Most welcome, everybody here in Stockholm, and also, of course, everyone participating on the telephone conference line to this presentation of Atlas Copco's Second Quarter 2011 Results. We will follow a very well-known format. After a few seconds more, I will hand over to our CEO, Ronnie Leten, who will go through the slides that are also available on the web, on his comments on the second quarter. After that, we will have a short break for arranging the questions, and then we will mix between questions on the telephone line and questions here in Stockholm. With that, I think I'll hand it over to you, Ronnie, right away.
Thank you, Hans Ola, and welcome all of you to our call on the quarter two results. As usual, I will start immediately with the highlights. It's on slide number two. We had a fantastic audience received for this quarter. It was again a record. As it says here on the slide, a very strong organic growth in orders received coming from mining, the manufacturing, and the construction area was a bit slower, but all the rest was really going very well. What is making me really pleased to see is that we also have record revenue. Remember that we get good order income, but you must also get it out. This time we really had a very strong revenue with, as a result, also record operating profit. That was very good that we saw these three records, and I'm very pleased to see that.
We continue to invest in the market. Densification is still the message we give to all our people in the field. Feet in the street is really an issue and a point where we push on. Of course, the product development goes on, and we are launching new innovative products continuously. This time it will be the last time we will report in three business areas. Next time when we're standing here, it will be reporting in four legs. You will find at the end of the presentation also information about the new four business areas, so you get used to this way of reporting. If I go then to the figures, like I said, SEK 22 billion when it comes to orders received, record high. Also the same for the revenue where we come close to SEK 20 billion and an operating margin, profit of 20.9%.
Hans Ola will, when we talk about the bridge, elaborate a bit more on that. When you look to the operating profit, almost SEK 4.2 billion. The rest, I think you can see that. When it comes to the operating cash flow, also that I will let to Hans Ola when we have a dedicated slide on that. As you can read, this was heavily affected by financial items. Now I would like to go to slide number four when we talk about the total group development and sales. As you see, all continents came up with very high figures. You see all double-digit growth, even all above 20%, with the exception of South America. As we all know, that was also the region which came back the fastest after the crisis. All regions are very strong in their development.
Let's go more specific, and we take first one on the Americans, a very strong North America. That is what we have seen and coming from the mining equipment, but compressors, air treatment, portable industrial compressors, industrial tools, they were all strong in that region. More specifically on the U.S., we had a very strong United States in quarter two. We had a very large mining order in Mexico, but even if we exclude that, I think the region had performed very well. What we see is compared to last quarter that the construction market is, for at least our orders, softer than in quarter one. When we then look to South America, +1 3%, so a continuation of the development. We see there maybe a softer growth in Brazil because that is the biggest market. That means also that, yeah, we only, and I can say only + 13%.
Let me then go to Europe. A very strong Europe we saw, + 22%. Still the same picture as in quarter one, a strong Germany, Scandinavia, very solid, and a very strong Russia. On the other hand, a soft Southern Europe, and of course then you talk Spain and Italy. We saw on all types of equipment, we saw good development, but again, a little bit softer on the construction equipment side. When you look to Africa and Middle East, there's a bit of a mixed picture. The southern part, the central southern part of Africa, very strong, very solid. Of course, that comes mainly from the mining part. The Middle East, North Africa, and we all see the turbulence there, it's a bit softer. Of course, when you look to the figures, + 55%, you say, what is she talking about? Softer.
Of course, it is also influenced by this fuel gas booster order we got in May, and which was also announced in a separate press release in Saudi Arabia. Let me then go to Asia and Australia. A very robust Asia, increased orders received in all the markets. Maybe when you look, you compare the + 37% with + 24%, you can say, yeah, it is that softer. Of course, we compare with a very strong quarter one. It is sequentially lower in this area, especially when we talk China. That is, but again, it is the second best ever. What we see is a bit of a softer India. That we can say that that is this quarter definitely a point to take away. We see a continuous development of the aftermarket.
That is nice to see that our One-to-one ratios and climbing the service ladder strategy is really yielding the result. Australia, yeah, what can I say more? It continues to go driven by the demand in the mining sector. That was a fantastic development in quarter two. Slide number eight, you see here with six quarters all above 20% and really almost the last five always cruising close to + 30%. We mean also that we know what to compare with; the comparison will be tougher because the demand is on a higher level. The sales bridge, structure changing. Our add-on acquisitions, + 1%, currency, - 14%. If you do a quick calculation, SEK 2.5 billion, that is more or less gone in currency. What I really see and like to see here is the price development. We see here a + 2%.
