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Executives

Hans-Ola Meyer – SVP, Controlling and Finance

Ronnie Leten – President and CEO

Analysts

James Moore – Redburn

Aaron Ibbotson – Goldman Sachs

Ben Maslen – Bank of America

Andreas Willi – JP Morgan

Martin Prozesky – Bernstein

Andreas Koski – Nordea

Atlas Copco Ab (OTCPK:ATLKY) Q1 2013 Earnings Call April 29, 2013 7:30 AM ET

Operator

Ladies and gentlemen, welcome to the Atlas Copco Q1 Report 2013. Today I’m pleased to present CEO Ronnie Leten and CFO Hans-Ola Meyer. For the first part of this call, all participants will be in listen-only mode and afterwards, there will be a question-and-answer session.

Speakers, please begin.

Hans-Ola Meyer

Thank you and very welcome to all of you participating in this telephone conference call. My name is Hans-Ola Meyer. I am the CFO of the Group. And with me here is also Ronnie Leten, our CEO, whom I will hand over to in a few seconds. We will do the usual format that Ronnie makes his comments on the quarterly results then we take the Q&A session.

Today, we have to be rather strict on the time unfortunately because we have the Annual General Meeting. After this call, so, Ronnie will have to leave sharp at 1.30 latest, 2.30 latest Stockholm time.

So, thank you for that and I’ll hand over the word to you Ronnie.

Ronnie Leten

Okay. Thank you Hans-Ola and good afternoon and good morning to all of you. And as Hans-Ola said, I will go through the presentation and I will try to refer to the numbers so that you know at which slide I will be. If I summarize the start and I’m going immediately to slide number two.

We can say that it was solid profitability level for the Group coming from, I will use the word again, solid service business and a weaker equipment. One of the point that I would like to remember you all is, when you look to the figures and go to compare the quarter, you would see that all the figures almost are negative and this comes that we are comparing with the best quarter we ever had last year. At that time we were still in the, can say maybe the mining boom in the first quarter and the second quarter of 2012.

But now, of course we are and we better focus on this quarter. What I see now is that service business continues to develop very well. So with – we have solid development. On the equipment we somewhat lower sequential development, but reasonably stable industrial equipment, I will elaborate a bit later on that. And I think it’s not a surprise that we also saw a slight negative development on the mining equipment when we look sequential.

I already mentioned, solid profitability level, given the output level we have, of course in money terms it’s a bit lower, also a bit lower than I have expected myself because I had also expected a little bit more revenue, so that we will have a bit more money at bottom of our P&L.

We landed also during the quarter a couple of nice acquisitions so well, so here we have strengthened our future, also our product portfolio. So that this – that’s good to see and this quarter we also celebrate Atlas Copco Hunt 40 years.

If I go now to slide number three, where you have the figures. I already mentioned that last year it was on orders received. It was a record quarter. This time we landed at 21 – to solid 21. But on the revenue side, like I already mentioned, I would like to see a little bit more on that, so giving it a bit more money. Operating margin, I elaborated a bit. I think is solid. And I think on the cash flow, we come back later on that and then Hans-Ola will take that part.

So, let me go then immediately to the geographical slides, which are slide number five. We go immediately to the Americas. What we see is – and of course mainly if I’m talking about, mainly US tier, we see a healthy demand for manufacturing and construction industry in the US.

Of course, we see a lower development, if we do quarter to quarter on the mining equipment. Sequentially it’s more or less on the same level. But of course, that makes also the minus 8 of the quarter. Service continued to be solid. Good development and that is good to see. So there is still some good development, if we take exception for the mining in North America.

South America, more or less the same picture, of course, when Peru and Chile – with their leading mining companies – mining countries are down, you really get also here a negative figure because also last year, Chile was extremely high. But what we see is a reasonable good solid Brazil. So, if we again – if we take away mining, we see Brazil developing good.

Coming to Europe, here, yeah, it may be a surprise, maybe for some of you, but we see sequentially a positive sign. Of course, we got a couple of good solid orders, bigger orders and that of course, they’re also part of our company. So, that has helped the situation. But on the other hand, it’s still tough in Europe and then, I’m really hinting to Spain, Italy and France, it’s still some business there. But all in all, we had a good compressor business in Europe.

Then, yeah, and I think what I’d mention also here, the strongest growth what we saw in the quarter was coming from Germany and Turkey. And in Germany, we ended a couple of larger orders, which I already mentioned.

