Atlas Copco AB (ADR) (ATLKY.PK) CEO Discusses Q2 2013 Results - Earnings Call Transcript

Jul.18.13 | About: Atlas Copco (ATLKY)

Atlas Copco Ab (OTCPK:ATLKY) Q2 2013 Earnings Call July 18, 2013 7:30 AM ET

Executives

Hans Ola Meyer – SVP, Controlling and Finance

Ronnie Leten – President and CEO

Analysts

Guillermo Peigneux – UBS

Andreas Koski – Nordea

Klas Bergelind – Nomura

Aaron Ibbotson – Goldman Sachs

Andreas Willi – JP Morgan Cazenove

Philip Wilson – Redburn Partners

Ben Maslen – Bank of America-Merrill Lynch

Lars Brorson – DnB Nor

Markus Almerud – Morgan Stanley

Andre Kukhnin – Credit Suisse

Operator

Welcome to Atlas Copco’s Q2 Report 2013.

(Operator Instructions).

Hans Ola Meyer

Very welcome to Atlas Copco’s Conference for releasing the second quarter results of 2013. We are in sunny Stockholm, but we cannot enjoy the sun because we are in the Atlas Copco House in Nacka for the time being. But we will try to be brief so that you can all enjoy the nice sunny summer weather here in Stockholm.

We will take about an hour and we will do it in the normal format that Ronnie Leten, our CEO will give his comments in the beginning and then from thereon, we will take a Q&A session. For that Q&A session, not only because we are in a hurry to get into the sunshine, we will try to restrict it to only two brief questions per questioner. So please if you can respect that, I would be very, very happy. That allows more people to ask their question and I think it is fairer. So without further ado, I leave the word to you, Ronnie. Take it from here.

Ronnie Leten

Thank you Hans Ola and good afternoon to all of you. As usually I will go through the slides, try not to forget to refer to which slide I am, so that you are still with us.

If I go to slide number two, and which is the summing up for the quarter. Healthy demand for services, a good development on equipment and a softer mining, that’s more or less I think the summary if we can say on quarter two. Service continues to develop and that’s good to see even one could think about the mining side to suffer but we see still potential there. Industrial and construction demand improved. We see that happening and I think it is not a surprise, weaker mining equipment part. Maybe just for everybody to put on the mining equipment today, mining equipment is around – equipment for mining is around 7% – 7%, 8% of the Atlas Copco Group.

We have launched a lot of new innovative products which makes us successful and is also giving us the potential to grow even faster, but on top of that we also have planned for acquisitions where a couple of them were really also bringing new products and new segments into the Group.

Profitability, solid. One should know that really strong headwind from currency worth was more than MSEK 500 million, and Hans Ola will allude more on that when we look to the sales bridge and last but not least the strong cash flow.

If I go to slide number three, where you see the figures and most of the figures you have seen. If you take the operating profit MSEK 4.5 billion, if you just make quickly the calculation with the currency, you can say it’s more or less on par with last year. Operating margin, 20.8% was diluted by the currency effect which was more than 1% and earnings per share at SEK 2.58. So more or less I think solid financial figures.

If we take slide number four, and look more to the geographical spreads, maybe couple of highlights before I go to the different components. Positive Europe, we can say very complete dramatic drop in Australia but one should know that we are comparing with the top quarter ever, so it really makes that tough comparison. And Africa, Middle East, solid development. Rest, I will take one by one when we go to different component.

The Americas now on slide number five, North America and mainly I could say US, if we talk about the industrial compressors and tools, a good development. We still see a good development in that part of the business and which we have been seeing several times the softer mining equipment order intake, and as the continued development on service and parts for our business. So North America more specific US, still a good development.

South America, of course when you have big countries on the mining and then I think about Peru and Chile, that is tougher because there you see sequentially a decrease. On the other hand, when you think Brazil, you still see a reasonable good development. And if you make a correction for the mining you would see even an increase there.

Europe, like I already said, positive. Of course again, we’re comparing with the softer quarter last year, and because I think if you all remember Europe is already a while in the lower level. But on the industrial compressors and tools, mainly when I talk tools, the motor vehicle tools industry, we do very well. And the more you go north of Brussels, we see also a more positive development. Softer when you talk about Italy, Portugal, France and Spain which are still tough.

Construction slightly increased and mining to repeat myself continues to decrease. When you take a couple of strong countries, Turkey. Turkey is doing very well since a while, and keeps doing. And then we have two other big countries there in Europe; UK and Germany, they continue to develop very well.

Middle East Africa, I think reasonable good level. Of course when you go, compare with last year, we see even plus 16%, mainly coming from – good result Africa but also some good development in Saudi.

Slide number seven, Asia. You can say minus one but you could say more or less, flat. When you look to China, slight growth, but it says here on the slide, sequential growth, I will say a slight sequential growth. So that’s good to see where India on the contrary is still going down and as we also said here a softer demand in India.

The other countries more or less continues as before. Australia I already mentioned it, minus 50%, but maybe remember last year when I think we had a plus 40% or something. So we really here there is a – it’s of course a big swing as we comparing with very strong last quarter, last year quarter and mainly coming from the mining part.

