Atlas Copco's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.25.13 | About: Atlas Copco (ATLKY)

Atlas Copco AB (OTCPK:ATLKY) Q3 2013 Earnings Conference Call October 25, 2013 9:00 AM ET

Executives

Ronnie Leten - President and CEO

Hans Ola Meyer - SVP Controlling and Chief Financial officer

Analysts

Anders Roslund - Swedbank

Ben Maslen - Merrill Lynch

Lars Brorson - DnB

Andre Kukhnin - Credit Suisse

Markus Almerud - Morgan Stanley

Aaron Ibbotson - Goldman Sachs

James Moore - Redburn

Hans Ola Meyer

Good morning, good day, good afternoon to everybody. That is participating on the telephone conference and here in Stockholm to this presentation of the third quarter results for Atlas Copco Group.

Today we will follow a very common format that you know since before. I will soon hand over to our CEO, Ronnie Leten, who will give us his comments on the quarter, the results and the trends, and then we will open up for questions and answers where we will have a few questions from the all here in Nacka, Stockholm and then we will take turns with the telephone conference.

So please without any further adieu, Ronnie I leave it to you.

Ronnie Leten

Thank you, Hans Ola. So let’s go and meet the slide number two, Q3 in brief for the highlights. Maybe just before I go take a bit better points here on the slide; I think if you look to our results, it’s a bit of a mix, maybe to talk you a bit about the negative parts and is the mining, mining equipment which is I assume for many of you, it’s not a surprise which is mainly the takeaway from this on the negative side. I believe there are many also positive sides in this quarter. One is the MVI, the motor vehicle business mainly in China and U.S. And I will come back later on that, but there is also another one is which I am happy to see is the growth in the construction equipment side where we see good work of the organization so that helps. And on the other hand is also the yellow canneries are still there. There is a good stable development on the small and medium sized compressors.

Maybe a one-time lower thought and that’s the reason why I didn’t put it under the umbrella. The negative is lower order intake of larger compressors. And I will elaborate a bit when I am talking on compressors what my analysis is of that part. So that is a bit of a mix, it’s not one size fits all, some businesses are doing fine. It’s not booming, but I don’t think anyone of you had expected that, but it’s either it’s sideways or slightly positive on the mining side, still tough.

The good one to mention is the service business. The journey we start many years ago. It keeps delivering, it’s a good business, it helps us to be closer to customers and it really pays off this transformation of the organization.

Healthy profit, healthy profitability, 20.5. We will also talk a little bit more than (inaudible) explain you why it seems a bit lower than maybe some of you had expected but mainly we can say through first it’s currency and second is the mining and the best option.

The two takeaways and the explanation why you see a small growth in profitability a bit bigger than you look to money. We will keep continuous taking actions toward just the capacity for lower demand in equipment in mining, so that is unfortunately we have to do and we have to adapt ourselves and we do that accordingly and then hopefully very soon we have reached a certain levels though we could say we state that.

And then I am also very pleased what we have done on the strategic part when it comes to acquisitions, one was the step up of our acquisition and profits back end so we really expand from a strategic point of view in vacuum and we have been spending many years in that area and I think this is the journey which Atlas Copco started now and I'm sure it also come to develop to the venue. And then we have a couple of actually four niche business area actually and maybe the first time we have this quarter in every business area one acquisition and they all fit nicely in our product portfolio.

We go then to slide number 3 on the figures, you see you can read the figures maybe on the operating margins and the profitability positive. We have good pricing development. So price mix is doing fine, negative is volume under absorption of that we will have. Also when you were comparing last year with this year, once we know also we also had one-time positive item last year and also last year we have the very high load, this is also good absorption. So you really compare to the left than the right side. The rest I will let to Hans Ola later on the presentation to elaborate a bit more on that.

Let me now go to the geographical part, I will go to slide number five. When we talk about the Americas, although the slide shows here minus 11 when it comes to quarters here, of course once we also know that last year around the same quarter, we had a couple of big orders in [Quebec technique] and second also Canada and Mexico are larger mining nations, which are also lower at this time.

So that make it a mining, but if you take and you try to look under the skin about and we can say it’s still good order intake for industrial compressors, the NVI business, industrial tools business also even the GI business is going good. I think we do very well, I think we penetrate very well, I think we’re gaining share and also we have the NVI business which are doing very well in the state actually. And I think last there is the construction equipment side, when comes to then the companies are doing a very good job which is lower pace mining and the logic compressors when we make the comparison and help the service business. So that's always nice to see that and we continue to develop that part. South America, Chile, Peru, low again mining, but what was good this quarter was Brazil.

So had a very solid development in Brazil, so that is good to be part again, and South America is a lot of mining and rock excavation.

We then go to Europe the next slide, I must say not so bad. Okay, you see the minus 2, that’s of course negative. But if we go again another [skin] we see a solid development for the tools business. The compressor business is doing fine. But again, I think in mining, the credits are down.

If you please switch stick out here and one is UK. It’s since couple of quarters that we see a very good development in UK a lot of self-help that I think also some tailwind for the business that we are in.

Africa, maybe this is the only plus which we had here. A good performance in the Middle East that’s mainly in Saudi and Dubai in the area when it comes to compressors, but one also, when you make comparison with last year which we do here it’s also good on the mining side. I see South Africa that’s not bad to when you make a comparison. One could say maybe and that’s true, South Africa was early last year also had a drop if you look to that [status] that we do. Of course it’s a little bit easier comparison, but it’s not at that level where we are in this moment.