It's the robustness of the work, what we do in the market, and price management over innovation really allows us to, the cost inflations you always have first with the material, but also on the salary side, really also to bring back to the market and volume you can see here. What is maybe another point to take away, you see here the book to bill. Again, we booked another extra SEK 2 billion on the orders on hand. We then go by business areas. We take Compressor Technique, record order intake, plus 27% organic, fantastic portable and industrial compressor sales, but also the air treatment products. We hardly talk about that, but they were also very strong this time. Our late cyclical business, the Gas and Process, also had a very solid demand coming from energy projects and air separation projects.
Again, the aftermarket, our dedication to work on the One-to-one, is also here paying back. An operating margin of 23.5%, a very strong operating margin. The positive effect you can read here in volume and of course the price. Of course, we get the negative effect, the headwind we get from the currency and a bit of revenue mix as we are invoicing a bit more equipment than we did in the previous quarter. Last but not least, we also have bought some land in India to extend our facilities and also we are planning to extend our manufacturing capabilities in India. I will go to slide number 12 when we talk about Construction and Mining Technique. A very strong demand in the mining industry. A bit softer on the construction side, especially when we look to Brazil, India, and a bit in China.
I already talked about the record order we got from Peñoles in Mexico, which was always nice to get these type of big orders. Continued good development for parts and service and the consumables. That's a good continuous business. We had again a margin above 20%, 20.1%, which was a record operating profit for this business area. That was again a very strong result. Let me then go to slide number 14 in Industrial Technique. Also here, you see, I don't know how many times I've already said record now, but it's record order intake, 37% up. Strong demand in all customer segments, in all major regions, and these major regions are U.S., we see Europe, we say India, and we say China. They were really all very strong. Otherwise, you cannot make this + 37%. We all know that.
What is nice to see is that even if we had a real currency headwind here, as we know that this business area has most of their exposure for manufacturing in Swedish krone, had a profitability of 21.8%. I'm very pleased to see that. We see also that our hard work here is also yielding results, and you can see it on slide number 15 that we really have here, my favorite V-shape recovery on the operating margin. The group total, I will not repeat more, but you see the profit before tax + 20% when we compare to last year's same quarter and the basic earnings per share, SEK 2.46, and the return on capital employed where we're also working on 34%. I would like now to hand over with this to Hans Ola.
Thank you, Ronnie. I will make a few comments on the following slides. If we start by looking at the difference between operating profit and the profit before tax, that is represented by the financial net. In this quarter, we have the normal negative net interest cost, of course, of about SEK 120 million, or exactly SEK 120 million. We have some negative currency, financial currency differences, I should say. We also, as we write in the report, have a contribution from selling the RSC shares, the rental service shares that we still own as a legacy from the divestment of that business, of SEK 75 million plus . All in all, SEK 96 million negative. If we look ahead, everything but the interest net is difficult to predict.
On the net interest cost, we estimate that we will be looking in the next couple of quarters at somewhere around minus SEK 150 million, as a relatively good guess. It could be thereabouts or slightly higher, but in that region. We still own some rental service shares that we intend to sell just like we have sold in this quarter and the previous one. When we sell those shares, if the rates or the share price on those shares stays as it is, it will add roughly SEK 100 million. That might happen in the third quarter, but it can also spill over to the fourth quarter if nothing exceptional happens, of course. If we move a little bit further down, we have the tax impact. It was slightly higher this quarter than the previous one, but not dramatically higher.
I think, again, if we look in the next couple of quarters going forward, you should expect somewhere between 26% and 27% in effective tax rate. I think that's what we can see right now. We also do what we refer to as a profit bridge versus last year, the same quarter. Here you can see on slide 17 that the so-called Flow-through of organic growth, price, and volume is coming down to more normalized levels. We talked a lot about this all quarters after the crisis. I think now with the 33%, 34%, it's coming, as I said, closer to a more normalized Flow-through from the volume increase. You can also appreciate the big currency impact, both on the revenue line compared to last year, SEK 2.4 billion, and as much as SEK 915 million on the currency.
A majority of that, but it's both Transactional effects, meaning that there are currency effects of those SEK 915 million, a little bit more than half, is truly affecting the margin negatively. Whereas the rest, SEK 400 million or something like that, is a pure Translation effect that doesn't have a very big impact at all on the margin. In other words, we can see that compared to last year, this result is about 2% negative effect on the margin compared with last year. When we look at the final column, you can see a slight negative contribution from acquisitions and divestments. This is related to two of the acquisitions where we yet have to see that the volumes following the financial crisis haven't really picked up yet. Orders are there to a certain extent, but we are still seeing a negative contribution from those in this particular quarter.