We look here on the – with perspective over the more years. We see we are at more or less four, five quarters where we had softening. So if we repeat ourselves in from history then next quarter maybe need to be positive, but we will see what happens on that part.

The sales bridge, that is kind of summarized, say 5% in currency, 4% or 5% price volume, then that is more or less the picture where we are on all this receipt side. So currency is a big part, Swedish kroners, strengthening Swedish kroner we can say that compared to last year but then another part is the weakening of Australian dollar, Canadian dollar, real, yen and South African Rand, which also are big markets and have been softening these currencies which of course is also a negative effect for us in the currency.

Let me go through the different business area and as usual we start with compressor technique and I am on slide number 11 now. Industrial Compressors remained at a good stable level, I think also the launch which we did of our latest new compressor, the GAV is the plus. It’s very successful and these type of new development, new products is what we need to really then to trend and make sure also with wet whether that we can deliver good results.

Service and parts continue to be positive and the operating margin is at a solid 23% and you also know we have a bit of currency headwind. And again also here we continue to launch new products. Last time it was for the smaller entities as already just mentioned. This time we had real good launch of couple of large compressors which again also will make us more competitive and also support our pricing power.

Industrial Technique maybe the positive takeaway here is the strong order intake from all the vehicle. That was nice to see that we are very successful in delivering the tools for the new models. This happens in U.S., happens in Europe and also happens in the Chinese market. So it’s good in these areas, within our biggest markets are that we are also very successful.

We see strong sequential improvement in general industry, there is a little bit tougher especially in China where it’s a bit tougher there. But it is gradually coming back and like I also said, we see some growth in Europe and Asia.

Margin 21.5%, a little bit lower invoice, lower invoicing which makes it bit affected and of course currency has – majority of that business is produced in Swiss kroner here in Sweden.

And again we also won a nice award, the Red Dot award with this versatile tool which also make us successful in the motor vehicle industry and also related businesses.

Mining and Rock Excavation, yeah weak demand and as I already mentioned it’s around now when we take it around 6%, 7% of our business is coming – is mining related. When it comes to the equipment, we are the one in more civil works, so in that part is reasonably stable. We still see a good development in parts and service and on the consumable level. So that’s good, so that means there is production, there is production for copper, there is production for iron ore and we see that also when you look after, we look to the statistics you see that that is really there and it’s today even more than 60% of our market.

Operating margin for this type of business giving currency effect and giving the volume I must say, great job from the guys, 22.1%. So that is good and we know that we are adapting the organization to lower volume. And unfortunately I also have to share with you that both the business area President has decided to go back home and go to live in Canada and we will hopefully very soon announce his replacement.

Construction Technique, also here we saw some organic growth of course on the 2% we would like to see a bit more, it would be nice to get a little bit tailwind there. So Brazil, Western Europe, India there are the markets where we see some improvements.

Parts & Service, so that remains good and the operating margin is around 11.2%. Of course again negative effect by currency and volume. But then also here and you see the picture here of our new flavorfully branded Atlas Copco, the Dynapac favors which is really the ones we want to – we are launching and also make sure we will get more share of the market.

So then on the profits, I think you have seen all the figures more or less and I think Hans Ola maybe you can elaborate more when it comes to the low operating profit.

Hans Ola Meyer

Yeah, I’ll come back to Ronnie soon but just a few points. Most of it you have been able to read and think about already. The first thing is of course that the 500 million in comparison with second quarter negative currency effect in comparison with second quarter last year is very noticeable. It explains the drop basically. There are some positives of course in that, but I will talk more about that on the coming slides.

If we move down the income statement, we had a little bit higher financial items, charges or costs this quarter. It’s not something that have established a new level though. We believe that it will come back down a bit in the next couple of quarters, barring of course that there are new surprises on the currency side, but from an interest net point of view, I would say that about 150 plus is more a better expectation than all the rest which is hurting this quarter of revaluations of the derivatives and financial exchange differences related both to internal and external situation, is not something that we predict will continue. So somewhere in the region of 150 plus would probably be a better guess going forward.

When it comes to the tax, it was a little bit higher, about the same level as first quarter. We believe that the underlying tax rate in the foreseeable future will probably be closer to 25% than the current one. There are certain issues that I talked about in April already. There is a lot of activity on surprising audits going on all over the world and there are certain issues on that where we don’t know where the final outcome will be. So there is a little bit of precaution on that one. But again, we don’t believe that it will be anything more than that.

On that topic perhaps it’s also valid to comment a little bit on the other thing that we put in the – that has not affected the profit anyway, but as you could read in the report we have been receiving an assessment in Belgium of a deductibility of interest rates that has been disallowed in the first instance. We believe that we are following in all respect the legislation in that. So we have appealed that verdict, which is representing about SEK 200 million. We have however since the outcome is not known of course we have put it as a contingent liability, but that is not affecting the income statement.

I then move on to the next slide. I don’t know how I do it on this one, but there I found it. Yes and that’s slide number 16. It’s the usual way of looking at what has changed from last year to this quarter’s profit and you can immediately see that the currency is the dominating factor here and it really relates to, it gives the result. As Ronnie has already said, it affects about slightly more than a percentage point, if you do the mathematics correctly on the margin compared with last year.