Asia, good tool business so mainly it’s the MVI business and then you see all the statistics of cost reductions and you could really also see that, the producers over there also go for the quality tools so really taking care of the quality of the cars, so that helps us also in the transformation. We got good stable order income for Dost Kompresör that keeps going even in China. So I could also say that.

That’s still, be still good solid development in China, but we miss and that we miss in that operative bigger and bigger tickets, the very big tickets in our terms and we don’t have that one and that would have make it a very good development.

So that’s on Asia, maybe I can give you a bit more info on India. For us India was in the quarter was not so bad, because we got a couple of good orders there, but we also see the outlook on India there I think I need to, we are careful, but still today it develops fine, so not to say anymore on that.

And Australia, yeah the more you get mining exposures, the bigger the [quarter] the tickets are that they are going. So also here it’s mainly on the mining side a good quarter.

We then go to the bridge, sales bridge. And you see, still, maybe some of you would have expected in making this price development, but we still see that the more practical way in new products, the innovation part that pays-off. We are able to sell productivity to our customers where we also get compensation for even on the service side. We also get there the right value for our services and our products.

Just to give on the currency, the mine is 5%, you see it around if you take it over the first nine months is around MSEK 3.5 billion, so it’s a significant amount of money because what’s done to the quarter and the volume, yeah minus price volume minus price minus six that should take you to together. It’s going, like I said, it’s going down.

Let me then go into the different business area, first go immediately to slide number 11 I will start with compressor technique. The decline and then the decline mainly comes from the order intake from larger compressor machines. So one would ask immediately, yeah, but what does that mean, we’ve got the surprise for you. What I see and hear in the market is that some orders for oil and gas were [stoned], that's not we see, we see also a quarter of orders in India when it comes to product lines were delayed. So that is what was say mainly the analysis. It’s structural, I don't see it because I see still a good quotation level, but of course that quotation level at the end of the day we have to get the orders and then to get it invoice. But at least, I don't see a real structural thought in that.

The Yellow Cannery is still going on. So also with GAV is the plus which we launched, was announced six months ago, it's very successful. So that also helps to take more share in the market than we actually go to launch those in one of the coming weeks in China. So we are ready now to also explore the market over there. And so this continues to grow.

Operating margin, 23.6, so a very solid margin where this business area should be, so that's nice to spend there and to say it's 23.6. And on Edwards, I have already elaborated on that, so we keep going on that and then we have a small service company in Turkey which we acquired.

Industrial Technique I have already said that a couple of times, a very strong motor vehicle parts. So we see everywhere really the car business developing very well for us and then the highlights of the U.S. and China, so that’s good. A bit softer demand for general industry, but I think you see it, it’s getting more positive I’d say, the trend, but that’s good to see and of course Asia it comes from the motor vehicle part which of course gives that.

Operating margin 23%, so I am pleased to see that and we acquired a nice acquisition really is an assembly solution expert which I expect a lot from Synatec, which goes very well together with our motor vehicle business. And hopefully it will be as successful as our SCA Schucker acquisition because it’s really spot on, so we're very enthusiastic to see this lending.

Mining and Rock Excavation I don’t know what I should say it’s a best place to be. We, as I started last [bidding] point we have a new leader so I think he’s played his full in adapting the organization and that is one of his first task really to adapt also to the new level. When it comes to the orders, we got the constellations as you can see on the slide. But what, I think in this area with this segment what is good, I see still a good development on consumables. So we don’t see it in volume dropping. So that means that the world is using iron ore, the world is using copper. We see that also in the service, I think it really stays at a good look , okay, gold is the third that is going down, but all the rest is really at a solid level.

Equipment is low, exploration is most common, would stand still that we see. As we reach the bottom, who knows, on the mining side, I don’t know. I still see that the mines, the mine owners are really focusing on the brownfields, not so much as on greenfields. So that means that they’re really using that equipment. So utilization, productivity is the theme of the day or of the week or of the year. So there is a lot of focusing on that part. So it’s not on new equipment, where the focus is today, but it’s more on automation, what can we do better efficiency.

At the end of the day, maybe it’s not the good thing today for us, as they postponed equipment there, but eventually all this automation during further efficiency, quickly to good development for us.

Operating margin 20.8, it is of course with restructuring taking to uncertain under absorptions like I said negative factors and lower volume we had back and also our way of working we take it, that means that the margin is dropping. We had a nice add-on acquisition. So that’s also good that we landed that part.

But Before I go to the CR I would like also to elaborate a bit what are we doing in Mining and Rock Excavation. We really here adapt, this looks like I said, but on the other hand around the organization and that’s also what we really do focusing on the customers so we are not going to lay off sales people nor we really have an increase in our intimacy with our customer understanding, where can we create more productivity in the mines. And second we are expanding hell of a lot of money and keep spending that in the design and development.

Does not only mean that we can do better that we want to reduce the time to market, yes for sure, but in money terms we keep eyes on the storm. And I said let’s go, eventually the world will need iron ore, the world will need more copper. The customers want to have productivity and you can only do that with new equipment and better equipment and that is where our focus is on in this organization, besides adapting the capacity and that we need to do and unfortunately that means also reducing the manpower specially then in the manufacturing.

Construction, I said already a positive side so it’s nice to see that the hardwork of the people is coming gradually paying back, it’s the most effective area to be in today, but we see that our focus is paying off. The operating margin, 10.2 or one should say, yeah, is a bit lower than expected, could be, but one should also know that the currency mix is a little bit different here than it is for the total group. So if we do this correction, more or less you come up for another 11% so even with more. So that means 11 plus and the copper restructuring works that we did come more or less at the same level as last year.