I think that the most important thing talking about the big currency impact is, of course, to look at the sequential situation. We know that our result today, 20.9%, is really with the currency rates that are prevailing in the second quarter. We have no hedge effects or anything like that. When we looked at what happened from Q1, we had a negative impact already from Q1 to Q2 of about a half a percentage point, roughly. The rest of the slightly lower margin than in Q1 comes from the product mix, as also Ronnie alluded to. To a certain extent, we also had a little bit higher corporate costs in the second quarter. That should, again, if we look ahead, come down to a more normalized SEK 150 million negative as our best estimate for the next couple of quarters.
When we are on the subject of the bridges, when we look at the currency situation today, as we speak, we know that that is more favorable currency rates than we had in Q2. However, it will still be negative compared to last year Q3, without any doubt. When it comes to the effect on the result on the margin, we don't expect that to be very big at all. When we look at the statement we made three months ago that comparing 2011 to 2010, we talked about a negative impact that could be as high as SEK 1.5 billion. I would say that that still stands as a rough estimate, which means that the second half of the year compared to the second half of 2010 will not, as we see it today, show very much of a negative comparison at all.
Slightly negative perhaps, but not much at all. If we move further, I think I will pass on the next slide, which is looking at the same situation per business area, because as you can see, the so-called Flow-through is very similar on all three business areas. On the balance sheet, not much more. The most important change if we compare with the beginning of the year is, of course, on our cash holdings, which is, of course, related to that in the second quarter we have paid almost SEK 5 billion in dividend and another SEK 6 billion in the capital reduction through a mandatory redemption of shares. At the same time, you can appreciate that the higher volumes are also translating into a slightly higher working capital.
Nevertheless, this big capital distribution, and now I'm on slide 20, has not yielded a dramatic impact on our capital debt structure. The net debt to EBITDA right now, 30th of June, comes, of course, back up again, but only to 0.8%. The funding and the debt situation is still very favorable and stable, I would say. To a point that perhaps needs a little bit of comment as well, we talk about the cash flow, and Ronnie alluded in his highlights about that it is a lower number as we refer to the operating cash flow on slide 21. You look at the bottom, we say SEK 567 million in Q2 versus SEK 2.5 billion in the same quarter last year. The main impacts are to be found in the second and the third row of the slide.
The change in working capital is, of course, quite natural since we are now growing dramatically, the production levels and the invoicing levels. Actually, I would say that the change in working capital is perfectly in line with the growth of the business. We don't see any extra inefficiency in that situation right now. The line above, which is net financial items and taxes, has another big impact of about SEK 1.3 billion. As commented in the written report, the main explanation is that we have large bond loans in Atlas Copco, and the absolute majority of those interest payments related to that falls in the second quarter and in the fourth quarter, not in the first and the third.
That means that compared to the strong cash flow of the first quarter, SEK 2 billion that we had in Q1, we now see a difference in that respect of about SEK 1 billion compared to Q1. Compared to last year, one might then question why wasn't it the same payment of interest last year? It actually was. At that time, we had a lower interest cost, primarily due to the fact that we were paying variable, very low interest rates at that time. Now, as the interest rate level of the world has gone up, we have locked in the interest rates, but it also means that we pay slightly more. The big impact is that we also have a financial currency hedge of the loans and the equity that we have in the group.
That has swung from a relatively large positive effect on cash flow last year to a big negative impact this year. That explains almost the whole billion of that difference. We don't foresee anything of these types of flows for the coming quarters. When it comes to these rolling of the currency hedges for financing for the loans and for the equity, of course, we cannot predict what the future will be when we have those rollovers. I would say the underlying cash generation in the group is nothing particularly worrisome in this respect. I just needed to point your attention to that. You can see the rest of the impact. Compared to last year, we're also investing a little bit more in the plant and our buildings. With that, we can move on. I hand back the word for the final comments to Ronnie.
Yeah, so we come to the last slide before we go to the Q&A. That is the outlook. As you can read here, we expect that the remainder demand to remain at the current high level. I would like to stop here, Hans Ola, and then immediately go to the questions, which I assume there will be.
Excellent. We have questions coming in through the telephone conference, and we will surely have questions here. If the operator can repeat the procedures for the Q&A session, please.
A quick reminder to the telephone participants: if you do wish to register a question, please press star followed by one on your telephone keypad. It's the hash or pound key to cancel.
Perfect. Thank you very much. I think we will start here in Stockholm, then let the questions on the conference call get organized. Yes, first question.