If we look a little bit more into the different parts of the business, you can immediately see that when you take away the currency impact, which by the way is about one percentage point negative on compressor technique similar on industrial technique and about 1.5 percentage point negative on the other two business areas, you can see that compressor technique is really making a very strong quarter. If we have problems like it’s not very surprising to have a problem that you make more profit than you make more revenue compared to last year. We should keep in mind that it’s not only a tremendous amount, we also commented last year that we had some costs, I would call them investments in our market organization quite a lot of service build up, which didn’t yield so much result last year. And now we see that coming through in a better way, so hence a very nice flow through on the profitability in compressor technique.

Industrial technique, mining and construction technique are of course suffering from not only the currency impact but also from lower volumes as you can see and that affects the profitability. Mitigating a little bit of that fall is that they have a better mix. They have a little bit more of an aftermarket in those numbers than last year as a percentage, otherwise the flow through would have been more negative I would say in – specifically in mining.

On the balance sheet, well not stopping so much, I will have the few comments on the next slide which is the cash flow, but this slide number 18 just want to point out that you remember that between December and June we have borrowed 5 billion euro in anticipation of amortization of loans in the early part of 2014. Temporarily that is of course only boosting both cash and loans, but that will be corrected as we come into 2014, if I used that word. Then of course between December and June we also have 6.5 billion roughly in dividend payment as you know.

If we go on into the cash flow, commenting a little bit more on balance sheet items, you can see two – one very dominating point in this bridge is the net financial items, now I underline again the cash flow effect from net financial items, not the profit effect, was hugely negative last year and is positive this year SEK400 million versus minus SEK800 million. And that relates to the valuation of currency swaps and interest rate swaps agreement that we have or contracts that we have. It is not something that is going to affect the income statement, but it has to be revalued every quarter and sometimes we have these effects when we close a swap contract and we roll it over into a new period.

Taxes reflect a slightly lower profit level as we saw before, and then change in working capital. The main reason for building more working capital in the second quarter is that the revenue, the invoicing is much higher than in the first quarter. So that explains why we tie up a little bit more receivables in – that’s the main thing between inventory and trade payables it’s actually slightly positive impact on the cash flow. Otherwise the rest is rather uneventful. We invest a little bit less in this quarter compared to last year, but ends up at a very healthy SEK 3.3 billion in cash flow for the quarter compared to SEK 1.9 last year.

So I think with that I invite Ronnie back and just from the outlook before we start the Q&A session or so far so much.

Ronnie Leten

Not much to say I think everybody can read it. So I suggest that we go immediately to the Q&A session.

Question-and-Answer Session

Hans Ola Meyer

We will have questions also from the telephone conference participators. Perhaps before we take the first two questions here, we ask the operator to give the instructions for the questions on the telephone conference please.

Operator

(Operator Instructions).

Hans Ola Meyer

Thank you very much and I just remind everyone that let’s try to keep it at the one or two questions maximum to allow more people to put questions. Then we start here, first and Guillermo, please.

Guillermo Peigneux – UBS

Good afternoon, Guillermo from UBS. Two questions, first regarding your outlook statement, can you give us little bit more granularity with regards to regions, divisions and aftermarket versus investments? And then the second question regards to mining equipment. And I am wondering and I am scratching my head trying to think what happen over the last quarter, a lot of your, or a lot of the subcontractors to the mining industry which sometimes actually buy your products to sell efficiency to the mining players have been told that during the second half this year are going to have lower volumes but more importantly they have also been told that they going to have lower price. And I cannot think of that conversation being different with you when it comes to the pricing of your equipment, and I may be wrong but I want to just sort of have your thoughts on that. Thank you very much.

Ronnie Leten

Maybe I take the mining equipment first, so then I hope this the last question I get on that part. To remind you it’s 7% of our business and stuff I think I hope to get question on the 93%. Now I think first on the pricing because that is and this is not a new story. This is of course now more highlighted because you see when you go to visit mines and the headquarters and all that you see there is a lot of activity going on, you see all those new strategies, new reviews, a lot of consultants coming and there is a lot of areas and we need to have short term money here and there and they debate all this.

Now one thing is it’s very easy to give different prices if you don’t get any volume. So that is a part, first one I think when you don’t buy and you get price reduction. So there is not much. But I think in this and that’s another discussion what we also get with the same owners is about productivity and you have heard me saying in the summary what did also we keep investing in new equipment. We keep investing in research and develop because that at the end will give real, real cost reduction. This will really give OpEx reduction maybe not CapEx reduction but at the end of the day it is good returns and that is where the story still goes. Of course it will be a bit more tougher because people fight for the same order that can happen.

Then will it be softer, and then I am heading to my outlook statement also. I don’t see and I have already mentioned a couple of times now on the equipment side that this is already very low. I don’t see for the time being on the equipment side that suddenly the mines will start to order a lot of equipment although volumes are okay if you look to copper, iron ore in a couple the volume there, but the uncertainty on pricing is a bit, make it more difficult to really let’s go for it.