So from that point of view I cannot be dissatisfied on that part. And the reason why the currency is lower, one should know also they have big market in Australia and in Brazil we know also the currency what has happened there. And openly we have done a nice acquisition there.

So then I am coming on my last slide before I give the word back to Hans-Ola. So I think you have seen most of the figures, if you see the operating profit just to highlight and that where you see the difference around SEK 700 million, a little bit less than 300 this currency and the other part is mainly MR underabsorption, we could say.

So I suggest that Hans-Ola takes over.

Hans Ola Meyer

Thank you, Ronnie. Just a very few brief comments on the next couple of slides, before we go to the question and answer session. We have already commented on the operating profit and Ronnie has already talked about that.

If we go a little bit further down, we have a financial map of close to 200 million negative in the quarter. Normally, the most interesting thing about that is what are your expects for the future. So, although that’s right away and that's about the same, I don't expect any major difference. As you know the interest net we can roughly calculate, but then there are sometimes, some revaluations of financial assets and so on and that we cannot predict where it's going.

But somewhere in the same neighborhood is what we expect for the near term at least.

If we go further down, there is also a tax charge of course coming to 24% in the quarter, somewhat lower than the run rate I would say. So we are still a little bit above 25%, which I would estimate to be the normalized situation right now. Coming into next year, yeah we will have to come back on that and see where we are and what the acquisition of Edward’s successor will give. But let's come back to that, when we know a little bit more that will have actually happen and when it will happen.

So these are the comments I would say on that part. If we go to the next month, which is the profit bridge, I just want to say that on the currency it is this 260 that Ronnie has already talked about and the other big impact, as you can see affecting the margin is in the flow-through of the volume price mix and that comes from one business area which is probably you seem to see on the next slide where you see that it’s rather uneventful because the numbers are isolating relatively close to the zero line on the other business areas there is a nice improvement on profitability in Industrial Technique clearly. So and then you see that Mining and Rock Excavation is of course suffering from under absorption and other reasons that Ronnie alluded to.

If we look ahead on the currency impact here, I could go back to the slide that shows the group, the 260. If we do the same comparison for the coming fourth quarter with the fourth quarter last year at today’s rate we expect it to be somewhat more negative than what we saw in this quarter actually and that is due to the fact of what happened last year but also where we are in the last couple of weeks with a slightly lower dollar on top of the emerging markets, currencies that was already low in the third quarter.

So we believe to be somewhere upto 400 negatively even as a bridge to the fourth quarter last year. And looking even further ahead on 2014, obviously it will continue to weigh negatively, it’s just to look that what has happened to the currency rates during this year to understand that, but that we come back and quantify it later when we report the fourth quarter.

So I'll move on for that to the balance sheet and I think that takeout from that slide is really only that, yes, we are accumulating some cash, but we have also burrowed a little bit of money. As you can see at the bottom there or in the middle at the, on that side, from 23 billion at the end of last year to 27.

So all in all, we are pretty stable and we of course look primarily at what has happened to the working capital. There hasn’t been a lot of release of receivables yet. The revenue is still at the reasonable level, compared to the order intake that we expect. Of course but as we move further down, we will have a little bit more of positive impact of reduction of receivables. And when it comes to the inventory, it stays relatively the same, it’s what Ronnie alluded to that we have in the mining sector experienced a number of cancellations. And of course in the short perspective, it’s a little bit hard to adjust quickly to find and offset of those impacts on the inventory as well.

All that is summarized you can say in the cash flow, I think that you can see that's what I talked about of releasing money or cash from working capital if not happening yet, that will be our next effect that we expect when the business has come to the level of the order intake represented today.

On the other points there, the increase in rental equipment, yes it’s a little bit higher than in a normal quarter, but it’s also true that we are doing some investments in certain markets in certain applications. This is a profitable business that we like the return on those investments.

With that, I think I leave it back to Ronnie to talk about what lies ahead in the near-term. So our most sophisticated outlook and I think everybody can read it, I suggest Hans Ola that we go everybody read and I think we got straight to the questions.

Ronnie Leten

And as you can see it remains exactly the same as we had before.

Question-and-Answer Session

Hans Ola Meyer

So with that, we are ready for the question-and-answer session. And we have some help here with the microphones, so I think we’ll start here in Nacka. Over here we have our first question please state your name and then the question. Before I let you start though, can I have the operator please repeat the procedure for the questions on the telephone conference please.

Operator

(Operator Instructions).

Ronnie Leten

Thank you very much. So go ahead (Kevin).

Unidentified Analyst

(inaudible). If we start with the larger orders in compressors, could you help us understand the magnitude here currently, maybe looking at the large orders in Q2 last year and also how it looks in the fourth quarter last year to understand what we’re facing in terms of comparisons? That’s my first question.

My second question, you mentioned Ronnie the obvious under absorption in the mining production and could you please clarify when you believe the overall headcount reduction will be finalized and also maybe helping us, what you are trying to sort of define or tell us the magnitude of the under absorption affecting the EBIT. And I guess I have to get back in line after those two questions. Thank you.

Ronnie Leten

Yeah, on the large orders, I don’t have individually the comparison, but I just give a bit -- try to give you the dynamics in this business. One should know also that large orders of revenue get, you get them China, so that’s where we get the majority and oil and gas related can be CNG, can be LNG, can be oil, so that’s where we get.