Peder Frölén from Handelsbanken Capital Markets. A couple of questions on your outlook, please. First of all, are you talking about sales or order volumes? In the outlook of a, call it, flattish demand on high level, could you please help us out with the split between the base business, the aftermarket? Is it so that you have received a normal amount of large size orders here in the second quarter and the first? That's the first question on the outlook. Second question on the outlook. Obviously, it's the construction that has not been growing sequentially. I guess that's also the segment where you see not contributing to demand quarter on quarter. Could you mention some of the segments that are contributing? Finally, on the outlook and China in particular, could you help us out there which segments are the strongest and the weakest in the quarter and ahead? Thank you.
Hans Ola, I suggest you start with giving a definition about the outlook.
No, absolutely. The outlook is and has always been the order, let's say, focused on the order situation, which means that what we try to predict is the demand from our customers. It's not the projection of how much sales we will have or revenues or indeed even order intake. It's an estimate of how the demand situation will develop from now throughout the third quarter. It's not the comparison with previous year either, just to make that very, very clear.
Yeah, so I need to try to explain to answer your questions. I think when it comes to the aftermarket level, which was the first one, and I have really also stressed it a bit, we see still a very good momentum. We have not reached 100% One-to-one ratio. We still have space in climbing the service level. You've also seen during what we said when we made the new organization, you have seen also us make specific service organization because we really believe in that concept that we can harvest much more in the parts and service business as we have already done. Without saying that we have not done a good job before, but there is more to take. Especially when you take on the Asian side, it is really going in a good, very solid level.
Do we have more larger orders than we had in quarter one? I've not calculated because first, we are not a company who is really having a lot of large orders. Once we have it, we are very proud to let you know, like we did the Mexican order and the fuel gas boost in quarter one when it comes to China and the air separation order we had. I think when I just take China as the comparison, we look to that, then the big difference between quarter one and quarter two is that a couple of large orders we had, which we had not in quarter two. Will that say that we will not get large order in quarter three? I don't know. I know that we are working on big orders, but when they fall, I don't know either.
Most probably if I knew that, I was not standing here, I suppose that. On that one, I would not make, that is not my biggest thing where I'm looking for, where are the big orders, although we like to say that. When it comes to the outlook and when you read also our document, our press release, you see that on the construction side, we said sequentially we have seen a softer development. That's mainly coming from Brazil, India, and China, where we see not the same momentum as we had in quarter two. Is it a bit seasonal? It could be. We all know that that is, say, the first months in the year. It's always a bit stronger than the other part. It could be. It could be also we all read the same indexes. We see also that that market is not really taking off.
That is which segments are then contributing, of course, mining. That is without saying. I see still a good development in the industrial part. I will not this time not talk about my canneries, but they do still well. I see also in the Industrial Technique side, so the general industry is doing well. That is also what I see. Maybe it will sound as a surprise, but that's also what we see in the U.S. I see a very strong manufacturing part in the U.S. The weakest is a bit construction segment, and the strongest for me is the mining and the industrial part. I see, and that is also what made us talking about the outlook. I see that if you take it as a group, maybe that, and you listen a bit in the total amount, that maybe we come at a bit of a breathing moment.
I try to guide us that we go more asymptotic development and constant going linear, going up + 20%, + 30%. I think the world cannot cope with that.
Thank you. We had one more question here. Yeah, Philippe?
I'll start with Fredric here from UBS. I'll start with one for you, Hans Ola. The gross margins have been going up and down last year, I think, if you look at the last four quarters. Is it fair to assume that this is primarily due to the mix between Aftermarket and equipment?
That it was weaker in this quarter, you mean?
Yes, it's gone up and down, I think, the last four quarters.
Yeah. No, it's, of course, extremely difficult to predict exactly the timing of when you see these effects. You're right. Our interpretation is, of course, that you get, to a certain extent, you are affected by the continuous currency slide that happens between these quarters. The change in the mix between Aftermarket and equipment sales is now starting to be quite significantly different than previous quarters. I would say there is the main impact, yes.
I had a question for you, Ronnie. You mentioned your canneries . You're a bit more cautious on construction in Brazil, India, China. Could you talk a bit about your canneries? What are they telling you?
Yeah, I was giving Peder already an upstart on that. I think that small to medium size business, if I see today, because that, okay, I'm not talking further, but they were really doing very well. I think it was summer for them. That, and that we see in most, yeah, most all markets, that it is a good development on the industrial part because that is mainly the industrial part. That made me saying that that is doing well. That was also a bit of a surprise when you think about what you read about the U.S. and you see then me talking, what is this? What is he talking about? I can only talk what I see and they do, the medium size compressor do very well.