So I think we will need to wait a couple of quarters, hopefully it’s maybe one it’s maybe two, but at the end of the something will land. What we also see is that the bigger players the [Anglos, the Barlays], the BHPs and all there if you look to their CapEx reaction it’s not really falling off the cliff. On the contrary for some of them it goes even up. But what you see is that smaller players, smaller companies and that’s also where our cancellations are coming from that they have tough, then they are tougher and because they have to see that the project is not coming and they cannot really hang in for a while and they have to be very careful.

So when it comes to the outlook statement I think when it comes to mining equipment I still see what I believe a slight reduction, somewhat lower if I have to say in my same terminology, somewhat higher maybe on the industrial part, service I think that continues to develop. So depending a bit where the minus is and then you have the construction which is maybe the different. So that made us when we were debating it becomes very here and there, but that is, make us to say okay it sequentially a flat on that.

Hans Ola Meyer

Are there question here in Stockholm or we go straight, yeah, yeah.

Andreas Koski – Nordea

Andreas Koski from Nordea. Also on mining, can you give us a better feeling of cost structure in mining and rock excavation, how much is variable cost and how much is fixed cost? If we assume that sales would have been down as much as orders i.e. 19% in terms of volume what impact would we have seen in the margin?

Ronnie Leten

Yeah, I think and you have heard us at least myself four and half years now preaching, agile and resilience. So now the proof is here. You have seen I think the result already today from this business area with headwind of currency and that has taken really cost reduction. We don’t have the habit to announce this but we take as they come. So that is in that part. There is when it comes to the equipment side there is really a lot of agility, but one should not forget and that is I would keep eyes in the [stomach]. I will keep investing in the presence I will not call to layoff sales people who have been building up experience of 20 years, I think that will be very unsustainable decision.

So I will keep the feet in the street and where we need to invest we keep investing. And second on design and development, of course we will revisit certain project and see and that because it’s always good, we should never miss a good crisis to do that. So that these are the things what really will hang in and I will not create certain agility, but the other parts are rather flexible and that either with in-sourcing and reducing workforce which unfortunately will take place more in the months to come that unfortunately I have to say.

Yeah I think one could say when it comes to the mix and of course you have consumable and aftermarket that you can make the calculation yourself. You know that how that will work out.

Hans Ola Meyer

Thank you. So we turn to the telephone conference then for two questions.

Operator

The first question comes from Mr. Klas Bergelind at Nomura. Please go ahead.

Klas Bergelind – Nomura

Yes, good afternoon gentlemen, it’s Klas Bergelind from Nomura and I have two questions please. Firstly on our service business, Ronnie in mining. So this is not a question on equipment. And we are getting some evidence from miners now considering more insourcing of service contracts to do more work themselves. I was wondering if you have seen anything of this at all or if you think that you are going for more protected given your underground exposure, so that’s my first question.

The second question is on Europe and construction technique. Last quarter you said that the increase was largely due to seasonality and not there is an increase again. Are you taking market shares there or is it underlying improvements? Thanks.

Ronnie Leten

Yeah, maybe I’ll start with the construction guys. If you listen to my guys they will definitely say that we take market share. There is maybe a bit of self-help part and maybe it’s on this statement we are going to see a bit. They do work, good work. You remember that on the road construction part that we have done a lot of work and that is yielding strong result, not at the level where we would like it to have but it’s coming. So on that part I cannot be disappointed. Of course we are not there where we want to be, but the trend is already there where we would like it to be but not the level we like.

When it comes to in sourcing and service, yes, I think these discussions are always coming when there is a crisis because you have to source your partner and the mine and let’s go for own people and this part but one should know also that we are a niche player. We have a very specialized product which is not just replacing tires. Most of the work is done at sophisticated machine, is proprietary service, proprietary parts. So once you have really outsourced it’s not so easy to do the in-sourcing. You see that these discussions going in, going on but I think it’s not the main activity what takes place for us in that.

I think on the service side in mining we still and I have mentioned that in so many occasions we still have a lot of potential self-help growth that I even don’t want to use that in favor of myself.

Klas Bergelind – Nomura

Thank you.

Hans Ola Meyer

Thank you. Another question.

Operator

The next question comes from Mr. Aaron Ibbotson at Goldman Sachs. Please go ahead.

Aaron Ibbotson – Goldman Sachs

Hi there. Good morning. Actually it’s off the lunch time. It’s good afternoon. I have two questions if I may. The first one was just on compressor technique and you alluded to some pay-off from a previous investment I am trying to understand how we should think about this going forward. If I look at the margins, sort of underlying margin improvement in compressor technique how much is that is driven, would you say by mix effect by sort of a flat equipment and then a slight growth as you say here in aftermarket and how much is driven by this payoff from your investments or lack of repeat maybe of investments. The first question.

And then my second was actually just a clarification. So it is mining equipment but I just want to understand your 7% are you talking about order intake here, revenues through EBIT when you say 7%. And if you are talking about order intake is it correct then to understand that it’s down roughly 60% year-over-year or something like that, is that a number that you guys recognize, thank you?

Ronnie Leten

Yeah, I just when it comes to the details on these numbers that you give later a call to Matias, he will then give you the right after call. But when I mentioned on the 7%, that is meant on the orders received when we take this quarter. And you remember around that we always said two-third is mining and one-third is more civil works. So that is more or less that part.