China is on that sense eight, nine months softer we know that. We don’t get to see and when I was elaborate on Asia I mentioned. So we will get them, we will see definitely in China, the normal business in China is there is good, and that is one for geographically.

And then on the oil and gas, what I see is certain hesitation why I think it’s also difficult to find out time to why people are postponing, I don’t see any total real cancelation but I see postponement in really, you get – you don’t -- the order does not ran, you know that the quotation is there, it is spoken and the thing is that, but it does not land. And this happened at the latter part of this quarter we saw this happening.

With that, and then I think also on this large one we had expected a couple of good orders also in India what I alluded a bit on certain power plants which were not landing. So that were the main, the way I see this structural, I understand I could not find any good structural, because I see still good quotation level, I see that when I call around, because this was also for me something to find out.

I don't hear anything really that is structural significant lower, I would not say that. So we continued, you will ask me again in January hopefully not that. The other one on under absorption, yeah now in Sweden, we have certain way to reduce unfortunately the workforce in (Inaudible) they had done in previous space ready in-sourcing, defense, government and now it's unfortunately contracted the people which we have to reduce, which we more or less gain to an agreement. So I expect that in the next month, next coming two, three months that we will have this reduction.

How much under absorption is it? It is what it is we take it and looking here to my right hand, there is, I think we have too many people and we are reducing workforce not only in [Edward Group] but it will be also in other areas gradually. So it’s a bit too slow otherwise, we do not have under absorption. But one thing I should also say and that was the reason I state a little bit longer (inaudible). If you look to the flow through later on when we are stabilized again, you will get a little bit about outage because I won’t then to focus on design and development and I think that is not the stop and go, you cannot do that and you cannot outsource that part because this is core and I don’t want really to be faster with new products into the market and that you don’t do by the using the workforce.

The same is with the sales people. I know that there is no demand, yes I can lay them off but who is going to sell when it comes back because they have maybe 10 20 years experience. So we need to set out this under absorption.

Hans Ola Meyer

Okay. And then we say under absorption is of course not only the technical part or below the certain machine, it’s the whole structure I guess functional cost and everything that is needed to give the quality of the business in fact. So coming back to how big was the effect of the fall, I think the profit falter that we look that is showing that very clearly, accounts and volume and that is of course under absorption. So it’s more or less that effect which we have.

Ronnie Leten

On the other hand of course we also must go for efficiency. We should not -- this is not the free ticket I give the organization because that would be too easy.

Unidentified Analyst

Okay. Thank you.

Ronnie Leten

We take one more question here in left hand then we will move.

Anders Roslund - Swedbank

Anders Roslund, Swedbank. I have two questions regarding demand, the sequential demand for underground versus surface mining, where you see the trends there and also can I compress, what about the sequential development?

Ronnie Leten

Yes. Sequentially, what we see on the underground that has kept sequentially at, I would say more or less the same level, surface is stuffed, especially the big machines.

They are also where we got most of cancellations and we see also that there is softer and that is also one of the reasons why it’s lower, unique to find into service part, not so much in mining. The mining is also lower when you compared quarter-to-quarter or year sequentially is more or less the same thing. So that's a mix spot.

The yellow canaries, I would say slightly positive, but of course depending a bit which region. That’s unfortunately not the region which really go under the digit. So that we don’t see, but I see Europe, I think hang in; China, yeah, we could say may be a bit slight negative, but I think it’s also that we are now going to launch a new product and they know that so they wait a bit. But if I listen really to the people and the quotation, I would say it’s more or less around the same level.

And always a bit strange and maybe a bit boring because if you to the transcript of last quarter I may have said more or less the same and this is a bit. But when we look to the analysis of the quarter say the explanation is a bit more or less the same. And that’s I think here I can only repeat what I said the most thing in Q2, to say.

Anders Roslund - Swedbank

So just to a follow up on the underground surface, what’s your outlook for the next quarter?

Ronnie Leten

You are asking. I am -- you see also readapting our suite. And let me first see what comes if I listen what the speeds and the others are in their mind, they focus a lot on utilization pushing back Greenfield operations, but also the surface that was used so I would say prudent and will be still prudent. And I am not betting on and I will not be over enthusiastic on that part, I am still prudent on that part.

Anders Roslund - Swedbank

Thank you.

Hans Ola Meyer

Thank you. We go to the telephone conference. And please restrain yourself to maximum one follow up question please.

Unidentified Company Representative

Otherwise we will not have many people having a chance to ask questions. So please we take the first one on the telephone conference.

Operator

We have a question from (inaudible). Please go ahead.

Unidentified Analyst

Yeah. Hi, two questions if I may. First of all the price component and then by the way both of you sort of referred to the Mining and Rock Excavation, it is holding up quite well with plus 3% in order in sales here. It is that a pure sort of a mix affect from the also market growing at the share or what are you seeing on the price development there in Mining and Rock Excavation?

And then again in Mining and Rock and then the drop through, I know you mentioned on the absorption and the drop through 45%. Is there sort of a caption coming from the aftermarket growing as the share as we see quarter or is this still to come ahead of us? That’s my two questions for now?

Ronnie Leten

I suggest I take the first one and Hans Ola you want specially put the drop too. Price component of goods, but what we see and remember six months ago there was a lot of worry about the price. And I got more, out of the 10 questions, I got the 11 on prince that and then additionally on the mining side. What we see is definitely that the purchase is there, but if you don’t buy much on recruitment you don’t have much to negotiate on, so that is first.