Africa, Middle East, again a tough comparison as we had last year record order income in South Africa for mining and in the Middle East, we landed also a large order for compressors. So, the comparison is again tough. But if we look sequentially, it had a good solid level, also in Africa – in South Africa, as well as in the Middle East.

I’m going now to slide number seven and I’m talking about Asia, slightly a bit better the order intake, and a bit more positive from – on China and India as there was a couple of months ago. So, let’s see what – when we are quarter older, what that will mean.

But today, at least I see some positive sign there to keep being strong in Southeast Asia. So that’s also good to see all this start and investment going on there. And as I already mentioned, China and India is sequentially improving.

Australia, minus 44%. But again, and this is already the third time I say it, we’re comparing real record order intake in Q1 last year. But, if we take that away I think it’s a solid order intake in Australia.

Slide number eight, yeah, you see here the minus on organic and I think I should say more on that. Then I’m going immediately to the sales bridge, slide number nine, currency minus 5%. Of course strong krona and of course the Brazilian, Russian, India and maybe South African currencies have been weakening. So, yeah, that all played in the same direction giving a minus 5% on currency.

Price still solid. I’m sure some of you would have been surprised, but, I think also our continuous thrive and strive for innovation, really creating value with our solutions, with our services and of course on the other hand, good discipline internally brings that we are still able to have a positive price development. Volume yeah, you can read yourself, minus 13 and of course on the revenue, I already mentioned at, yeah, minus 6. So this what it is, although I would like to see a smallest figure there.

Then I’m going immediately to the different business areas and I’m now on slide number 11, talking about Compressor Technique. Stable order income for industrial compressors. So, that’s good to see that it’s more or less over that we see, yeah, definitely a good development there.

And of course, it’s very good seeing that the service machine which we build up there, keeps -continue to grow. I think the guys are doing – done a good job there and really also creating value for our customers. And we learned that a good operating margin just missed the 23, but I think the 22.9%, giving the level of output is good and I think it’s supported by a couple of efficiency improvements of projects we started last year and yielding good result.

And I’m really proud also that we launched the break-through energy-efficient compressors where people in Atlas Copco have been working since many, many years on it and at the end we came really with that breakthrough which gives another step-up on the VSD all known by you, I think and that will be – I think I’m sure of early success into the market. So it’s also proved again the power of our innovation. And in compressor, we also landed two smaller acquisitions in the quarter.

I’m going now to slide number 12, Industrial Technique. A bit weaker, general industry up, MBI a bit down, but again, remember last year MBI was really booking. But as on the other hand the positive thing is that general industry has picked up.

We see positive North America. So it’s a bit in line what we also seen in the compressor world and a bit negative in Europe. Operating margin, 22.3% make it lower than expected. A bit affected by lower output but I think at a good solid level. And also here we landed two nice strategic acquisitions for us. One the segments, and the other part was the southeast the mechanical ranges. So that will be a nice extending of the offer in those techniques business area.

Now I am going to slide number 13, Mining and Rock Excavation. Yeah, a lot of things already mean written and said about to mining. I assume that this is not surprising new novel, so when I said, okay, the caution isn’t in affecting our demand, we all know what has happened the last year, I think 16 CEOs being replaced, I’m sure also that boards get more prudent when it comes to investments.

So, I think we would see, yeah, a bit of wait and see period here in on the mining side when it comes to equipment. But on the other hand, we see some improvement on the civil engineering, the hydropower and the tunneling. So, that’s good and that goes with business which belong to us, with good development in service and parts and also on the consumable parts, saw recently also there a good development.

So, I think when it comes to the mining rock excavation, I think I’m pleased to see what the quarter. Although, you can see the equipment is going down that we need to look into the organization and make sure we take the right measures. Operating margin, solid 23.4%. So, that’s good. So, the guys are really doing what they need to do and then we landed our acquisition in China for rock dwelling tools.

Construction Technique, page 14, a little bit organic decrease, but a good development in North America and Asia. So, that’s good to see. But it’s very tough in Europe when you’re working in this business area, and the margin is around just below 10. So more or less where we have expected it to be and when you see the picture we also have in Bauma we also have launched a full new visual identity for our road construction equipment. Now it looks really that yeah, like yeah, was Copco covers. So the Dynapac and the Atlas Copco are really going joint forces to the market.