Aaron Ibbotson – Goldman Sachs

That make sense. I got to that number. I just wanted to clarify and thank you.

Ronnie Leten

Yeah then when it comes to CT and when you remember last year, this quarter we talked about CT and looked to the profitability and people were asking, I think we had done a lot of investment in presence, presence and presence. I think I used more or less. And a second one I think we keep investing on the product and that part. Sometimes this cost hit in that quarter and we take as it comes. So that is an area. And Hans Ola I think you have already said in the flow through, it is some payback we get and of course also we should not be afraid to say that. We also have efficiency improvement when it comes to service in other areas and even we got negative currency effect in that part. So it think it’s good work what they have done over the last 12 months in CTS and in CT, I should say which give this type of result where they are today with their EBIT level between 23%-24%.

Aaron Ibbotson – Goldman Sachs

But there is no chance you can sort of give us any steer on what the after marketing compressor technique did, you know we are talking low, mid high single digit any that type of indication there, year-over-year development there.

Ronnie Leten

They keep growing. I think they keep growing at more or less at a same level of contribution.

Aaron Ibbotson – Goldman Sachs

Okay.

Ronnie Leten

So there is no dilution on profitability when we talk about the service business in compressor technique.

Aaron Ibbotson – Goldman Sachs

Okay, thank you.

Ronnie Leten

Thank you, Aaron.

Operator

We have a question from Mr. Andreas Willi at JPMorgan. Please go ahead.

Andreas Willi – JP Morgan Cazenove

Yeah, good afternoon gentlemen. My first question is on clarification on the mining equipment share within your sales. If we look at the sales level of 7.9 billion this quarter what’s the share of mining equipment in that and how much backlog do you have? And you said you are taking measures to bring cost down or take employment out in manufacturing. Have you already provisioned for this as part of the Q2 numbers or is that something we see in the second half of the year?

And the second question on compressors is what have you seen in order intake in the last few weeks, maybe last month in emerging markets? If you look at it historically normally when PMI order components come down, we get a relatively quick follow through on your industrial compressors orders coming down. So what have you seen in emerging market, and is Europe and U.S. up enough to offset the emerging markets in Q3 and Q4?

Ronnie Leten

Yeah I will let the first question to answer by Hans Ola. When it comes to CT and the emerging market I must say I have not recognized a difference, I am trying to recall the different months now and the countries. I didn’t really look, was for me no change as such and I am trying to look to the yellow cannery, so which we use as a good indicator. I didn’t see a trend difference in that part. So for me I didn’t see that. When it comes to the U.S., there we still see a good development but the growth is not at the same, the sequential growth is not at the same level as it was seven-eight months ago because you also get for comparisons but there is still some growth that we see.

Hans Ola Meyer

Yeah, on the question of, I understood the question Andreas as the revenue number on mining equipment, right?

Andreas Willi – JP Morgan Cazenove

Yeah.

Hans Ola Meyer

Yeah not the order and it’s a little bit more than 40% and consequently it’s lower than 40% when you take the orders received in the equipment part.

Andreas Willi – JP Morgan Cazenove

So out of the 7.9 billion about 40% you are invoicing now is still mining equipment.

Hans Ola Meyer

Yeah, that’s exactly what I said, yeah, equipment.

Andreas Willi – JP Morgan Cazenove

And in terms of the provisions taken for these measures you have mentioned earlier…

Hans Ola Meyer

Yeah we don’t disclose exactly. I mean that’s the work we consider we have to do constantly. Sometimes we have to build up resources when we grow and we don’t disclose that, there’s an extraordinary cost either that doesn’t have any revenue against it, so it’s constant work. It’s continuous work. When we have a big restructuring like we close a plant or we move a plant yeah, then we will give you an indication of how much it is but it’s taken. We see it as something we have to do and we do it continuously adjustment and we don’t disclose a specific number.

Is that always the case for every quarter coming forward? I don’t know. It depends on the character of the change and if it’s a clear one-time cost then we will tell you how much it is but it is affecting somewhat the profit margin.

Andreas Willi – JP Morgan Cazenove

On the 40% you said in mining, in equipment of this aftermarket 60 and civil mining equipment can’t really be 40, it would then include civil equipment as well the 40%.

Hans Ola Meyer

It would be say 60% for service? Then we include consumables in that, if that is what you mean.

Andreas Willi – JP Morgan Cazenove

Yeah, basically if 60% of the 7.9 billion is consumables and service that leaves 40% for equipment which breaks down into civil equipment and mining equipment.

Hans Ola Meyer

Yes, yes.

Andreas Willi – JP Morgan Cazenove

So it’s about 30% maybe or just below 30% which is pure mining equipment still.

Hans Ola Meyer

Sorry I talked about MR sorry, you were right. You asked about mining equipment. But we don’t follow it to this level…

Ronnie Leten

But what you can say it’s more or else this is now you can say more or less it’s one-third is civil and two-third is mining.

Andreas Willi – JP Morgan Cazenove

Thank you very much.