Should we then take the next question from the telephone conference, and then we'll come back to Stockholm?
The first telephone question comes from the line of Nico Dill. Please go ahead and announce your company name.
Good afternoon, gentlemen. It's Nico Dil from JP Morgan. I'd like to ask three questions, please. The first part is really sort of what has changed in the last few weeks in the mindset of your customers, which has made you sort of take down your outlook statement. I'd just like to get a bit more flavor around your outlook statement. You highlighted in the previous comment that it was just an outlook statement for Q3, but if it's just construction equipment, which is turning a notch lower whilst you have the growth of the company, so industrial and mining still doing relatively well, it comes across as a relatively conservative outlook statement to me. Just wondering whether I'm reading you well. Number two is on the step up in the revenues, if I look at it sequentially, I'm just trying to understand the sequential incrementals a bit better.
Even if there was 0.5% of a negative impact on the currency, you're still sitting at a sequential incremental margin or drop-through of about 15%, which seems sort of a lot lower than what we're seeing 35% sort of year on year. Wondering whether you can give us a little bit more qualification around that. Lastly, looking at your inventories, you highlighted that this is a normal course of action in this type of an environment. I sort of looked back in the last 13 years, and this is the second time I see such a big relative step up in inventories. Wondering whether you could qualify that a little bit more as well. Thank you.
Maybe we can start with the last to answer that, and then Hans Ola, if you can take revenue.
Yep.
I will take then the customer mind. Yeah, I think when you come to the inventory and you make a more analysis, and Hans Ola has already talked about that when he was explaining the cash flow. Of course, what we see when it comes to the whole mining part, there is a lot in the pipeline to our customers and to get commissioned. That is the main reason why you see an absolute business of the inventory going up. When you take it on an aggregated level, it's relative, and the way we calculate it internally, it is in days. It's relative in relation to the business development. It is not getting better. I agree on that side, which I would like to see that we get some efficiency in inventory. On the other hand, it's not getting worse. It's rather on the same level as it was before.
It's more, of course, significant more money, that one. Maybe Hans Ola, if you can take.
Yeah, you talked about the sequential drop-through, and I understand the question that even with currency between Q1 and Q2, why didn't you get more profit out of it? The main, I think I answered on a previous question as well, is that we have a continuous change of the mix of what we sell, specifically if we look at the invoicing or the revenue composition. That is that we are now catching up the output and the invoicing of some of the bigger orders. Let's say big equipment, whatever the size of the order was. That is, of course, not giving a positive impact on the Flow-through. There is also, as I mentioned, even though it's not a huge significance, all the small bits and pieces put together. I mentioned a slightly higher corporate cost in the second quarter than the first quarter.
It's not a huge impact, but it still explains a few tenths of a percent on that if you compare it. As a more general comment, perhaps, we are now working at, as Ronnie has said many, many times, we are at record levels in terms of both order intake and in terms of invoicing. Of course, at such a rapid pickup that we have seen in the last 12 to 18 months, it is, of course, not so easy to every three-month period see the same efficiency in that buildup of volumes. You're quite right in your observation that the Flow-through is clearly lower than what we have seen lately if you compare it sequentially. It's not something that reveals for us anything of a huge surprise when you see the product mix and the other, and the speed at which we have picked up the volumes of output.
It drives a few extra costs in these processes when the increase is very strong.
Yeah, then your question, Nico, on the customer mind change, or is there a change? Okay, I'm now talking general. I don't think that there is significant much change, especially when you talk about, say, the northern part of the world. The reason why we really changed slightly, I would say, or somewhat, I should maybe use that word, is that we are very good in our outlook, mainly because we see that we are on a very high level. We feel also that when you look to certain markets like Brazil and India, you get a bit of a softer development. Some are even growing, but at a lower pace, and some of them are even going down a bit on that. That was the reason why we changed.
You said maybe you can express it that maybe the customers need a bit of a breathing moment to catch up with the real recovery where we are. If you look to our figures and our segments, we are definitely above peak. We all remember maybe if we go back to peak, you see how it really is increasing because you need more people, the war of talent, and all these things that are definitely coming back. That made that it takes a bit of time to do a step up.
Thank you.
Thank you. Next question on the telephone conference, please.
The next question comes from the line of James Moore. Please go ahead and announce your company name.
