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Atlas Copco AB (ATLKY.PK)

Q3 2010 Earnings Call

October 22, 2010 08:30 am ET

Executives

Ronnie Leten - President & CEO

Hans Ola Meyer- SVP of Controlling and Finance

Analysts

Nico Dil - JPMorgan

James Moore - Redburn

Daniel Cunliffe - RBS

Ben Maslen - Merrill Lynch

Ola Kinnander - Bloomberg

Colin Gibson - HSBC

Fredric Stahl - UBS

Arnaud Brossard - Exane BNP Paribas

Hans Ola Meyer

Thank you [Pereira] and very welcome to everybody to this presentation of the Third Quarter Results for Atlas Copco. I particularly welcome also the participants on the telephone conference of course. We will do the usual format. I will very soon hand over to Ronnie who will takes us through his comments on the quarter results and the trends and after that we will immediately jump into the Q&A session. So I don’t think I waste anymore than just to hand it over to you Ronnie.

Ronnie Leten

Thank you Hans Ola and as usually, I will refer to the slides so that we are sure we are talking about the same slides. Let’s go immediately to the highlights so slide number two. We were very pleased to see this strong order growth in all regions if you see later on the slides and also we see that happening in all customer segments. Record order intake and I think it’s not a surprise for anyone when you see this regions Asia, South America and Australia and we should not forget but we had a very, very good development in the after market.

Record operations margins and record operating profit also in absolute terms coming from good lot in all the different areas, a good after market, solid pricing efficiencies measure which we have taken for many, many months and the years before. And last but not least, I think one thing what is paying back now is also our continuous push in innovation and common but state of the art products which our customers also like to work with. The statement also on the market organization. We keep investing further intensifying our network. You have seen lately we opened also a special office in Panama and also we are having in overrating tool, logistic sent us one in US for giving better service to our customers and supporting our after market and also in Nanjing in China for giving a better performance in Asia on that topic.

If we then go to a bit on the figures, 35% organic growth which I believe is a very good achievement. Revenue plus 18, I think we see stress in the supply chain but it doesn’t really effect us so much that we cannot keep it going on the output. And then, I guess third point and I would like to spend a minute on that 21.9% as the margin and 3.782 billion when it comes to operating profit. And of course we also know that we had this 100 million SEK restructuring. I think I must say a very strong achievement on the operating profit.

And the operating cash flow of course now, we entering in other phase. We are investing in our business in receivables and inventory but Hans Ola will show you a little bit later on that where it comes from. So summarized, I think a very good achievement in quarter three. All this you received globally, you see all very strong development in all regions but let’s go immediately to slide number five when we talk about the Americans. A very strong North America, you see surplus 49% and then we see that as well for equipment as for aftermarket and we see that also in the industry and we see also an improvement on the construction part. Rental companies are ordering so that makes it good for us. Quincy, the acquisition we did early January is performing very well and is representing a little bit less than 10% of the growth. So if you take that away, it would around the 40%. So a very solid development in North America which we also see in Canada and Mexico. South America continue, it is maybe a boring story when I say it but it really goes on continuously good development in Brazil, in Peru and Chile. So that’s going on and of course, you can see only a plus 30% but they came a bit earlier in the recap last year. So we comparing here also, they be very strong, relative strong you should say quarter, last year.

Europe, talk first on that. Plus 26 okay as it is also said on the slide to be compared with week quarter three but anyhow plus 26. A bit of a mix too where we see Nordic, East Europe, Russia doing very well where than say maybe south of (inaudible) where you can see a bit of doubt in the development. We then look at Africa, Middle East. There we have a bit of mix picture where southern part of Africa is doing well. So you see it’s of course the mining industry where it’s a little bit softer in the Middle East but anyhow also here we had last year a very solid quarter also.

In all these areas as well in Europe as in African, Middle East we see good development of the aftermarket. Asia, Australia I don’t know what I have to say on this it all goes up, up, up. You see it also at plus 60, plus 96 for Australia. We had a record from Kazakhstan which was the highest we ever had here and also for the business area so we are very proud that we got that but we also see extremely good development in India. Everybody talks these days about China but we should not forget that India is very strong market for us and it is now already number four for Altas Copco.