Hans Ola Meyer

Okay. So we move back here I think. So perhaps we had too many questions but is there any more question in Stockholm here. We have too many people enjoying the sunshine so we had more participants on the telephone line. I think, yeah we have follow up here from Guillermo. Go ahead since there were no one else raising their hand.

Guillermo Peigneux – UBS

Yeah a question regarding mining again sorry. Production numbers that we have seen actually on the majors are actually quite good, over 10% in most cases year-over-year is the aftermarket up the same or is up less than that, i.e. are the miners getting more efficient?

Ronnie Leten It’s up less than that. We don’t have the service business that is growing double-digit for the time being in the Group, but then again it varies a little bit between the different business areas but it’s not up double-digit, no.

Hans Ola Meyer

We go to the conference call again, another question please.

Operator

We have a question from Mr…

Hans Ola Meyer

Yeah, go ahead sorry we will take the telephone conference and then we go back to Stockholm.

Operator

We have a question from Mr. Phil…

Hans Ola Meyer

Now I am confused here. I am blinded by the light as the song said somewhere in the lyrics. But I take it back then, I give a second question in Stockholm first, sorry for that. We’ll come back.

Unidentified Analyst

Nordea. So when we look at Europe Mr. Leten, do you think we are getting close to bottom here in Europe. You are talking about the differences between the North and the Southern parts but in general is confidence coming back to the customers, are they beginning to ask for tenders on the bigger compressors? Are they getting on the margin are they just getting slightly more optimistic?

Ronnie Leten

It’s very difficult, it’s an easy question but a very difficult answer and I have already I think mentioned I think two months ago, when I was in one of the conferences that I got a sense that I think maybe Europe is bottoming out. And when you look to our figures and I am try to stick what I see I would say yes, I think it is but there is still a big mix, we don’t want to be political and have used, northern part of Brussels is doing well, I may say.

Unidentified Analyst

I would say rather smaller area, Northern part of Brussels.

Ronnie Leten

Yeah but it’s small, north part of that is really doing well. When you take Spain, Italy and the other part is still tough. So if you take maybe in total we can say more or less it may be bottoming out but there is still a big difference between Spain, Italy and if you take Germany, Benelux or…

Hans Ola Meyer

So if we summarize North America industrial demand is doing fine, Europe we are bottoming out, China is coming back. So basically the world is doing fine and we are step by step will increase from that.

Ronnie Leten

Let’s hope you are right.

Hans Ola Meyer

As a final comment on Europe, when you hear the countries Germany, UK and to certain other parts, the Northern parts of Europe there are rather export strong countries and that is of course always giving a little bit of a spread effect that the growth might come from somewhere else in the world. We don’t have a perfect match that everything comes in the right region where the actual end demand is. But nevertheless I mean that is just an add-on comment.

So now we go back to the telephone conference.

Operator

We have a question from Mr. Phil Wilson at Redburn. Please go ahead.

Philip Wilson – Redburn Partners

Yes, good afternoon it’s Phil Wilson at Redburn. I have two questions please. I am they are based on mining but going back to your early comments Ronnie can you help us understand Ronnie how’s the mix effect in mining and can you say roughly what portion of your mining sales go to smaller junior miners and have these customers been higher margins in better years? We are just trying to understand what you expect, would that it be a source of future negative mix pressure. That’s the first question.

And the second question is for your mining sales outside the West, so Australia, Chile, South Africa et cetera do you sell everything in dollars or local currency or what is the mix? Just to help understand the impact of the recent emerging market currency weakness. Thank you.

Ronnie Leten

When it comes to sales the majority of our activities is done in local currency but of course when you do these negotiations and you look forward of course you take into account that when certain local currency is devaluating yeah of course the prices will be adapted. So that is way the majority of the business works. It could be with letter of intent that you have a dollar or Swedish pricing that fixed in it but the majority is done with an adapted local currency and people – people are used to that when you see the drop of South African rand of course local prices will go up to adapt to it.

When it comes to sales I think the majority is of course for majors, that for sure that we have that, and margins are mainly they are not a big significant difference and margin is sometimes also depending what type of machine it is. Is there lot of adaptations? How is the competitive landscape at that time? But there is not a significant difference in that part that you see certainly see that yeah, margins 10% to 15% digit difference is that we don’t have that type of difference.

Philip Wilson – Redburn Partners

Okay. Thank you.

Hans Ola Meyer

Another question from the telephone conference please.

Operator

The next question comes from Mr. Ben Maslen at Merrill Lynch. Please go ahead.

Ben Maslen – Bank of America-Merrill Lynch

Yeah, good afternoon everyone. Hi Ronnie, hi, Hans Ola. Two questions please, firstly on working capital, could you talk a little bit about how much working capital is still tied up in the mining equipment cycle and just what you would expect maybe in the second half of the year as you deliver what’s left of the order book, would you expect to begin slow as we saw in 2009? And then secondly on M&A just a bit of a color maybe on how the pipeline is, market valuations look right now and just divisionally what are your priorities? Thank you.