Yeah, good afternoon, if please. James Moore at Redburn. One question on currency and one on the outlook, if I could. Just trying to understand your currency comments. If we see a SEK 1.5 billion impact for the year, I think that leaves hardly anything for the second half. They're like -SEK 40 million. I think your translation was 14% in the quarter. Given where rates are, you could see 4%, 5%, 6% in the second half. Is that because you're going to see a transaction positive in the second half? I'm just trying to understand why there isn't perhaps a bit more headwind from currency. In terms of the outlook, I see from the statement, you talk about the fact that orders in Asia at the group level were below revenue.
Is that the case that you had a negative book to bills in some of these countries like China and Brazil and India?
Should I start with the currency then? Yeah, I think you give most of the answers yourself, James, that we had in the second half of last year quite a sliding situation when it comes to basically all important currencies, except for, let's say, the euro didn't move very much against the Swedish krona, but not only the dollar, but many of them. That gives an adjustment, a negative adjustment also on what we refer to sometimes as the revaluation of receivables in the balance sheet. That was the case the second half of last year. Even though the average rates are still somewhat negative, as you say, quite rightly, if they stay at today's levels, we will not have that other negative impact this year.
This is why we believe that it will only be a marginally negative impact compared to the second half last year when it comes to the results. When it comes to top line Translation effects, yes, you're right that it will continue to be somewhat negative comparisons also for the second half of the year, but substantially less than for Q2, just as you said yourself.
Okay. Yeah, when it comes to the outlook, James, and specifically when it comes to Asia, you see the difference between the revenue when all this quarter was more than SEK 2 billion. We had the book to bill, which was more than SEK 1.1 billion. Also, in Asia, it's still that we have a plus one book to bill area.
In some of these countries, you're talking about like China, India, and Brazil.
Yeah, I take.
They've gone backward.
If you see, I take Korea also, then you should not. If you take Asia, then the markets I have in my head in that case are India, China, Korea, and then you take the Singapore region. They are above one.
Okay, thank you.
If we go back to Stockholm now for a question, and then we come back to the conference call questions later. Yes, yeah.
Okay. [Mats Liesveld] Bank, a couple of questions. First, coming back to China, I guess there's been some structural changes going on there, especially within the mining sector. I was just trying to get a feel if you sort of are left behind. I refer to Joy Global's acquisition and maybe Sandvik earlier on. If you could give some comments regarding that.
You want to comment me that we are left behind then?
No, I mean you're talking about China and that.
Yeah. No, I think we saw that what this movement, which was going on now, you should see when it comes to the mining part and where we are strong in China, it's definitely not all the same segments as Joy is strong. I think we have a lot on the quarries on cement. We have, I think, in the larger construction work when it comes to a lot of other hydropower and other infrastructure works where you need some special drilling. That is the main part where we are working. Of course, you have the other part when it comes to the mining. What Joy was, was, yeah, head-to-head to coal and, you know, our exposure to coal, which is significantly less than some of our colleagues nearby here.
Specifically underground coal.
Underground coal, yeah.
Yeah, sounds good. Just about the order backlog here, if you could give some indication about the pricing of orders compared to what you have invoiced during the second quarter. Maybe also, I mean, you show a positive book to bill here. If you could just confirm that there aren't any difficulties in the supply chains that have affected your invoicing during the second.
No, I think I said the failure when it comes to the sequential improvement of the output of the factory. I think we had, again, a bit around 10% if I recall it. We get definitely the factories speeding up. You see we had almost SEK 20 billion invoiced. Given the currency, you see how much volume increase it is, + 27%. On that, of course, there is stress still in the supply chain for sure. It is not one specific item. It's not much changed compared to the previous situation. Of course, our purchase people need to do their job. I cannot use that as an argument that there should be more outcome. We have done incremental investments. You've also seen in our cash flow that we have done. These measures we have already, some of them we had already taken last year.
Actually, a couple of weeks ago, we also approved a couple of other investments for machining tools. This will go on. You've seen India where we go on. We had a couple of projects going on in China to expand. These things are going and some already are put ready in practice. Others are still to come. That works fine. When it comes to pricing, I'm rather confident there is nothing in the order portfolio that can really affect the margin when it comes to prices. No, I'm rather confident. That was also the reason when I was talking about the bridge to highlight that it is good price management. There is a good discipline on that part that what we sell is done at the right value.
Let's see if there are any more. I think we go back to the telephone conference questions.
The next question comes from the line of Ben Maslen. Please go ahead and announce your company name.