Second the price is value selling and that's also what we always had said, okay, you get innovated the best products. It’s still the cost of the ownership, that's the way these products are sold and that's the same is on the service and on the products side and on the consumables side.

Having said that, is there price pressure? Yes. We see, if we taken on the consumable side, there is definitely price pressure, because there are people who have a little bit too much inventory and maybe they get pushed and okay, they adapt to what the customer maybe wants to pay on that. But I see still if I listen to our organization and what we do, we still get the right value out in the market. So I think we keep up on that part. And that that goes to reason why we should make sure that we keep striving for innovation, get reliable value to sell.

Unidentified Analyst

Okay.

Hans Ola Meyer

Just a quick comment there. I don't think that we can die sick every detail of the payment drop through. But what we see is of course inside that affect that I pointed to which was close to 500 million or between 400 million and 500 million negative as we call the drop through is consist of many parts and there is a component not in absolute value, but from a profit margin point of view of that mix with after market, that's for sure.

So if you're looking for more the explanation of the margin drop, yes. The pure volume drop plus let's say having a too big costume on top of that is more than what you see in the effect net-net.

So that’s, I don’t know if it explains or if it answers any of your question, but it is what it is as we normally say and I don’t expect it to be a dramatically different situation from a volume drop through. What will gradually change is of course the extra negative that comes from having a too big costume. So that will of course gradually, over the next couple of quarters adjust to the better. So that’s how it looks.

So the margin drop is of course the combination, yes. There is a slight positive mix but then the effect of pure volume drop and under absorption explains the rest.

Ronnie Leten

And we realized we don’t make it easy for you. But on the other hand I don’t want to establish a shelter announcing a big restructuring draw where let’s say we put it all in. And like Hans Ola said, it is what it is, we take it. That means that we sometimes standing in from the view and we also have to explain, but it has happened this quarter it’s a real money.

Unidentified Analyst

Okay, great. Thanks.

Hans Ola Meyer

Thank you. Next question from the telephone conference please.

Operator

We have a question from Mr. Ben Maslen of Merrill Lynch. Please go ahead.

Ben Maslen - Merrill Lynch

Yeah, thank you. Hi, Ronnie. Hi Hans-Ola. The first question is just when you look back to last quarter you guided demand to be flat Q3 versus Q2 and it came in about $0.08 lower, just what was the big disappointment for you? And maybe how, because you went through the quarter how do they look on a monthly basis, was there a big difference month-by-month?

Ronnie Leten

Yeah, Ben. For sure that’s right, but a little bit more. And the two areas there let say, ‘where I went wrong’. I would not blame my COO here, is in the mining, it dropped two more on that of course with the cancellations and a bit debt. So that was one in part.

And as explained here also to better I think is on the larger all free and get in process over to switch, I’d expect a little bit more of that part.

That's where we really, when I look to our calculation over three months ago, that's where we see a litigation. So there we went, yeah, wrong for whatever.

Hans Ola Meyer

And as you know I mean it’s an outlook that tries to gauge what we think of the customers’ desire to purchase and invest and it’s not an order intake outlook so that can be all [isolation] of course.

Ronnie Leten

Ben you also asked about the timing a bit in the quarter. I think I didn’t see any differences if we take it on the quarter, of course on these large ones, of course when they don’t come here, you see it in that what the latter part of the quarter, but the rest was more or less at equal divided over the three months.

Ben Maslen - Merrill Lynch

Great and as a follow-up then looking forward I mean last quarter, you did a very good explanation of what was the moving parts and then what you thought might be up, what might down, maybe you could do that again by division and regions? That would be very helpful. Thanks.

Ronnie Leten

Okay. I got back to when I did a summary at the beginning of the presentation, I can take it like that. And I have here also to (inaudible) when he was asking about the mining. Surface the bigger, the bigger drill, so still to the question what will be coming back and I did reluctant underground, see reasonable development still works maybe slightly positive.

MVI we standing strong here I think that works great. We see also SEA official crew doing fine and that’s part of the MVI part. So the industry technique side is doing on the volume part solid. Construction in our week, reentering a season now which is a bit lower, then if we take the previous, specially the first and the second quarter. So there we have to see a bit seasonality. But if we take the portable energy part which is a big part also there as the portable compressors and generators, so we see a good development there. I think the question will be what will the rental companies do in the latter part of this quarter. So that these talks are going on.

And then on the compressor side, I think it’s slight sideways that we will move like I also said here to the better when ask the large orders. I don’t see a structural reason to say this over the period, but I don’t see it. So I just stick to that. And the yellow canaries, I think if we get a bit self help with new progress launched working hard to get a little bit shares here and there, we should get back on that part.

Ben Maslen - Merrill Lynch

Perfect. Thanks Ronnie, thanks Hans-Ola.

Ronnie Leten

And maybe I forgot to say, the biggest part, the biggest contribute that is allowed to service, sorry Ben I tried to go on that per se, because that is definitely the area which now in the organization, we are focusing on a lot. There is still a lot to take and you know very well that that is the one with a nicest contribution. But that is an area where there we have a lot of focus also in the mining side, even if the business is now difficult we can take more there.

Ben Maslen - Merrill Lynch

Okay, thank you.

Hans Ola Meyer

Okay. Thank you Ben. I think we take one more question from the -- before go back to Stockholm, yes, from the telephone conference.

Operator

We have a question from Mr. Lars Brorson at DnB. Please go ahead.