Let us than then go immediately to slide number 15, before I hand it over to Hans-Ola. I’ve said most of it, the revenue minus 9 a bit too low, but okay. The operating margin 20.5% more or less in line with last year because in absolute terms the operating margin – the operating profit is negatively affected with some currently effect. I think it’s around SEK 220 million.

Yeah, the rest I think I will let it over to Hans-Ola.

Hans-Ola Meyer

Thank you, Ronnie. Just taking a few more comments on the same slide. You see in the slide number 15 that the financial net was relatively unchanged compared to last year and the – within the financial net the biggest portion is always the interest net. It came in actually slightly lower than I think what we had given you the reason to believe some part.

It’s related to that indeed the euro has weakened compared to previous year, and we paid quite a lot of interest in euro and then there was also a little bit of a lower perhaps on the subsidiary part out in the world where the interest rates last year were a little bit higher, and that gave us the reason to expect also that 2013 would be higher.

If I look forward, I would still say that somewhere in the region of SEK 600 million to SEK 700 million is probably to expect for the year. As you well know, we took the advantage in the first quarter, borrowing a 10-year loan in anticipation of the amortization of other loans next year. And that is of course also going to be a little bit of a negative effect in the next couple of quarters on the financial net.

If you look on the other hand on tax, there you see that the tax rate was higher this year than last year same period, 26% versus 24% roughly. And the reason here is partly mix which is a factor that is difficult to predict. But we also have some tax disputes around the world related to transfer pricing, where of course there are countries that argue that the distribution of profit between one country that delivers goods and another one that receives and sells is not exactly what they want, but that discussions that are difficult to say what is right and wrong.

We’ve had a couple of surprises on that, and we believe that those two have – we believe those two reasons have compensated for the Swedish tax reduction that we talked about in the last quarter.

So, all in all here, I believe that we will be in this range for the foreseeable future 26% to 27%, effective tax rate, in the longer future we need to come back and see where is the situation, because there is a trend in many countries in Europe for lowering of the corporate tax rates.

But for the time being and the near future that’s the guidance I can see.

If I then go to the next slide number 16 – sorry, we look at the profit bridge as we call it and I think there is a so called flow through of 24% when we take away currency effects, when we take away onetime items and acquisitions and other issues or other factors that oscillates between the quarter. Rather normal given the volume development and Ronnie has alluded to that already the revenue level in the first quarter.

If we look at the next slide where the business areas are listed. I just offer a few comments. I don’t think that one should make long-term ranging assumptions based on one quarter. But on compressor technique, of course, they report a volume price mix improvement on profit in spite of a revenue drop. And I think that is what we also commented in the report about cost reductions and efficiency improvement that compensate fully for the lower revenue.

When it comes to industrial technique, perhaps the number stands out a little bit. I don’t think that one should overemphasize that 62% flow through – negative flow through from. So a bit soft on the revenue as we have discussed before and at the same time, the business area is continuing to make significant investments in the service and the sales organization in many parts of the world, notably in Asia and that is probably the reason. And on the other two, I think it’s more what would be expected if you know the revenue development as you know from the sales bridge that Ronnie commented.

If I move to page 18, balance sheet is not very dramatic to report anything. I just point that what I talked about before that we took up and took advantage a very favorable borrowing conditions. So, you can see that we have extra much cash for the time being and also that the interest-bearing liabilities have increased in the quarter, but otherwise it’s a relatively stable development for the last quarter at least.

And then finally, on the cash flow, I just want to highlight one thing, because the numbers are rather clear. The main change compared to last year is that we are almost neutral when it comes to working capital in this quarter whereas we have a negative SEK 2 billion effect last year when volumes were extremely strong as we have said many times already.

However, in the net financial items, there is a big swing and in the report it was commented that without a quantity the swing is, it almost explained the whole difference there and it’s SEK 900 million between first quarter 2012 and first quarter 2013, relating to cross-currency swapped, the relative transactions that are there to hedge our internal capital situation in different currencies. In this case, it relates to dollar versus euro and it gave a very positive cash flow effect last year and a similar large negative cash flow in this quarter.

Over time, these hedges are rolled every six months and they do give at those roll over movements, the cash flow effect. However, for the purpose of the hedges, the whole period which is several years, will be neutral in terms of obvious effect. But in separate quarter, the impact is either positive or negative and I will comment every time that that has significant impact that – which was the case this time. So, if you compare the SEK 1.6 billion operating cash flow with SEK 1.4 billion, in reality, I would say that it’s a much better improvement that was negotiable.