I don’t say on quarter on slide number 8 you see we have three quarters with a very solid development so that is good to have. If we then take the bridge we see structural changes so Quincy and a couple other acquisitions account for 2%, currency is negative and we know that Swedish chrome price. We keep having good price development and this is to continue also driven by our new products which allow us to get that price development and the volume is around 34%. If then I think slide number 10 on the rose I think everybody can see the figures. It improves as profit improves and we keep tight control on our working capital, we get of course a better rose.

Compressor technique plus 25% organic, coming from a good stationery and portable compressor sales so the small to medium size and smaller larger ones are compressors are doing very well. Gas and process stays on a good solid level so but not the big tickets for the big compressors that is not yet to come. There is quotation going on but we have not landed them then we see a very good development I can say except in West Europe if you read this and rest North and South Asia and East Europe that doesn’t left much. So that is where we see still not the development which we would like to see.

Extremely good aftermarket all over but specially in the emerging markets and on the operations margin 26% coming from I think a very good drive all the time to have better products of course a better lot. No one will get surprise in that currency is playing in favor, sales mix is playing in favor and the price is solid which gives them this fantastic margin we have here in compressor technique. And we keep investing in the business also via acquisition where we had late in October. We had done the acquisition of Cirmac, a Dutch company specialized in gas treatment systems and also biogas upgrade, a fantastic quarter for compressor technique.

If I then go to slide 13, a very strong development for CMT, this for equipment as well as for aftermarket plus 47 organic included the aftermarket. I don’t know the figures by heart on equipment but I am sure they will be much higher that 47. We see a continues strong demand in the mining industry that goes on and I don’t see for the time being it going down. And we had a bit weaker specifically for our construction equipment, a bit weaker compared to quarter two and quarter three but nothing something to have a drama about that. It’s maybe a bit more and you can say seasonal either also we got a couple of bigger orders in quarter two which we don’t landed in quarter three.

Margin 19.2, I think I give not the right credit if I talk about 17.82 CMT I think I should say 19.2 which was obvious a record operation margin for CMT and is fantastic if you can make that margin in this business. And we did an acquisition on the mobile crushing and screening which we said the company have to (inaudible) scale which we will further integrate but there is nothing more to say on that part.

We then go to industrial technique also here fantastic improvement on the demand, 45% organic, a very strong Asia so India, China are doing extremely well and our continuous investing in the region also last year when they had the tough period is paying back and we see the result also here. Of course, we also have a good of the market and on the margin remember last year where we were cruising below the zero line, we have now here a plus 20. So its fantastic development also from this organization coming of course from a better load but also from a lot of cost savings this organization debt and a good price development. And last but not least, we keep investing in that business so we also have an acquisition of our distributor in Michigan that was also an application center. So we really strengthen our position in United States.

Just to give you, I stay now on slide number 16. Just to give you a nice example of the V shape recovery on profitability, if someone was looking for a nice example, I think this is fantastic example if you can go in five quarters from zero to 20. I think that is a real congratulation to the organization.

Then, I would suggest Hans Ola, you take over.

Hans Ola Meyer

I will just comment the few of the coming slides very briefly and picking on where Ronnie has already started on page 17 to highlight of course the record operating margin and the record operating profit. When it comes to the financial net, its roughly SEK 100 million negative as you have seen and it as always, it's primarily the interest net that reflects that. We have gradually over the last two quarter moved our interest rate profile from almost full variable to more and more fixed interest rate which means and that you have seen also some comments on closing of some interest rates swaps in the last two quarters.

And that is a giving an effect that we will have a slightly higher interest cost going forward but of course with the intention to be a better strategy if you look, a few years ahead of course. We believe that the impact for the next couple of quarters will be in the region of SEK 20, 25 million more per quarter in cost compared to a year ago. so roughly its not the dramatic importance but at least as an add-on comment when it comes to the tax you've probably seen that the quarter as such had the 27.9 tax rate which is higher then what we've had for quite some time. It reflects some one time provisions of certain income taxes that will not be repeated to the same extent at lease in the next quarter.

Going forward we believe that between 26 and 27% is probably where we will have our best guess for the foreseeable future.

If I move to the next one its what we've have referred to as the profit bridge and you see here on the total group I just want to point out perhaps that still also in this quarter you see a very strong flow through of organic growth to profit 61% as you can see there. And I don’t have to repeat its because of the same comments that Ronnie already touched upon. We still have a very strong and the improving load of activity in the factories while the cost has not yet come up to the level where we started before the crisis. We are still seeing very strong flow through. When it comes to the currency, it’s not a big impact on the margin if we compared last year but the negative as you can see here of 135 on profit in the bridge almost entirely from the corporate of our profit not from the business areas. That you can appreciate on the next slide and the only comment I will have is that you can pickup in the second to last column to the right. The impact of the restructuring in CMT of 100 and you can also see that with somewhat varying degrees. All business areas have a similar good flow through of volume impact to profit.