Lars Brorson - DnB

Yeah. Thank you very much. Good afternoon Ronnie and Hans Ola. A couple of questions if I could, follow up on earlier questions. Can I just make sure and start to keep growing on about your outlook statement into Q4 and mining in particular, but on the components you mentioned Ronnie surface arguably worsening into Q4; underground, okay; civil engineering, slightly positive; and service quite good. That sounds to me as though you’re guiding mining quite flat. I am trying to reconcile that with your ordering take down 10% sequentially. And I also want to try and get a sense for what you see cancellation wise here. You saw cancellations accelerate from Q2 about 200 million to 340 million in Q3. Is there a risk ahead of cancellations accelerate further? What kind of stability do you have on that? And again if you can -- you perhaps conclude about mining overall, what you see outlook wise there for Q4?

Ronnie Leten

I will elaborate first on the cancellation and the visibility. That is a big question you don't get much visibility on that part, because if they stop the project they come to you and -- the Beach Peas and the Valleys and the (inaudible) come to you to cancel there, they would only say thank you for not to fire us. But that's also -- I don't get much visibility on that part.

Now, just before we enter into this quarter, I had a talk with Head of Mining and ask him also, have you just heard something about cancellations, we didn't pick-up any today, yesterday, the day before. But who know what come out.

I will not over doing it, when say what you say there is an acceleration in cancelling, yes, technically, yes, because we have 200 and now 340, yes, it is an accelerations more, but and I think it was one or two orders will come and then these were big orders that come. And actually these were orders for surface coming back on that part.

Now when you say on the outlook on the surface and the big sales, I think it’s rather low today already. So I don't think it will going much, much down, because then I think there is not much.

On the other hand, I think if I sense now the quarter four and of course now I take crystal ball and see, I still see that and listening to the mine owners listening to consultants, there is still a lot going on talks, reshuffling its projects. So I think that’s not stabilized yet. That’s my reading of it, wrong or right I don’t know, but that’s people are not straight sure then, okay, then if those thing can happen, that’s on the mining side.

On the other hand on the civil works we see some nice projects going on so because we had Mining and Rock Excavations so we should not forget that. As of that part we get a little bit more push of it. So is it really balancing each other, I will let you know by in three months. But on the mining side I am still cautious. That’s my reading of the situation today.

Lars Brorson - DnB

Thanks. And Ronnie just on [CT], is your outlook here predicated on these large orders that didn’t come in Q3 returning perhaps in Q4 or in the near-term?

Ronnie Leten

Well, I think like I said CT, on the quotation level is good, also in China the quotation level is good. So there is a lot of project in the air. So I should not be -- of course as a CEO you are always need to be concerned and what you have. But I am not say pessimistic on that side, let me say like that. I don’t believe it is structural thing and I think there is, again, I am repeating myself here, there is a good quotation level going on and taking place also in U.S. You see even in Europe. There have couple good projects going on in China. There is definitely activity and one should talk now, we still don’t have 100% market share. So we can still evolving new and new products we have, we should also be able to sell more.

Lars Brorson - DnB

Thanks.

Hans Ola Meyer

Looking around here and not got perhaps, we've continue instead with the question from the telephone conference.

Operator

We have a question from Andre Kukhnin of Credit Suisse. Please go ahead.

Andre Kukhnin - Credit Suisse

Thanks for taking my question. Firstly on mining it’s a cautious or focus in asset on new product introduction and spend in R&D and presence. What driving that at the moment when markets are relatively factored it in response to something that you’re seeing others doing in the markets and therefore maybe an early sign of market becoming more competitive down the line?

Ronnie Leten

I think the more competitive, I think the world always get both competitive if you meet because (inaudible) maybe my previous call is it was more competitive in my time. But I think it really, the road is more transparent so that means that buyers are getting more and more inform so you need to really make sure you sell value and that is also what drives us and what we keep working on.

And it’s really making sure we come up with new technology because that is the only way I see for us to be create sustainable profitable growth. If we keep not doing that part then I think it will be very, very difficult.

Second one is of course on presence, we keep developing our presence, keep with our customers in close that we need. We have done that also if you look in 2008 and I said maybe it was early 2010, we made mistake and that was talking away of reducing certain presence in China where we should kept investing and I will not repeat that problem myself in any market. I think we need to be there and stick to that, that’s a mission and we have agreed with all four business areas we need to be there where potential customers are.

Andre Kukhnin - Credit Suisse

Okay. You wouldn’t say that’s in there to…

Ronnie Leten

Nacka.

Andre Kukhnin - Credit Suisse

On the Q2 order intake, could you please help us with the share of aftermarket?

Ronnie Leten

I don’t have any percentages. We don’t disclose those in details as you know, so otherwise it would have been in the report, but it’s clear that sequentially the aftermarket was relatively flat. It had of course the impact like in anyone else, like any other income of the currency and but if you take that out. So clearly the percentage is increasing and we will come back when we do the full year analysis and give you the again, but it developed of course in the right direction if we look at the fact that you’re referring out.

Andre Kukhnin - Credit Suisse

You also had certain seasonality in this thing, which is so and especially when the growth levels get to, you need to integrate it by different business area?

Hans Ola Meyer

Actually on city if the service is growing sequentially or flat sequentially take out the FX.

Ronnie Leten

It’s is growing sequentially, but it’s very, very moderate of course because it’s a short period.

Andre Kukhnin - Credit Suisse

Okay. Thank you.

Hans Ola Meyer

We go back to the telephone conference where we have some questions left, so I think, can we queue?

Operator

We have a question from Mr. Markus Almerud of Morgan Stanley. Please go ahead.