So with that, I hand it back to Ronnie for comments on the outlook.

Ronnie Leten

Thank you, Hans-Ola. Yeah. And you’re seeing that we changed our outlook and maybe also to pre-answer one of the questions, why we have done that. I’d see – I have a better view or positive view on US and China than I had when we did the outlook of the first quarter on the 31st of January. So with that positive view on US and China – well, positive view on US and China, but still remain tough in Europe. It means that we change the outlook to expect to remain on current level. So by this, I hand over to Hans.

Hans-Ola Meyer

Yeah, Ronnie. Operator, I think we’re ready for the questions and answer sessions. So if you repeat the procedures perhaps and then we go on from there.

Question-and-Answer Session

Operator

(Operator’s Instruction). The first question comes from Mr. James Moore at Redburn, please go ahead.

James Moore – Redburn

Yeah, good afternoon everybody. Hi Ronnie, hi Hans-Ola Meyer. I’ve got some questions on the mining business. I wonder if you could say what the current lead times, the key product categories are and how that’s changed? And then secondly, I wondered if you could help, you say in the annual there was around 75% of the product cost is purchased in the mining OE business. Could you give us a feel for how much is purchased in the aftermarket and consumable side right seemed you add more value?

Ronnie Leten

That last one is a difficult one, just to know James, but I will try. But on the lead time and the change, I you see and I hinted a couple of times during the call here that, I was not so pleased with our output. So on the lead time when it comes to the factory output, we still have significant orders on hand situation and we have not eaten really in our order book, due to the fact that, okay, the output was not really coming out as we expected, so what I kind of expected.

When it comes to the service and I don’t this figure, I don’t have it by hand, but I will try to describe a bit so that you’ll see how we were. We will take on the consumables side, you can see that there is a lot of added value, because you do all the hardening, the machining, all the manipulation is done in in-house. So that this is vertical integrator and that’s maybe one of the most vertically integrated organizations we have in Atlas Copco there is on the consumables side.

When it comes to service, yeah, on the service, I think you’ll have – you should make the split between the parts and the service, where the service is – it is people and that of course you – that’s internal and then you have on spare parts okay, we buy them almost all of them except when it comes to our core elements, our rock tools, which we sell as placements, our drills, so that is what we do internally. So, it is I think a bit different but still you had a – you get a good flow through in that area.

James Moore – Redburn

That’s fine. Can I just follow-up and like I wonder if you could help us to the sense as to how your utilization is in the consumables, rock drill side of the business. And whether it’s changed much over time and whether you expect it to have an impact in the current environment?

Ronnie Leten

Yeah, yeah. I think again it’s a good question. You remembered that with the signal investment, we – two years or three years ago, we started to do that and before even we had another investment. So, we really increased our capacity on the consumable side. And for the reason that we still see some growth potential in that area. I think, we believe that we can take more out of the market, also by launching new products. So, from that point of view – utilization, it’s definitely not gone down, because we have the possibility to do some insourcing also here, as we work together with external parties.

So from that point of view, it’s more or less the same over the last four, five months. Of course, I should make a bit of an exception when you talk about the last quarter last year, when we had a bit the destocking taking place. So what meant, that the consumer book – and I think we also reported that in – when we report quarter four that the consumer book was a bit down where we now say that the consumer book is more or less at the same level. And I see – real – a big positive trend coming back to that level.

James Moore – Redburn

Very helpful. Thanks. Thanks so much.

Ronnie Leten

Yeah. So on utilization thing, I’m not so worried. You see I’m – I don’t think it’s the major issue. Maybe to just elaborate on that thing, I will get a question anyhow, so I’ll answer to you. When it comes to the mining part, if you take our mining and rock excavation part, I think when it comes to equipment – we can say equipment, it may be – but your calculation it may be around 25% of the total revenue today when it comes to real mining.

If this service, it’s consumables and its civil engineering. So with people when you really look and you start thinking about okay, oh, what is going on, on the gold, what is going on, on the copper, what is going on the iron ore? Of course, I would like to see a positive trend that’s coming in because that will bring us back to go to quarter one 2012. But it is not so much a real effect for us in the long run and that makes it also that we are able to come to these profit levels 23%, 24%.

James Moore – Redburn

Thank you, very much Ronnie. Thanks.

Operator

We have a question from Mr. Aaron Ibbotson at Goldman Sachs. Please go ahead.