If we move to the balance sheet still a very strong balance sheet as you can appreciate and it will strong in the sense of financial strength which can be appreciated even more if we look at the two next slides. One the capital structure, the net debt to EBITDA is improving as expected I would say and also the next one is just confirming that we feel comfortable that we have the debt structure in good shape for the future and that is on page 22. finally on the cash flow Ronnie already alluded to it, I only point to one thing I think and that is the tremendous swing in the cash flow statement compared to third quarter last year where we actually released 2 billion from working capital in that quarter and now tie up about the billion in working capital due to the strong increase of volume and activity. In spite of that the operating cash flow is still at a very good level at about SEK 2.5 billion in spite of that. So with that I think I leave it back to you Ronnie, you need that one.

Ronnie Leten

So thank you Hans Ola, then I would like to highlight that very soon we have a Capital Markets Day so looking forward to all see you there so we have some interesting stuff to share with you then near term outlook. But before I go on the outlook just to give you an idea also where we are and if we look back to pre-crisis, if you look to pre-crisis and we compare with today and we take a bit to gap away from West Europe. We are more or less at a level where were pre-crisis. So one should really take into account when you look through these figures of Altas Copco when it comes to the outlook it is exactly the same as we had done in for quarter three and then at the end of quarter two and then our quarter three. So looking forward, looking ahead so we believe that we will have a continues increase of course we use the word somewhat because we believe already like I said we are running already at a good strong level where we also primarily second the growth coming, the real growth coming from the emerging markets. It doesn’t mean that we don’t see any improvement in North America or Europe but we fell definitely that the majority is coming from these markets. So I would say that is it what we have up to now when you go to the questions. So, if I can ask the operator just to repeat the procedures for the telephone questions and after that we will take the first questions.

Question and Answer Session

Operator

(Operator Instructions)

Hans Ola Meyer

Very good. So I think while the questions are lining up on the telephone conference, we start here in Stockholm and we have a question over here in the first table here. You will get the microphone as well.

Unidentified Analyst

Well, you mentioned there only about you were in pressed yourself by the compressor margins and I guess it also indicates that, but you don’t have that much extra within this EBIT and my question is have you reached another level? Should we expect this be the sustainable and maybe improve further?

Ronnie Leten

I think extra; of course when you take profitability and profit, I think I am sure we have some extra when it comes to profit. If I take to the absolute figure and that is of course the whole message for the all organization when you have a profitability level of 26 and last time it was bit more than 23 than the messages to grow. And to grow to make it bigger and that is our focus, I am not obsessed by say next month to get a 26.5 or whatever, we are not after the records but we really want to make it bigger and that is the message we are going and which we believe that it can still in absolute value can [incorrupt].

Unidentified Analyst

But mining, I guess the orders were already impressive in the quarter and should be well. Could you give some indication about lead times here? Should we stick it to orders that turn into saves already throughout the balance of the year?

Ronnie Leten

Yes. When of course when you look to see empty figures I think if we would have done the equipment development and specifically on mining it would have a bigger figure in increase and I don’t know may be Mathias can later in giving that answer may be tomorrow what is, and that is continuous. We still believe that it goes on development and demand on the mining side. When it comes to lead times, yes I think they are, they are more stressed, they are longer for sure and that can go from say from three months to almost 10 months. That’s one depending on the few after service (inaudible) from a specific but that is more of less what you have. We come up to a booked to bill if I talk now I think in total for the company what is it 109 or something like that, so that this where we are. It is low of course.

Unidentified Analyst

And finally just are you able to safeguard that customers don’t place multiple orders and sort of…

Ronnie Leten

Yes, I think that is of course we are…we've learned our lessons from pre crises and we are really are scanning that constantly and we have a much more of a team that we don’t get this orders which yes I just to provoke or bypass the lead times that this I think is well under control on that. That’s is, I think we have a much better understanding from both sides that you need to work together in that area. And I think believe that we have a pretty well under control I think is on the core components capacity is there. We can cope so also when you look beyond this quarter, we believe we can manage the output.