Hans Ola Meyer

I can go first, on the working capital. Yeah absolutely we depending on what the business will do and as going forward when it comes to the order intake it will have an impact on the working capital situation specifically in MR. And we will exactly as you said we will still continue to invoice at the higher level than what we receive orders currently and that everything else equal is reducing the inventory level. So it will have a positive that component isolated at least will have a positive impact on our working capital. So in size or in amount I cannot compare with 2009 but the direction is absolutely that’s what will happen.

Ben Maslen – Bank of America-Merrill Lynch

Okay. Thanks.

Ronnie Leten

Yeah, when it comes to M&A Ben, as you know we have been hunting constantly and we keep hunting and also in quarter two we landed four acquisitions. Activities are going on. We map the market and we keep trying to get the right nice add-ons in our business. Market valuations I don’t what I have seen and especially if I just take these four as a reference, I think they are normal valuation. I think when they are too expensive I think you will not see them and I won’t talk about that they will not land I don’t get the impression that what we are looking for that price will be the deal breaking. Of course you always have couple here and there case where people are very optimistic and when (inaudible) start to take that prices go but when we really start become serious with these nice add-ons I don’t see price as an issue.

Ben Maslen – Bank of America-Merrill Lynch

Okay. Thank you very much.

Operator

The next question comes from Mr. Lars Brorson at DnB. Please go ahead.

Lars Brorson – DnB Nor

Yeah, thank you very much. Good afternoon Ronnie and Hans Ola. In mining and sorry to return to the topic but from the perspective of your mining OE order intake can you give us a sense of where we are across your key commodity exposures from a year-over-year perspective. Are you starting to level out in your core and perhaps your iron ore exposures and would it be the right to assume that gold will have a very challenging second year, sorry second half year ahead of it again from an order perspective? Thanks.

Ronnie Leten

Yeah I don’t think there are many new gold equipment orders lending for the time being. So that’s an easy answer and then I think when you look to our order intake for mining and I think I mentioned also when I think the same question came more or less also from Aaron where he was hinting to that. I think it is already at a very low level. So and the majority of these orders are underground and then smaller surface drilling machines. So that is where we see still some activity going on when it comes to the bigger surface mining equipment that is today very, very soft.

Lars Brorson – DnB Nor

And on your base metals and coal exposures again would it be fair to assume that we are starting level off there on a year-over-year comparison perspective?

Ronnie Leten

But coal, today, coal in the world, I think you only see more or less two how can I say components investing and that is India where we still see some orders coming in for coal and I think but that’s less for us I think when it comes to China. I think all the rest is rather soft when it comes to coal for the time being, especially for our machines.

Hans Ola Meyer

And we are not in underground demand at all as you probably knows as before.

Ronnie Leten

So coal is for us a minority and I think if you take coal in Australia I think it’s very weak for us.

Lars Brorson – DnB Nor

If I could just get out one final question on the capacity adjustments, I mean you continue to make gradual capacity adjustment here recent in South Africa back in November in Europe or to the earlier question I mean what’s preventing you from making a more significant adjustment here in and how should we think about the cost under absorption in the second half and perhaps going into ‘14?

Ronnie Leten

But I don’t think we adjust as we go and I don’t like this really revolutionary one-off adjustment, because I don’t think it’s needed for our business. I think also does not create right atmosphere in the company and we really adapt where we need to go and I think also I have to be respecting the people in the organization as they come up with 22.1% EBIT giving currency effect of more than 1.5%, I think they do their job and then I have to back off and say okay you guys you adapt and I wait.

Lars Brorson – DnB Nor

Thanks. That’s all I have. Thanks very much.

Operator

We have a question from Mr. Markus Almerud at Morgan Stanley.

Markus Almerud – Morgan Stanley

Hi, Markus Almerud here at Morgan Stanley. My first question is on China, could you talk a little bit about what you are seeing underlying there. So you see, say you see sequential growth but there was on the New Year, could you just give a feeling of what we are seeing there. And my second question is if on after markets all combining, is it, what kind of growth are your seeing there at the moment that you have said it impressed that you expect somewhere low to mid-single digit growth in coming years. Is it something that you are still looking for. Thank you.

Ronnie Leten

And I made that statement, maybe I should, when it comes to growing now and I still confirm that. I think giving the potential, giving our customer share what we have today in service and you can take mining or you can take industrial technique or you take compressor, I believe that our growth for aftermarket should be between this 5% and 10%, giving okay, when you have more tailwind it goes a little bit easier than when you have headwind. But that I think the self-help business development, further feet on the street, getting more connectivity, more drawbacks for sure is I think that should be our ambition then. I don’t think that we are not, yeah, we are on track for that part.

When it comes to China I think it’s a bit also self-help. I think we do good work when it comes to the industrial technique and compressor, I think we have invested a lot in presence, maybe lately we have not been talking so much about that and maybe I didn’t talk so much about feet in the street and really entering deeper into the Asian market, but we have been working doing that. We have really increased our footprint in China. We have really hired a lot of more people, we have also trained a lot of more people. So and that is yeah, yielding some result.

Than a second one, one should know that was a two, yeah almost three years ago, we decided two years ago we more or less, we start to be up and running. We had really done a big investment in Nanjing when it comes to coal mining where we also had changed our product offer to the Asian market and particularly to the Chinese market. So that also is giving us more competitiveness in this market and that is, yeah, couple of self-help remedies which now come in and give some results. So I think we are beating a bit the trend, which but okay, I am talking only about the figures I see. So I am not a macro economist.