Ronnie Leten

Hi Aaron Ibbotson.

Aaron Ibbotson – Goldman Sachs

Yes. Hi there. Good afternoon. I’ve got three questions, if I may. So first of all, just a very simple question I guess on the FX, which your effect coming quite a bit lower than I had anticipated. Just wondering what the reason for the sort of basically no transaction impact as far as I can tell.

Is that something we should expect to come into this second quarter with reinforced vigor? Is it driven by some hedging or was there anything else going on there and that’s firstly.

Secondly, if I could just ask a little bit big picture I guess on sort of the operating leverage on the downside. So obviously very impressive operating leverage in the first quarter here when I got to 22%, I think we got to something close to that. Is that something you expect to be able to for the group roughly keep if we continue to see sort of 5%, 10% volume declines in the second quarter and third quarter?

And then finally, just on the favorite topic of your 25% of revenues in mining and rock excavation, which is the mining equipment. Is it fair to assume that reading between the lines that you – that it was down from some 15%, 20% in the first quarter. And I was just hoping if you could give us some idea of where profitability on that sort of sliver of your earnings change came in, if it was still sort of in the teens, double-digits or if you were the operating leverage still be down to single-digit profitability in the mining equipment specifically? Thank you.

Ronnie Leten

I will start maybe first with the last one, because that makes it’s easier to you and then I gave the word to Hans-Ola about the transaction effect. I think when it comes to the profitability level of equipment; I think this is more or less at the same level as we have with other equipment. So there is not a big difference.

Now when you talk about that, its goes down 10%, 15% I was looking here around – want room here. I think, I’ve not seen and maybe you look, of course if you compare quarter-to-quarter or on – then suppose then you get that because you know that in Chili another big quarter in South Africa big quarter, we got the big quarter in Australia.

Yeah, there we get definitely quarter-to-quarter, last year quarter, yeah, last year, last year then of course we have more than 15% drop of that one. But I think, if you look sequentially, I think it’s slightly lower that yeah...

Aaron Ibbotson – Goldman Sachs

Just to clarify, I was looking at the revenue line actually, just for the equipment sideway; you have 8% for the mining and rock excavation.

Ronnie Leten

Yeah, that could be yeah. Yeah, I don’t have here in front of me because I was looking on beyond these results.

Hans-Ola Meyer

During the right neighborhood.

Ronnie Leten

Yeah.

Hans-Ola Meyer

That’s about the same. That’s about the results.

Ronnie Leten

You know I’m dead fast, we have a rubber and you know we have been preaching since many years about our agile resilient part on that and we have the possibility to absorb this drops of the say. Of course when it really drops in over 50% yeah then we talk in other one, but this drops we’re able to absorb that.

Aaron Ibbotson – Goldman Sachs

Okay. Thank you.

Ronnie Leten

And then you asked about FX and the reason why you might have expected more and of a negative is primarily that the euro to the dollar in terms of a transaction exposure is rather important. So that has been not at all the negative impact on Compressor Technique as for this more Swedish based activities. The translation is there for everybody to suffer, but from a transaction point of view it’s different and that is mainly the reason why it was kept neutral on the margin affect.

Hans-Ola Meyer

Yeah. And then your second question when it comes to the big picture and the downside and then the leverage on that, of course, what I’m working with is first to make sure, we make sure that we don’t produce for stock that our inventory stays under control.

You have seen it has gone slightly up, but that is mainly it’s in transit and also you know that on the construction side it is in quarter two, that is normally the period when we should get the invoicing so they are producing already now for getting it out and these orders are on their way out. So that’s the reason why inventory is a bit higher, but as we already mentioned many times, it should go down over time for the whole group.

I think also when – if we would see a drop from top line revenue and profitability wise, I think I’m not sure that – of course, it will always have create under absorption on the equipment side, but on the other hand, you also know that we have a positive mix which come in play then, when it comes to our service part or our aftermarket part. So, of course, every drop on equipment will have a negative effect, but it will not be the – 5% or 10% will not be a dramatic profitability top down.

I think you – and that this to what Hans-Ola and I here speculating several times when it comes the agility and resilient, how does it play and for the time being, we still are strong and believing in that attempt play in that.

Aaron Ibbotson – Goldman Sachs

Okay.

Ronnie Leten

Thank you.

Aaron Ibbotson – Goldman Sachs

Perfect. Thank you very much.