Operator

So we have another question here in Stockholm before we turn to the telephone.

Unidentified Analyst

You referred to the strong sales mix when it comes to the strong profitability not only in CT but also in other areas except for the new equipment aftermarket mix. Could you please explain a bit where to begin with because it seems like one of the most profitable segments are not really kicking in yet and then you see the growth in the portable and smaller side so please explain the sales mix in equipment for this division.

Ronnie Leten

First I go on the aftermarket mix, I think it’s not drastically changed so that one is still we have still a very good aftermarket part in that one and as we are growing also very strong in the aftermarket that I have said that several times. To give you when it comes to if you take CT and you take the equipment divisions if we take that one I would not support your statement when you mentioned the portable business that is not the good profitable business. I think you can’t make 26 if you don’t work in all the areas they have a good profitability. So that is I think moving in the right direction again I’m repeating myself that we have done an enormous on the design and development not only for creating more value for our customers but also when it comes to the product cost design which then yielded also in a good improvement on the margin.

Unidentified Analyst

Thank you my second question is to the mining side, to turn the backlog here and are you did get a very big order in the ProdEx in the quarter I know that but only sort of lot of activities for ProdEx are they building up or expecting more to come soon or is it still moving around.

Ronnie Leten

If I listen to the people in the mining divisions and also talk to several of our customers I think that is still more to come. No one -- I didn’t see any or didn’t heal any clouds in the blue sky in that month so everybody is very positive on that and we see it also in the order income that is good. You saw Australia, if we take Chile, if we take Brazil, it is all going very extremely well, take Kazakhstan and you have me hear talking about Russia so these things are coming in place. So there is a good underlying development on that front but again that was one of the reasons before I start to talk about the outlook we are back pre-crisis where we all stopped it is the super cycle whether talked about that.

Hans Ola Meyer

And specially if we look at the mining as you asked on that segment if not at or above that part of the CMT business is extremely high level as we speak in terms of orders and even referring to what we believe to be a super year of 2008 so one has to carry that one’s head as well.

Unidentified Analyst

Okay on the (inaudible) I request him regarding CapEx in fixed asset. It has been below last year’s level and now suddenly in the third quarter is like half the amount for the full year. What should we expect in CapEx for next year?

Ronnie Leten

I don’t have an immediate figure in my head and…

Hans Ola Meyer

One cam make the note, the observation as you do. I mean in the numbers and have we sort of turned the corner from the bottom and that’s probably exactly the right observation. In a yearly run rate as it looks in the third quarter and this is of course not very stable over every quarter but its probably indicating some tangible CapEx of about 1.5 billion per year and which would represent roughly some 2%, close to 2% of sales. Even if it goes up from there, we will definitely see numbers that will be between 2% and 3%, its nothing more dramatic then that even if we would come into a need to do more CapEx later on, so it's big. But any gradual increase from this level is probably exactly what you should expect.

Ronnie Leten

You can image to be within into merging 2009 on that thought where we had 2007, 2008 and if I see what projects and now with me on my table to do investments definitely we have to invest in China, we have to invest in India and we have to invest in certain machining tools for core components and that is going on that one. But that it will not be like Hans Ola said the type of big, that’s enormous now.

Hans Ola Meyer

The relative increase is quite important not only for you but in all manufacturing companies, it seems that the investment boom will start to pick up in 2011.

Ronnie Leten

Yes, if you take it from that point, yes, right. I have to see when it comes to…I see what I get in for the signing on machining tools. If you take it that and you deduct that then I must say yes. If you compare with 2009, 2010 yes or 2011. Correct.

So we turn to the first question on the telephone line please.

Operator

Thank you, our first question comes from the line of Nico Dil from JPMorgan. Please go ahead your line is now open.

Nico Dil - JPMorgan

Good afternoon everyone. Three questions please. First of all already you looked to the fact that you want to get CT, Compressor Technique open absolute terms in terms of the profits. I am more into interested in the margins itself sort of, well do you think that is sustainable from here over then there is something unsustainable in these margins currently. The second question is where around the interest rates very interesting comment there just to sort of wondering why you are switching towards that fixed interest rate seems to me that you are looking for quite a good pipeline in terms of orders. Otherwise I wouldn’t expect this to be fixed here going forward. Is it correct that issuing about $150 million a quarter, is the sub question here? Third on the construction what is the key issue here for the sequential slow down. I was wondering whether there is anything behind the slow down here.