Yeah, good afternoon, everyone. It's Ben Maslen from Merrill Lynch. Two questions, please. Firstly, Hans Ola, just to come back to currency. In previous quarters, you've often broken down the currency impact into a kind of P&L impact and then a balance sheet effect due to the kind of net negative impact of revaluation of receivables and payables and so forth. I wonder if you'd give us the split for this quarter so we can understand the moving parts. Secondly, on Compressor Technique, as you say, the incremental margins or drop-through in your bridge analysis have started to come down towards 35%. Is that a sustainable level, do you think, going forward? Added to that, when the large Gas and Process deliveries really start to kick in, how big a negative impact do you think that will have on the overall CT margin? Thank you.
If we, again, I think I made a comment on one of the slides that the big SEK 900 million impact with the currency rates of second quarter 2010 that we talked about, SEK 900 million, a little bit more than half of that is true. I think that's what you refer to when you say P&L effect or margin impact or a true currency difference. The other one is more when you revalue, let's say, the numbers or just translate them, both sales and profits and everything is a little bit less than half then, of course. That gives the impact on the margin of about two percentage points compared to last year. When it comes to the Flow-through or the incremental profit of coming down towards 30%, it's impossible to say what is absolutely a normality.
Considering that we are now with a 2% price increase environment right now, we have no reason to believe that that will evaporate very quickly, like Ronnie said, in the near future. I think that that is a level or around about that is a level where we can expect to be going forward. Of course, what will impact is that we sell more and we invoice more and more of the equipment and, as you said, also more and more of big equipment. At the same time, of course, we are growing the aftermarket and we are growing also the yellow canneries in terms of volume. There is a balancing effect of that. With the pricing component, as I said, at this level, I think that 30% is still achievable.
Okay, and then maybe just to follow up on CT, thanks for that. The orders are running well ahead of the revenues. How fast a ramp-up would you expect in sales to catch up with the order figure through the back end of this year? I mean, are you capacity constrained at the moment? Will it run into next year or do you think you can do it fairly quickly?
No, I think you have seen and I've already hinted when you compare sequentially quarter one to quarter two to ramp up a production, which is then already at a good level. That takes time. You should more or less expect the same type of change you have seen between quarter one and quarter two. I think that is a very pragmatic approach, you can say. It will take us a bit of time before we are on the book to bill for one, assuming, of course, if the book to bill goes, if the orders received goes further, then we really have another challenge on that part. It will build a bit of time on that.
Great, thanks a lot.
We still have some questions on the telephone line. I think we have time to take one more.
The next question comes from the line of Guillermo Peigneux. Please go ahead and announce your company name.
Hi, good afternoon. It's Guillermo Peigneux from Morgan Stanley. Maybe a couple of questions. One regarding currency again, so I'm sorry. I'm just trying to understand in terms of what I've seen in the spot markets and what we've seen in reported accounts. There is a big sort of gap between currencies or the Swedish krona actually is starting to depreciate. Actually, your accounts are showing a larger impact into the second quarter compared to the first quarter. This is obviously even if you adjust for currency movements with the last year. I was wondering whether you could explain why this deterioration into the second quarter compared to the first one, actually.
Why is the number bigger in the second quarter compared to the first quarter?
Yeah, despite the fact that the spots are actually moving in the right direction.
I think if you follow, for example, the dollar development last year, you will see that it was a strengthening in the second quarter, actually. That we have not seen this year if you look at this as an average rate. I would argue that we have a worse currency situation in Q2 versus Q1 this year, and it was the opposite last year. I'm not 100% convinced we see the same rates, but we might dive into that discussion after the call, perhaps. Mattias Olsson is prepared to help you through that, I'm sure. I can't give you any specific reason that there is a huge mixed change or something like that. When you go down to each country, each currency, of course, it's not exactly the same every quarter. That might have explained some of these movements that you have difficulty of seeing from an outside-in perspective.
This is where we stand. I repeat again that the most important thing for us, at least, is to look at what are the rates now compared to where they were in Q2. As Ronnie also said initially, they are more favorable now than what we saw in Q2. That is, of course, giving us some comfort going forward.
Definitely understood. I was wondering, then maybe a follow-up. Given the fact that at the moment you sort of mentioned that your pricing is running at 2% maybe per quarter, I was wondering whether that is basically what we should expect for the second half of the year, or maybe in some of the other markets you sort of still expect to increase prices, for example, mining.
I think, if you look to our historical track record on that part, you would see more or less when the market is a real supply market or a demand market, depending on where we are, we will get more or less the same development as we got when you look a couple of years back. Of course, it is much easier when material prices and inflation are in the air to increase prices. As you all know, that is one of the reasons why we push so hard. One of the reasons why we push so hard on product development is also to do a very good price management to sell really value to our customers. I've already answered when someone asked me about the order book, what it is about, is the quality of the pricing on that part.