Operator

The next question comes from Mr. Ben Maslen of Bank of America. Please go ahead.

Ben Maslen – Bank of America

Okay. Thank you. Afternoon, Ronnie, afternoon, Hans-Ola. Two questions, please. Firstly Ronnie on the group outlook, where you said demand would be – stay at the current level, you’ve given some kind of directional source in terms by geography, can you give us a sense of what you expect sequentially for the different divisions if possible?

Secondly, on mining and rock excavation, can you just give us a sense of what percentage of your orders received, we saw pretty much low figure is now mining equipment, so we get a sense of how much that has fallen? And then finally, you mentioned that revenues were – deliveries were below expectations, just a bit more color on why that was and if there are any impacts from the timing of at least not getting products out of the door that will kind of reverse and make Q2 stronger in compensation. Thank you.

Ronnie Leten

Yeah. I will start to answer the last one first and I don’t want to blame the weather and working days because really I don’t have a real good one single answer on that, so there’s a little bit here and little bit there. It is in more or less in all business areas and you can see that when you look to that.

I’m sure also when you compare your own expectations, I think it’s maybe a little bit that the market this really not pulling, so people are a little bit more careful to take it. So all the small things and then you’ll easily come up a couple of working days less, a bad whether here and then people are not pushing. At the end of the day, you get it a bit lower on that one.

So that – but I don’t have a real, real good answer and that is also what annoys me in this. So I think the orders are still there, but it is not and that is good and I have no – I should have maybe mention it before. It’s not that we see a lot of cancellations or whatever.

I think we don’t see that because one could think, yeah, the mining guys are really drooping out whatever, but that we don’t see. So that I think is maybe a positive sign on this part, but the orders are still there. So what gets in must get out. So at the end we should see it.

Then when it comes to – when you asked outlook where I have given you a little bit of geographical outlook, it’s – by translated a bit in say industrial segments. I think on the mining equipment, I think I still believe it will slightly lower. I think that’s what I believe. On the industrial, I would see slightly up, and on construction, I would see a bit how the play will be in Europe. Europe is stub on the construction.

We see reasonable positive signs in China, but you know we are not so big. So, that’s – then it does not play so much, but we see good development on the US. So from that side I must say, equal to a little bit positive. But on the mining side and on the biggest ticket, because on the other hand, what we can see is the yellow cannery our – in some regions coming up are really positive. But we’re missing a little bit the bigger orders.

Ben Maslen – Bank of America

Yeah.

Hans-Ola Meyer

That this what – hurting us. Then your second question is on the mining side. It’s around 25%, 30%.

Ben Maslen – Bank of America

Of orders. Yeah.

Hans-Ola Meyer

Yeah.

Ronnie Leten

Of total.

Hans-Ola Meyer

Yeah, total.

Ronnie Leten

Total, yeah, total Ben, yeah.

Ben Maslen – Bank of America

Got it. Thanks very much. Thank you.

Ronnie Leten

Okay. Construction of that to total.

Operator

The next question comes from Mr. Andreas Willi at JP Morgan. Please go ahead.

Andreas Willi – JP Morgan

Yeah. Good afternoon. I have a follow-up question first on mining. To complete the picture here the 25%, 30% of the mining divisions orders which are mining equipment, how much were they down year-on-year? And, if you look at into the commodities, did you already see an affect there on copper and gold or would you expect that still to come now that these commodities have also come off a bit?

The second question is on your balance sheet, maybe you could just say whether this is something in terms of a special dividend, which is for you an annual review or whether there is also an opportunity to do something during the year, if your plans change? And the third one just on your investments, to what degree are you willing to kind of cutback R&D feet on the ground in terms of improving margins or stabilizing margins as the top line is weaker? Thank you.

Ronnie Leten

Yeah. I will start as a common practice to answer the last one first. I think I’m not thinking about really reducing on the contrary the investment in R&D. I think we should keep going on, because that is the future of Atlas Copco. That’s the strength and we should keep going and we should do it only quicker and we should spend definitely what we need to spend.

The same is on presence. We are keeping – increasing our presence, of course in grow areas. Of course where are adopting our presence is in areas where we see difficulties. If you think about equally Spain, France, of course, we are debating the presence there. But when you take about Africa, when you take about China, when you take about US, I think we keep going on investing in presence. Because I think if you come out on the profitability level around close to 21%. I think it will be corporate obstruction not to invest in R&D and in presence. Then I think, I’m not doing my job.