Markus Almerud - Morgan Stanley

Hi, Markus Almerud here. First I want to just come back to the underground there is obviously some mining where you said the underground mining equipment is stable. First of all, what is the reason for this and what is obviously the last fall as well, I am having one-offs in there? And also is there something that you see for the next quarter that is it is flatter this quarter, was it also flat in Q2?

My second question is aftermarket. You said you saw so negative volumes in aftermarket sequentially also in mining and rock. Can you just help us out what aftermarket revenues has done year-to-date, I know that it has to be a flat up or down? Thank you.

Hans Ola Meyer

Are you speaking about MR?

Markus Almerud - Morgan Stanley

Yes.

Hans Ola Meyer

Is that a question regarding MR?

Markus Almerud - Morgan Stanley

Yes.

Hans Ola Meyer

Okay. So then the aftermarket is flat. If you take into consideration that there is continuous price increases that we also do consistently then it’s organically flat.

Markus Almerud - Morgan Stanley

And currency should be in line with the business area?

Hans Ola Meyer

Sorry.

Markus Almerud - Morgan Stanley

Currency should be in line with the business area as a whole?

Hans Ola Meyer

Roughly, yes

Markus Almerud - Morgan Stanley

Yeah.

Ronnie Leten

Yeah. And then you asked about the underground and surface and maybe I should have not gone on this road. Sorry, I’ve to ask you to go and get a little follow-up question on that. I think if you try to analyze why is it actually and one should also know when it comes to the underground, where we are operating, because you also should see then also Atlas Copco's position in mine. It's a lot of copper and copper is still on that side. I think surface, I think there is also a lot of greenfields and other bigger new projects, which they may be canceled or maybe postponed. And so that is I think the main two, three reasons what I see the background on to that.

Markus Almerud - Morgan Stanley

And is it a new phenomena or is it, did you already see this in [India]?

Ronnie Leten

This is the last, when it comes to service, I think this is the last two, three quarters than to say where the last two quarters are maybe the most outspoken.

Markus Almerud - Morgan Stanley

Okay. Thank you.

Hans Ola Meyer

Another question on the telephone conference perhaps?

Operator

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

Aaron Ibbotson - Goldman Sachs

Yes, hi there. Good afternoon. I’ve got two very quick questions I think. So the first one is just on pricing in light of the bigger FX moves and maybe more relevant to mining. But across the board, how should we think about this? So when you say you have positive pricing, how are you factoring the fact that a lot of particularly these sort of resource heavy currencies depreciated quite massively going the krona. So is that pricing set in say South African rand or is it your price realization so we’re effectively looking at something down 10% in dollars or 15% in krona, but up 3% in South African rand, but how should we think about this pricing sort of in context of that?

And my second question is just very quick, I’m not sure nobody has asked about it, but I assure it’s, I assume it’s a little tough and you all have to talk about it. But what’s happening with Edwards. Are they progressing towards their target, do you have anything to tell us? Thank you.

Ronnie Leten

I suggest that pricing goes over to Hans Ola.

Hans Ola Meyer

The way you see us refer to price is what happens in local currency if I put it that way. Of course the aftermarket business in particular is a local business. So when there is a price it’s not just an effect of using it in looking at as you say, a weak currency I don’t say we have growth in that so it’s in hard currency. It’s making an average of the price increase that we see in the markets around the world. And then to your point of course if you would translate that into one currency, you would have a negative impact. But this is a local price, both cost and price. So in other words, this is a true price increase that's what I am trying to say.

Aaron Ibbotson - Goldman Sachs

Sorry, but just to exemplify and so if you look at doing such for instance, I mean I assume you don’t have local manufacturing in [oil] in Peru and parts of Africa, but or is that the case, you basically thought majority is locally produced?

Hans Ola Meyer

Yeah. But in those cases where we buy the spare parts for example or indeed that they come from one of our factories, yes we match the price increases as quickly as possible to the currency depreciation. Of course, we can’t do that weekly, you can’t do it by day and you have to know of course where it is possible to do in the short-term. But that's what I mean by saying that it’s a true local picture.

Ronnie Leten

That’s only on the transit.

Hans Ola Meyer

Yeah, exactly. So the way we see it, this is a true price that speaks so to speak in adding to our profitability.

Ronnie Leten

Okay. I don’t know on that part.

Aaron Ibbotson - Goldman Sachs

Yeah. That’s fine.

Hans Ola Meyer

We can come back later.

Ronnie Leten

So I will then elaborate a bit on Edwards, so our commitment to process vacuum, it is moving in the right direction so we get, a couple of weeks ago the shareholders’ meeting took place and that was positive. So we go ahead. We are filing for Antitrust in several countries. So that is a procedure which take place. And if everything works fine which I think we should expect because there is not much anti-competition one depressed, but we can expect in the vacuum scenery as we don’t have much.

We expect to close early January that is our ID. But in the meantime, Hans Ola is saving dollars to make sure we can pay it. So that is also in process so that works. So if the dollar is weakening, sometimes we are happy and sometimes we are unhappy. So with this project we are a bit more happy.

When it comes to the business it developing according plan so that’s also good actually for me to see that is the main reason that we bought it, so that is good. And also the integration teams, they are meeting, so we try to make sure that the people in Edwards really trust what we want to do and we talk to them as good as we can talk, because one should know we don’t go in the company. So it’s still company which is in process. And Edwards is guiding the market on their performance a few weeks ago on their third quarter performance, so that you can find higher on norms here.