Markus Almerud – Morgan Stanley

But if you look at the compressors in particular and you look at that underlying trend, underlying demand of what you are seeing down there, is it, is kind of sequential improvement still if you would, if you had taken U.S. into account, what you are feeling, I know it’s subjective and just feeling but still, just..

Ronnie Leten

I think it is, when it comes to compressors, when you take the big ticket, the big ticket is still difficult in China. We just take the larger air separation compressors, we hardly sell anything today in China because there is no investment going on in air separation. So big ticket for the oil and gas, for the gas division as we used to call, we have hardly that. Of course there are other applications which come on, I think fuel gas boosters all that type of thing, that is pipeline compressors, this and other types of business which we see coming in and that’s where we try to enter in.

When it comes to the yellow canneries and the small to medium sized compressors, I that is okay, that level. So that is definitely not dropping off and red chili improving, coming from a better penetration coming from a better product offer, whatever, it’s a bit here and there but I think I see red chili some improvement and yeah.

Markus Almerud – Morgan Stanley

Okay, thank you very much.

Operator

The next question comes from Mr. Andre Kukhnin at Credit Suisse. Please go ahead.

Andre Kukhnin – Credit Suisse

Good afternoon. Thanks for taking my question. Firstly on construction technique. I am thinking about it in the context of a business that’s been invested in and now maybe you could help us with that investment. Is that how we should think about it like what you have done at compressor technique or is this still in a kind of full on investment mode and therefore we shouldn’t expect as pronounced kind of margin herein when volumes come back.

Ronnie Leten

I think with the work we do in construction technique we have done over the last two-three years we have done a lot of capacity adjustments, movements we have invested and still investing a lot in design and development and new product range. I showed also one of the pictures in a slide, we have open blast air, I think this is panel 11, new really sales company dedicated to construction technique and so we have done that and of course time of harvesting is coming close and that is also what we work hard to see happening.

I was going to say hoping to happen, but I should not use the word hope in this I think it’s hard work, but I think we can see more and more competitive with our products where we will weekly be extending our offer. We penetrate deeper into the market, all these things is coming and if the market like the construction in China as an example would have been really at the same level as 2010, 2011. You would see a totally different volume. But okay, it’s not so we need to, and the same is on Europe we will see a better Europe, new levels and a bit better results.

But I would like to hang in a bit and that’s also what I said to the guys, let’s keep investing on design and development getting the products, one day it has to come because I believe fundamentally the world will need this type of equipment.

Hans Ola Meyer

With that I think we take, we have to take the final question and this goes to Stockholm here now and I know that there are more questions waiting the telephone conference but unfortunately we have to defer them to conversations after the common call here. I hope that’s fine. So please.

Unidentified Analyst

[Inaudible]. I have a question on compressor technique, if you could discuss a little bit about your new innovative products and then talk in the coming few years how we should expect them to impact your sales, like how much they will grow in percentage terms of the CT sales and also what risk you see or impact you may see already on your existing sales when you bring in the new ones?

Ronnie Leten

Thank you for asking question about compressor technique. So that’s nice. So I think we launched the products, what was it now, four-five months or four months. I see good development. People are very enthusiastic also sales people that’s the first thing. So that works. Of course in that we have always had in compressors we do cannibalization and that’s a good thing, really make sure we get state of the art and we really make sure you replace it with a more efficient compressor. So we try to give the most, so let’s convert your electricity bill into equipment sales and service. That is the whole concept of what we do and I think with this GA VACP plus it’s even easier, because it has more efficiency and electricity price go up. So that makes it easier to sell also on the small range.

This product what we have done launched…

Unidentified Analyst

The one you mentioned now or…

Ronnie Leten

No, no the GA VAC plus what we have done now is really I think a smaller range of products. So you cannot expect that, that will create suddenly a growth of 10% in the whole compressor technique, no we will need to be better. It’s really a good sign that again these areas we mastered the technology we do a quantum leap what makes again the business more robust and again an area, slight area which itself helps the growth, same as what is happening on the largest compressors which we will be launching now mainly in Asia but also have a much more efficient product range coming on, which makes it easier for the salesman to sell. And we are again more competitive and that gives you also the pricing power and that is the whole innovation machine what is running in compression technique.

So I will be very difficult to be not enthusiastic about compressor technique especially from my side, I see a lot of these things what makes that a lot of self-help business development taking place.

Unidentified Analyst

Very significant impact immediately but looking two-three four years ahead.

Ronnie Leten

Yeah, I think one is if you think the whole world of compressors there is not a good argument why the world will not be maybe 80% variable speed. There is no good rationale. The only good rationale is that you need to convince the customers the benefit of that. So it’s more that we lead, we have always had the transformation and that is of course training for our sales people but also training for the market.

Hans Ola Meyer

Thank you very much not only for that question but for all the question and the participation coming here today and listening in on the telephone conference or participating on the telephone conference. We wish you the best for whoever now has holiday and hope to hear and see you back if not before in October for the third quarter results presentation. So thank you very much.

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