When it comes to the balance sheet, I think normally – I think, I have not heard any board member to ask any questions about that. But I think we will bring that up at the end of the year, beginning of the year that this is normally the period where we discuss and I – personally I don’t see any reason to do it now. But okay, maybe some – with these questions maybe you have triggered some of the board members who knows but we’ll come back. But it’s not on the agenda for time being.

Then your first question, of course, year-on-year, it has dropped enormous. But the equipment that 30%, 50% see I’m listening here to some people who have just made a quick calculation if you do year – quarter-on-quarter, year-on-year, it really has come down.

Hans-Ola Meyer

It’s of course important and you know that Anderas of course, I mean, that as Ronnie has started the conversation, we are comparing with something that is not a normalized number. So this particular looks almost out of place comparing with any other quarter, it’s more of a downturn. But it’s not the catastrophe.

Ronnie Leten

If you see what has happened in the whole mining segment, I think at the end of 2011 and the beginning of 2012, I think it was really an investment CapEx boom for all companies and that’s over. And we should, I think the new level more or less came in, in June, July.

So if you look through our figures, of course you don’t have the monthly figures, but if you take the quarterly figures, that’s more or less where we have been cruising. And you know that we are growing a bit more in service, of course in consumables, which was a bit lower, but not now it’s more or less at the same level. And the level is more or less the same than you know that the equipment is still going down slightly of somewhat.

I think what we will see happening – okay now I’m taking the crystal bowl maybe I should not do that, but I believe when it comes to the mining debt, for the time being knowing that so many CEOs have been replaced, both are very reluctant to take extra risk, those high volatility. I don’t think we would see these big projects. I think we would see now small incremental investments coming on and that is what we should – yeah, that’s the new level like what we will have.

I think I’d see iron ore demand is still there. We see that also in the consumables. Copper, we also know that the grades are lower and lower and the world will need copper. So, we need to do automatization, we need to do further mechanization on that part. And gold is the question. We would see, I don’t know either, but will happen on that area.

Andreas Willi – JP Morgan

Thank you very much.

Operator

The next question comes from Martin Prozesky of Bernstein. Please go ahead.

Martin Prozesky – Bernstein

Good afternoon. Just another question on mining please. On the service business, can you give us a sense for what is the current attachment rate or penetration rate within the OEM equipment sales? And I think previously you’ve mentioned that one of things holding back your service growth in mining has been service engineers. Can you give us a sense for any opportunity do you see over the next kind of few quarters to accelerate the growth in service? First question.

And then the second totally different topic on construction, I mean, longer-term this business compared to the rest of the group remains low margin, low return. I think it’s about 200 basis points dilutive to the group. You’ve done a lot to try and improve it. Can you give us a sense for how much further margin upside you can see in the construction and if not kind of strategically, when we look at disposing this unit if that’s on the agenda at all?

Ronnie Leten

Yeah. I think again, I’ll start with the last one received. I think there is no plan to dispose. I think we had done a lot of fundamental good work. Now we have a dedicated business area for almost yeah, one-and- a-half year. We had done a lot of targets. Construction in that area, when we will get a little bit of tailwind, I think you’ll see good returns.

So let’s see what is going to happen, you also know that if you – and you know very well if you look to the construction statistics from China, you take also Brazil and you take Europe, you’ve seen that how down they were. I think, now you see Brazil coming back a bit. We see also China coming back Europe not yet.

So, I’m rather convinced that the time of harvesting if we get a little bit of tailwind we’ll be there. So, I’m not thinking about any albeit any divestment on that one. So, we will get still a good future there, I promise you. But of course you will ask that question back within a couple of years I’m sure, if – as I miss it.

Martin Prozesky – Bernstein

Here?

Hans-Ola Meyer

Yeah, that’s okay, just one thing. The on service side was it mainly on the mining side or was...

Martin Prozesky – Bernstein

Yes.

Hans-Ola Meyer

In the mining side.

Martin Prozesky – Bernstein

Mining side. Yeah.

Hans-Ola Meyer

I think we still have a lot of areas where we can increase our penetration and also extending our offer and especially now what we see all the mining companies have productivity challenge and that how can they improve their productivity. It’s for sure that to make sure that the equipment runs top notch that they do further automatization, looking for the right equipment, all these things are now on the agenda and we are called in several desks to do that.