Hans Ola Meyer

You might already have seen that?

Aaron Ibbotson - Goldman Sachs

Yeah, I have indeed. Okay. Thank you very much.

Ronnie Leten

Thank you, Aaron.

Hans Ola Meyer

We could take one final question perhaps because we have a lot of questions there, but that is of absolute final and then we have to stop, I’m sorry for that.

Operator

The last question comes from Mr. James Moore of Redburn. Please go ahead.

James Moore - Redburn

Yeah. Good afternoon, everyone. Thanks for taking a last question. I’ve got a couple both on the mining division if I could. I know you are saying that you don’t want to breakout [OEE] aftermarket, but maybe you can help us a bit now that Metso Sandvik joint [cat rule] trying to help him on his plate. I think last year you did about $16 billion of OEE and $18 billion of aftermarket in consumables. Should we think about $18 billion as a broadly flattish number, and therefore it comes from 16 to 10 this year, all of the drop there is in OEE and within that question, my real one is, can you tell us what the OEE book-to-bill is in the quarter?

The second question relates really to what cost structure you now have in mining. You took talked once about attempts staying some 7% to 20%, but demand is down, your headcount is down, how flexible is that cost base today and how many attempts do you have?

Ronnie Leten

Okay.

Hans Ola Meyer

I’ll start with the last one.

Ronnie Leten

Yeah you can take that I think it was….

Hans Ola Meyer

Yeah, you are right. I mean what we have said there is basically a flat development, a slight increase over-year-over. As you said, you mentioned the 18 and 15, so the drop is only in the original equipment, that’s true. And then of course currency, you have to take that factor into consideration, the 6% that is in the MR business area year-on-year. Then on the book-to-bill ratio, yes I think we can all calculate that we are talking somewhere in the region of 0.87 or something for the whole MR. So I didn’t actually make out the number this time, but obviously it's much worse than that from the book-to-bill ratio for equipment in the quarter, yes. Then I….

Ronnie Leten

On the cost structure, yeah I can give him on the cost structure. James on the cost structure of course we have used the flexibility which like say the outsourcing depends. That in certain countries it's fully used when it comes to manufacturing people. That we do and that is the reason why we have nowhere else to go deeper in the organization and that was your question from (Inaudible) when it comes to a little bit away. The process takes a little bit longer than it would happen let's say in Garland in Texas where you can, where you have a higher flexibility when it comes to manufacturing people.

So that is one area where we reflect, but one other thing and now I'm going back maybe two years and even longer where we have said and maybe you can read your notes on when we were in the Capital Markets Day actually. We said we invest in Asia. We have built a whole new plant in -- actually where we also are really doing design and development and also making other platform ready for Asia. So we could play that you will offer where it's needed. So that is an area where I have to make it or invest and we keep that, because I think on the long run that will payback.

The flexibility and I repeat myself on R&D, yeah you will not see any, very few changes, of course now you will see that more when it comes to the flow through because yeah I keep the cost, but the revenues on there and that is a difference between short and long-term. So I keep rising the stomach on that part.

And the third one, you also should know that we also have done a couple of acquisitions, spoke awfully (Inaudible) and one is the one Shandong actually in China on consumables side which also is an area where we're investing a lot and that is also an area which will take us a while before it’s really up to the level which we would like it to be there. But of course we still have some work to do on the cost structure to adapt to suite. So that is also when we talked about under absorption. So we have to do that. And that is more like I also said in the first slide, we continues to adapt. So in the months to come we will do a couple more of changes because we need to adapt to the new norm which I see today.

But again, I will not make it easy for you, James, I know that you won’t forget this exact figure as restructuring, but I don’t want to give in on that because it’s too easy shelter for myself and a too easy shelter also for, if we do is that they should we do it in the most efficient way as we can do so that we come later on can show you that we have generated cash. Maybe we didn’t generate this year value, but we promised you two years ago if you don’t value, you get cash. So that is what I would like you to deliver.

James Moore - Redburn

So can I just follow-up and ask you to say a distant way, I’m sorry. If the orders in the quarter were 6.04 and we add back the cancellations and then we times that number by four, we get to a sort of 25 billion, 26 billion, 27 billion type run rate, which is clearly a lot lower. Is it you are trying to right size to that quarter or are you taking the whole nine months and think of it more robust about it?

Ronnie Leten

I think you are not far away of also my thinking. So I am not going further rather we’ll actually start to discuss after the call. I don’t suggest that you’d take further with Matthias, I’m sure he is delighted to do this debate with you, James.

Hans Ola Meyer

So we are adjusting to what we seek today, James and not what we saw in the beginning of the year, that’s correct.

Ronnie Leten

We live today and we should react on this, unfortunately sometimes we have to react, because it’s very difficult to predict the future.

James Moore - Redburn

Thank you very much.

Ronnie Leten

Thank you, James.

Hans Ola Meyer

Excellent. Thank you. I apologize to everybody that thought we took too long time, but we have a lot of questions on the telephone conference, still we didn’t make all of them I’m sure, so please turn to our IR department or us to hear for further questions. But for now, thank you very much for coming and for participating in the telephone conference. If not before, we see you again, I hope on the 30th of January when we talk about the fourth quarter.

Ronnie Leten

No, no. We hopefully will see you all on the Capital Markets Day.

Hans Ola Meyer

I stand corrective my dear boss. We have a Capital Market Day that comes in a few weeks time. And we’d love to see many of you participating on that one as well. Thank you for that. With that, thanks for coming. Bye, bye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!