Ronnie Leten

I think the interest rate I think Hans Ola will take that part. When answer first the last question, like I said also in the presentation and when we compared, it is a bit of this, in the business we are, it’s a bit seasonal where you have more into first half of the year and then in the second half of the year and also we compare quarter two with quarter three where we had in quarter two a couple of larger orders which we had not from the same magnitude in quarter three. When you really look on the underlying development or demand there is nothing really to say that it was a weak or a real weaker construction output. When it comes to CT I will repeat what I said on that one I think I want to make it absolute bigger and like I said I’m not going to pin myself on 26% that is sustainable. I think we will definitely have a good margin development and a good margin in CT for the quarters to come. Why do I say that I think we have a solid resilient aftermarket business which is going, which is efficient which is creating good profitability and equipment division are with their new products really also beside of good factory lot but also have a good margin on that one. So really we believe that we are on the right track with that business area and if you look back to pre crisis where you see that that business area was running 21 22 if you then look a bit to mix you come to a solid margin. Don’t ask me to say a specific percentage then we will stand here going until 7 o’clock in the evening.

Hans Ola Meyer

But as it was a question before on this equipment mix in compressor technique perhaps to add to what Ronnie has already said. There is of course in the previous peak margins before the crisis we had a very strong contribution from the really big gas and process compressors that which have a little bit of a different profile than the standard industrial and portable compressors and that mix is in the numbers as we speak because they don’t have the same type of relative weight of invoicing this period compared during 2008 so that has effected a little.

Nico Dil - JPMorgan

The other one on the margin and I think that counts also for all business area if you see to shift where there is going on to the different regions and remember many times people were asking how is the profitability in China, how is the profitability in India I know that you see here that we are significant selling more in that region how we keep a good margin just to highlight, maybe you can highlight on the interest

Hans Ola Meyer

Nico if I understood right, you are wondering about the interest rate comment and I didn’t pick up really the connection you made in you question but what I said was that in our debt management if I call it like that we have gradually moved from a very extreme only variable rate structure to a more fixed lets say and of course it doesn’t reflect anything more or less than we are at very, very low, historically low long term interest rates and that its perhaps time to adjust a little bit. There are extreme variable rate profile that we had before and that would probably lead to something you mentioned 150 million if I heard you right per quarter and I would say well somewhere in the region of 125 and something perhaps is the best guess today.

Operator

Our next question comes from the line of James Moore, please go ahead. Your line is now open.

James Moore - Redburn

Three questions from me if I could. One I wonder if you could just rank it from highest to lowest what the margins are but really different regions of degree of level and whether that’s adjusting to make, it sounds like it has to a degree. Secondly your balance sheet looks like strong, could you just prioritize for us, what's more important in the near term acquisitions or shareholder return and thirdly just looking at your headcounts and looking at your revenue, headcount was up 8% and the revenue 18% so there is a 8% to 10% productivity and Hans Ola, you alluded to a fact that cost is got to come back at some stage. Would you be able to put a time frame as to how much as to when that was going to have to happen and whether you have got the capacity to handle to four, six more quarters of these high growth rates before that does happen.

Ronnie Leten

I think I have to come normal James to explain that all. The margins, I likely said days and I think I have mentioned that in several occasions that I don’t mind where we grow that was my statement. If it is in Brazil or it is in Australia, or it is in Russia, if you see overall, if you take the big figures, it doesn’t matter. Of course you can, if you go really detail by detail by division and you see there are ProdEx where it is the competition is hard but in certain countries but then its less for on other type but if you take it by country more or less I think we don’t mind where we grow and that is a good thing do that. When the balance sheet, what is the priority growth, growth, growth then of course organic because we all know that, that is giving the best return, of course acquisitions, we are exploring the market we are looking on you have seen also that if you take this what we have done I think four or five not the big once but ok, one day may be one is coming and then of course we had the shareholders return which is coming to that. So that is all priority James in that sequence. When it comes to the headcount, yes, I think we succeed to create more output to if less people and that is also what you see in the bottom line, that there is no secret on that and we are hiring more people when it comes to service people that we have always done, I think we are hiring more sales people and of course we will hire a more people the factory, still over the factory that is going on and fortunately we will succeed to grow more then the head counts growth.

On capacity and I think I also mentioned that when the I was asked here the question about the CapEx, yes, I think when it comes to core components that is what we have really to watch and we also investing in more machining tools, we are also extending some of our factories, but this will primarily be in the Asian area where we do that to be able to cope with the future growth.