And of course one big advantage for them is that to let or to make sure that the equipment is available. And I think we are as the provider of this equipment, we are much better equipped to provide to service. And that means for us, high investments in people, in competence, not so much in utilities, but means that we need to speed it up and that is also what we are doing.

But you cannot, and I’ve mentioned that several times in previous call, you cannot expect in service that the service business is growing with 20%, 30% in year, you cannot do that. I think if we can run and that this is my personal target here, we should be able to have a double-digit growth on the service side. If we can get that I think then we are state-of-the-art.

That’s what I believe and that is what the guys also in the mining believing in. The profits are still there. So that’s for sure. As long there is drilling taking place, because if the drilling stops really of the – the uses of the mine is closed, yeah, then I’m also gone. But as long as the world will need copper and the equipment is utilized, so this will be needed.

Martin Prozesky – Bernstein

Just one follow-up on that. So if you can grow that service business double digit, does that then mean you will be increasing your penetration rate if you want of the existing fleet that’s out there.

Hans-Ola Meyer

Yeah. Yeah. Yeah.

Martin Prozesky – Bernstein

Okay. And do you see continued upside there. Just give us a sense for...

Ronnie Leten

Yeah. I see yeah, I see. Yeah, that’s for sure. But of course, the biggest competitor in that is not the competition. It’s the owners and that is also our ability to do that because some of the places in the middle of Africa, yeah, we also have to show our capabilities there. We need to convince the mine that we can do it. So that is hard work from the guys from our mining rock excavation service guys.

Martin Prozesky – Bernstein

Right. Thank you.

Operator

The next question comes from Mr. Andreas Koski, Nordea. Please go ahead.

Andreas Koski – Nordea

Yes. Hello. I also have a question on the mining rock excavation and on pricing. You had a year-over-year price increase of 3% in this quarter compared to 2% in previous quarter. Have you made any price increases during the third quarter that will give support during the remainder of the year or should we expect the year-over-year price increase to fade away as the year progresses?

Ronnie Leten

Yeah. It’s a good question. Of course, we do price management constantly in Atlas Copco. And you should make maybe a split between say equipment price management and parts and service price management.

When it comes to price, parts and service, I think we are more or less doing this every six months where we are really working on this and see where we need to adopt positively or negatively. Of course, in total, aggregate hopefully, it’s positive. And so, there is also you have the part of inflation, which gives you that possibility, so – and that we do every six months as a common practice for me as long as I’m more or less in our Atlas Copco when more outspoken maybe the last six years, seven years.

When it comes to equipment, that’s another that this goes together with say engineering innovation, because you need to do upselling, you need to really make sure that it’s not just a matter of increasing the price, because that would be too easy, but the other side of the table will never accept that.

So, you really need to sell productivity and this goes together that when you improve your equipment and then you create more value for our customers that you can do that. And you know and I even can’t follow anymore, we are releasing every week, every second week, we are releasing new products. So, as a constant price update, price management going on in the Group for all business areas and that’s the way it works.

Andreas Koski – Nordea

Okay. Thank you. The next question for Hans-Ola, because you had a non-cash item in the cash flow of SEK 303 million. Can you please explain what is included in this number?

Hans-Ola Meyer

Yeah. These are – you can see them as adjustments to the reported operating profit number. And sometimes there are various financial derivatives; sometimes that will affect the result, which is not reported for various reasons in the line financial item. But it’s not only that it’s – it can be pension, assets related and any other topic that is included in the operating profit that is delayed or is not having an effect on the cash flow results.

I don’t know have the specification. I don’t think it’s very helpful to go through in detail, the specification of this quarter, because if you follow backwards every year you will see that sometimes it’s a bit positive that specific line in the cash flow statement, sometimes it’s negative. So, it’s very difficult to say, because of this it will always tend to be slightly negative or slightly positive. I can’t do that unfortunately. But these are the type of items.

Andreas Koski – Nordea

Perfect. Thank you.

Hans-Ola Meyer

With that, I think, we need to close our line. Ronnie has AGMs to take care of. And I’d say it more firm than ever, you know that we are here and the questions you didn’t have a chance to ask, please don’t hesitate to call us. But unfortunately we have to close the telephone meeting, right now. I think the questions were rather broad and I hope that you have gotten Ronnie’s comment on most of the interesting areas at least.

So with that, thank you very much. And I hope to hear and see you back, if not before in July for the second quarter results. Thank you.

Ronnie Leten

Thank you. Bye.

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