quarter four and quarter one were very soft in construction. 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. As I already said, when it comes to construction in China and Asia, Atlas Copco is a smaller player, all the effort and focus what we do is a gain. If you ask me to make a quote on demand, you should be very careful to what I say and interpret it.
Could you put
Maybe not a number, but an indication of whether we're talking sequentially low single digit, medium single digit.
Single digit.
Single digit.
Yeah.
An average single digit.
Yeah.
Okay. I think we have still a few questions on the telephone line. We've been very kind to Klas and Andreas. I repeat. Perhaps we go back to having two questions per caller.
Thanks, sir. Our next question comes from Aaron
Hi there. I'll be kind to you. I only got one question.
Great.
It's the favorite topic of contribution margins. Disregarding the details within the various divisions, as we're seeing equipment sales grow or 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 from aftermarket is substantially higher. If I look at the group, you've 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?
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 per krona, so to speak. At the same time, nothing is static. Depending on what phase we are in adjusting, let's say, to a slowdown of order intake or whether we are in a phase where revenues for equipment are falling, but actually the orders received are stable, that will also affect the load of the factories, et cetera. It is a very difficult question. Normally, what we have seen is that we have seen an aftermarket that is stable even in 2009 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.
Yeah.
Even if Atlas Copco is not a very leveraged operational company, as you know, there is, of course, some effect of that. It's very difficult to say, yes, you will see that in that scenario. Your basic underlying question, is it still so that the aftermarket will yield a better operating margin? Yes, definitely.
I'm just trying to understand how you're expanding or contracting your equipment cost base, call it. 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, should we call it normalized contribution margin, or would you still expect that to be weaker because of not increasing equipment sales?
Would probably be normalized in that very hypothetical or let's say theoretical, as you said yourself, theoretical example. 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 have an opinion about that before we are actually there. 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. Other question on the telephone conference call.
Thank you. Our next question comes from Andreas.
Good afternoon, gentlemen. Andreas from J.P. Morgan. I have just one question as well. It's regarding outlook visibility and large orders. For Q2, you were looking for flattish demand. Orders 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? What's been baked in 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 that may be benefiting from Hans Ola 's 75 quarters? What historically happens if you basically have weak large orders across most businesses, across most regions? What happened in the quarters afterwards 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. I just wanted, before Ronnie gives his correct answer to the question, remember that we're only talking about what we see in the demand 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 one quarter. We are not making a projection about our order intake, that's, again, because of the situation that Ronnie has alluded to, that we have large orders, we have chain, we don't know exactly the timing. Our outlook is never, how should I say, tainted by the fact that we know that we didn't get it now, but we did it in two weeks, so to speak.
That you should not read into it, Andreas. I'll leave the difficult part to Ronnie.
I think first, when you compare quarter one, quarter two, when you say that, I think you should, of course, first recalibrate quarter one, when we were trying to explain it. Because quarter one was, and I got here the question, I think you asked me, what about the real orders? Because sometimes you get large orders which really make the quarter either look bad or look good. That I think 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 Hans Ola and myself who sit together and say, "Hans Ola, what are we going to say this time? How consistent can we be?" I think we talk to all the different businesses, and the businesses are all talking to their people.
We have a whole roll-up system, which we do every month, every quarter, and every year. That works up, and then we see what comes out of that. That's really when we come to the figures. Second is when, listen also to the market, what are the leading indicators which we use? We see, okay, are these consistent rate of what we see? That is what we try to do and see where we end it. That's the type of visibility we have. Some of the businesses have reasonably 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 end at the 31st of March come in, but it comes the 1st of April. It's just come in.
We also have to take it when it comes in. That is the way it works. Our visibility 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 get?
I think we have time for another question from the telephone line.
Our final question comes from Ben Madsen. Please go ahead, sir.
Yeah, good afternoon, Ronnie. Hi, Hans Olav. Just one question from me, please, on Mining and Rock Excavation Technique. Hans Olav, you mentioned factory loading. I think in the past, you've used third parties to assemble some of your drill rigs and loaders and so forth. Could you 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 third parties? Thank you.
I can-
I actually don't have the numbers. I leave it to Ronnie.
I can answer on that one. There's still a significant part, and I don't have an exact figure either, but there's a significant part where we do the assembly work with partners outside of our operations, which really do that work. 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 or in India. The majority of the work for MR is done in Sweden and is done in U.S. We still do it, I think at a higher magnitude as we were doing that in 2007, 2008.
Great. 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, you will come back to that, Ben. I think it is significant we can drop. It's a significant drop. We know from history that, of course, I hope it will not happen, but we know that suddenly these things can come to a standstill. On the mining side, it can all be sunshine every day, but at a certain moment, you get a stop, and then it's a stop for a quarter or six months or a year. These things can happen, 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.
Great. Thanks so 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.
Hi, yes. It's Jonathan Mounsey from Exane, capital goods team. Just a question on capital allocation. Obviously, we see a strong balance sheet. There have been questions about a 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 for sure, I can promise you we will have some more to come on that part. We are hunting, and the likelihood you land smaller ones is much larger than you will land a bigger one. We are exploring the market. When it comes, we will take it, and then that is the second priority. The third priority is shareholders. It's either a dividend or something else. Who knows what will come out?
That, I think, will be a subject which Hans Ola 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.
Even if I would underline as well the sequence that Ronnie said, well, we both would like to say that shareholders are not coming third, but they're coming very high up on our agenda. In this capacity, yes, we go for organic growth, but capital allocation, acquisition, and then see if we have still capital enough, then of course, we have no problem, like we did in 2005, 2007, 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 will also be repeated in the future. Everything comes in that order that Ronnie said.
Then one thing is also, maybe Hans Ola, 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 time being in the pipeline. I think we have done a couple bigger ones, which are now landing the cash flow. When it was here in Sweden, I think we did a couple in India, which we will open very soon, and the same as in China. We believe that given the present volume we need, I think we have a reasonably good capacity.
Absolutely. We don't foresee any further growth in those type of investments. No.
Knowing that this company makes 20% EBIT plus, you see what the flow too is, you can calculate yourself.
Yep.
That sounds like acquisitions or capital return.
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. 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. With that, I think that we are 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. I thank you for participating both here and on the telephone conference. Thank you very much.