Ronnie Leten

So wait, we turn back to stock on for two questions here, if we have any. Doesn't seem like that, so we continue with the telephone conference for the time being.

Operator

Our next question comes from the line of Daniel Cunliffe from RBS. Please go ahead. Your line is now open.

Daniel Cunliffe - RBS

Daniel Cunliffe for RBS. Two questions thanks first one on the aftermarket if you could just comment what proportion of OE do you currently have in your revenues for CT and CMT versus the peak of OE in 2008 and also whether there is a incremental margin differential between the two. I’m assuming there is roughly around 10% but if you can comment on that and then the second question you are talking about supply chain bottleneck, longer lead times. We saw earlier this week Caterpillar raise pricing by a full point from 2.5 to 3.5. you currently sell at one percent price increase for the quarter year-over-year. You have seen as much as four historically when you saw this degree of volume where do you see pricing developing giving obviously what’s going on in supply chains and lead times.

Ronnie Leten

I suggest that Hans Ola you take the aftermarket and I will take first maybe the supply chain. Of course there is stress in the supply chain and that I have already explained. When you refer to prices from Caterpillar, we apply continuous good price management and this is driven by our innovation and this is also making sure that we generate customer value and that is way pricing is managed in Altas Copco. It’s not because suddenly the demand is going up crazy that we go out with a enormous increase to our customers I think that is creating a lasting relation with your customers on that front. But when you look to of course if Caterpillar increase prices as we also buy engines from them you also get cost into the system and that is also what Hans Ola also mentioned when he was explaining the margin of course you get pressured from our suppliers which of course see that copper price increasing so that means electrical motors increasing, you see iron ore is increasing that means that the steel and the Caterpillar is rowing up and also that engine is coming up so this is what we feel coming in into the system but of course as did the market is demanding for Products that makes it a bit easier also to increase prices and that is what we continually do and we will do that for the next quarter and more quarters to come.

Hans Ola Meyer

When it comes to the after market, the split between OES you say the equipment sales and the after market I don’t have all the exact percentages in my head but if we take in compressive technique which is representing quite a big portion of the group we are still enjoying of course a bigger portion of sales that is revenue now of after market compared to the total perhaps somewhere in the region of 30 plus 33% in that region whether it is 32 or 34 depends on exactly where you look and you remember that in the peak we talked about and aftermarket proportion of perhaps 27% or something compared to the total sales and then it is important to remember what I said before that we had a very strong period of eth invoicing of gas and process compressors for example during that period which also affected the total so its not enormous difference and when we look at orders received we can see that its gradually coming down towards 30% as the order book is increasing of course but we have to remember that we have seen good growth in aftermarket so where the real future percentage will land, we don’t really know, I think you also asked about the margin difference and of course there is no secret there is all the substantial margin difference between the aftermarket revenues and the OE equipment. We however I also want to point that what Ronnie eluded to that we have seen a tremendous margin improvement when it comes to equipment sales compared to the two years ago and that is because of the efficiency gains and all the measures that were taken during 2009 when the market was really down.

So there is a margin difference of course as before and yes we are still at a situation now that we have more aftermarket revenue share than we had in 2008.

Daniel Cunliffe - RBS

Just a come back, it was a incremental margin; I mean the difference between EBIT margin for service and for OE. Is it the same difference, the incremental level as well?

Hans Ola

Well, when it comes to incremental margin or incremental profit on after market which is selling service hours and spare parts primarily then of course there is not the same type of leverage affect that you would have when you load the factory with more volume but to get into what difference and so on is extremely difficult and I don’t dare to do that.

Operator

Our next question comes from the line Ben Maslen from ML, go ahead.

Ben Maslen - Merrill Lynch

This is Ben Maslen from Merrill Lynch. Three quick question please. Firstly on currency, the effect you had in Q3 to the include any offer revaluation effects at all and what you expect for Q4 and next year if we stay at current spot rates, that’s the first one. Secondly, Dynapac still seems to be struggling a little bit given the charge you have taken. Is that the function of very markets in Europe and the US or is there something more structural going on there, may be a bit more color on that. And then finally mining, if I remember right at the peak of the last cycle I think you used third parties or contract assemblers to kind of out together some of the drill rigs and so forth are you doing now and just it varies that the kind of capacity utilization you have on the mining side. Thank you.