I think that is more or less the same as we got, say, the last two quarters. You can more or less expect more or less the same development.
Thank you. Last, maybe on large Gas and Process compressors, you mentioned that there's a degree of slowdown, especially when it comes to Asia. I was wondering also, are you adding capacity in China, precisely in large Gas and Process? Is it the case that it's just a temporary slowdown, or you're basically at the moment happy with the turnaround activity or with the way you're adding capacity in Asia at the moment?
I didn't mention, if I don't recall, otherwise I didn't talk about the slowdown on Gas and Process in China. What I only said in one of the questions is that we did not get a large order in quarter two for Gas and Process compared to quarter one. That is one thing. Second, to answer your question, as we have ramped up our capacity for Gas and Process in China, it's definitely for getting already the orders on hand to get them out in a good way. Otherwise, we should have invested in capacity, maybe U.S. and/or in Europe, where we felt we should do this capacity increase in China. On the Gas and Process, as I already said in the beginning of the call, it's a late cyclical business.
We see good orders first, but also good quotation levels, especially when it comes to energy projects, air separation projects. I'm sure also the LNG business will come back very soon. That last one is more a speculation statement from myself talking about nuclear power and all that.
Is all the capacity going to add, let's say, incremental growth or organic growth, or is that cannibalizing some of your European capacity?
Can you repeat again, Guillermo?
Yeah, all that capacity that you are putting up in China, is that generating organic growth on your revenues from the Compressor Technique, or is it actually, in a way, cannibalizing some of the orders you are supplying from Europe at the moment?
No, the whole thing is, of course, to get more capacity in that area because that is because we, if you have seen our track record on the Gas and Process one over the last five years, it is always having gone up, of course, besides the 2009 period. We still see a continuous development in the demand for this type of compressors.
Okay, thank you very much.
I think we take the final question from the telephone conference, please.
The final question comes from the line of Sebastian [Guther]. Please go ahead and announce your company name.
Good afternoon, Sébastien Gruter from Société Générale. I have three questions. On construction technique, I've noticed that there was no price increase over the past quarters. I just wonder how do you feel about your pricing power in this new division? Second question on SG&A, you mentioned that you are investing in the business, but we have not seen a significant step up in marketing expenses or R&D in the quarter. Should we expect this to come in the next quarters? The final question is in mining and a rock excavation division. We have seen a sharp sequential growth in orders over the past four or five quarters or so, and it stopped in Q2. Are we reaching a plateau in the level of demand for this division, or is it due to capacity constraints on your side? Thank you.
I don't know if I understood your first question, but I think it was about construction.
Do we have the pricing power as far as I understood the question?
Yeah, in construction technique, yeah.
Yeah, I think when it comes to construction technique, which is organized around the three divisions, where the majority, the largest one is our portable energy part, there definitely we have pricing power with our presence and also with our product range. When it comes to Dynapac, the rollers and the paver business, that is another question. We are working hard to get there also, a stronger position. There is still some work to do. We are working hard now to increase our product portfolio in Asia, and that will take us maybe a year or two years before we are on that part. When it comes to our marketing cost and design and development, maybe you don't see everything, but we definitely invest in feet in the street. What I said, Densification, dig deeper.
We are hiring more and more salespeople where we feel it is needed, and not only for equipment, but also for aftermarket. That we do. We also do more and more design work in the emerging markets, which is then, I mean, primarily India and China. These investments we do on, I think the costs are going up more or less in relation to our revenue increase. That is more or less in the same line. If you see, if you go up + 27%, +25%, you cannot have a design and development department going up + 25%. You cannot cope with that increase in your design and development. We are investing in that. When it comes to the mining and rock excavation, it's not capacity.
I think we still can do more, although in certain areas, like when it comes to consumables, we are running definitely three shifts and even some of them in the weekend. As you know, we also have there last year also made an investment or are implementing the investment, which is going on. We do the same in China.
We have also increased our capacity for mining and rock excavation. On floor space, definitely we do not lack any capacity. When you compare quarter one with quarter two, where you said the orders received are sequentially not developing, I would not immediately look after any reason that that is slowing down. On that part, I have not heard that saying when it comes to the mining part.
Okay, many thanks.
Thank you very much. I think we have exhausted the questions for the time being, but of course we are ready to take further questions as the summer progresses. Should anyone be at work? I thank you very much for today for attending both the telephone conference and here in Stockholm. Thank you very much.
Thank you.