Ronnie Leten

I just suggest Hans Ola you take the currency has left first start with the answer the last part of the question that’s start third parties we do the same lets call trick of the same application as last time where we also worked together with parties of partners around the factories which do some of the assembly work for us so that this outsourced to them and that is going on and we are talking like as I also mentioned to of course we talk with them to do more because there is more demand coming but on the other hand also when you compare with two years ago we are also stronger with some facilities in China and in India so we will do also more in these areas then we will do in our factories in US as also in Sweden.

Then on Dynapac what we did is of course is a structural change where we felt that we didn’t need that type of factories, this two factories close by so we could do with a liner structure which we have done but I would really invite you to look to the website of Dynapac and see the amount of new products what we are coming because we have an outstanding still in Dynapac although the amount was not very strong last year but we have kept investing in new products which again giving more features to our customer but also had a debt cost structure and this will go on next week we have a big launch in Germany for an example where we are inviting a lot of dealers and showing our new products.

I see really good development in Dynapac unfortunately the demand what we have all experienced in 2007 and 2008 is not yet back but let’s hope that the construction business in US and Europe is also taking often then I think we are on a good track.

Hans Ola Meyer

You asked about the currency impact in the third quarter. And if we refer to the bridge that we looked at before as I said there is not a very big difference compared to third quarter last year if you take out let’s say the impact the corporate hedges last year had. But yes we had a negative impact of revaluation of receivable as you refer I think in the third quarter this year. But we also had the similar type of effect last year. The going forward for Q4 judging from the rates today we would estimate that we will have about the same type of negative impact compared to the same period last year as we had in this report 100 or 150 minus or something like that.

Ben Maslen - Merrill Lynch

Okay, that’s great. Thanks and maybe just follow up on Dynapac are you able to say roughly what level of sales and margin the business does now?

Hans Ola Meyer

Well we don’t disclose the divisions and you have of course the press release from when we booked them in 2007 right in front of you I guess but so of course they belong to one of several other divisions that are not back to those peak levels by a long shot of course that’s for sure.

Ronnie Leten

Now we go back to Stockholm.

Unidentified Analyst

I would like to come back to the mining demand you mentioned that you believe the mining demand was at the peak level here, a very high level could you just elaborate whether that is relative terms or in absolute terms?

Ronnie Leten

Yes I - when we talked about that they say we set compared to the high level in 2008 that we are reaching that level and that is also what Hans Ola mentioned when you strengthened statement I made in that one so that is where we made the comparison. Is it ready to peak if I believe what I see today, no, so I am still very positive on the outlook when it comes to mining on that point? So it’s everywhere where you meet and I mention corporate countries, it is still strong sunshine. And that we also see in the amount of other equipment and also in our after market.

Hans Ola Meyer

So, next question here in Stockholm please.

Ola Kinnander - Bloomberg

Ola Kinnander, Bloomberg News. Just a quick questionnaire on currency again, we are wondering how Atlas is affected right now by the arising Krona and if there is anyway of pinpointing how your earnings are related to the rising Krona for example of the Krona rises by 10% then the earnings are effected by so many Krona rate, is there way to do it.

Hans Ola Meyer

Well its of course a more complicated process since the Swedish Krona is important but yes it is not the only currency that we have and we - so we don’t really use a rule of (inaudible) against the Swedish Krona very often that we - you can of course do that but the risk is that when you do it you make so many assumptions that everything is so equal and there is no dynamic effects that its becomes an uninteresting answer let me say that of course we are effected negatively everything else equal but to quantify it too much is a difficult task and when we look at the whole currency exposure that the group has and out that in relation to an amount in Swedish Krona you can say that we have about 9 billion in exposed currency flows but that is between very many different currencies of course and that we measure very carefully every month how is that basket of currencies developing let say.

And the 10% deterioration of that basket which means that there is a strengthening of the Krona it’s the strengthening of the Euro for example and at our corresponding weakening of the rest lets say, if that happens with 10% then it affects us about 900 million on a 12 months basis since the exposed value is about 9 billion in total. So that’s the simple math's you can do on that and, but to quantify it would be a little bit difficult to do specifically for the Krona strengthening.

Hans Ola Meyer

So we move to the telephone line again.

Operator

Thank you our next question comes from the line of Colin Gibson from HSBC, please go ahead your line is now open.

Colin Gibson - HSBC

Two questions please. First is the North America revenue increase and order increase there was a little commentary around the most recent ISM number, a lot of pundits agreeing that it is proved that we have had all the growth this year has been done to restocking and that restocking was not over. So the obvious question is how much of your demand growth in North America this year, do you think its restocking and where do you see that going from here? Second question is there is not much in this quarterly report to suggest your feeling the heat from competition at the moment but where are you seeing the most aggressive competition at the moment and is that aggressive competition on price or on technology or could you just give us a bit of color on that?

Ronnie Leten

When it comes to North America if I look to that of course in the way we are in capital goods so when it come to the restocking and all that I think we are not I think not much effective of course indirectly most probably but directly not and also we see our channel through the market is primarily direct so we don’t have that distributor so a third party in the middle. So on that part I don’t see much on the restocking. What I see if I dig in the figures of North America, I see that the industrial to the manufacturing part to the small to medium size companies are really investing that’s what I see. I see also that the aftermarket is doing good development so is it of course that they have not done their investment into 2008.

Yes then you say it is maybe restocking but then it is catching up with the investment but that is what I see and the same is bit also when it comes to the rental companies which are coming back in the picture which we had not seen in the 2009 which we back in 2010. So that is what my analysis if I look to the figures from Altas Copco when it comes to competition it’s not so much on the technology where we really feel that we are lagging behind.

Of course we can never be happy on that, we have to say scope because there is a always better way even if we have just launched a new machine we wanted to do it better because we see opportunities so on that part on the technology part I don’t see

today an obvious threat is that other competition who also have good machines, who have good equipments yes of course locally it is so it is definitely a real competition and it looked a bit specially if I make the segment about competition that I don’t have but where we have the toughest discussion also internally when it comes to competition its primarily in Asia, its also that we are very ambitious there.

We are pushing a lot of our attention to that area because we still don’t have the same market share as we would have in - what we have in Europe so we can take more and that is also the reason why a lot of our effort is going there are that also some of our management is there now in China and in India. Actually we are self traveled to China and India as Executive committee to really see how we really up to stand up. But the completion if I have to say one region I would say Asia.

Hans Ola Meyer

Another question from the telephone conference please.

Operator

Our next question comes from the line of Fredric Stahl from UBS; please go ahead the lines are open.

Fredric Stahl - UBS

It’s Fredric Stahl from UBS. On the subject of aftermarket can you tell us whether the penetration differs significantly in the emerging market block again compared to the developed world?

Ronnie Leten

Yes it definitely does and I think one of our investor’s relation presentations where we have done also that comparison. It would be a real surprise if we would say that we have the same penetration of 1:1 ratio in Switzerland as in china that’s not…there is still a lot more to date in Asia that they could even also in US where we still don’t have the same penetration level as we have in Europe.

Fredric Stahl - UBS

Towards that side I have to assume that the strong growth you have there now is part of a catch up rather than a temporary boost offer in a weak 2009?

Ronnie Leten

I think it is both. I think it is also the strong aftermarket as it is sold so I think over good work and I would of the people who are really doing good work, that is one thing and of course we have not reached 100% one-to-one ratio, so there is still more to take in the aftermarket then and that is the way it works and also if you look to our strategy we are also claiming the service letters we are standing over offer, we would only maybe selling, the filth is now we are selling a complete, it’s a real service business and that is the concept but we really worked further and further with our customers to create really customer value and that yield it seems to be that it yield results.

Fredric Stahl - UBS

And finally can I just open on earlier questions. Did you say that a big explanation for your margin expansion year-to-date have been that equipment margins have gone up significantly from where you were at the previous peak?

Ronnie Leten

Yes. I think first you have a better load of the factories so you have less under absorption, that’s for sure and as I mentioned also in a couple of occasions, I think we have definitely redesigned a lot of our equipment not only for creating more customer value but also for cost and of course it generates a better contribution

Hans Ola Meyer

So, mindful of the time can we have the last question from the telephone conference and before we let that go, anyone that still have questions from the telephone conference we welcome you to call anyone of us of course after the conference as well since you didn’t have the opportunity to call, to ask your question. But we take one final question then from the telephone line.

Operator

Our final question comes from the line of Arnaud Brossard from Exane BNP Paribas. Please go ahead your line is open.

Arnaud Brossard - Exane BNP Paribas

In recent quarters demand has increased faster then expected I think which means your customer base was probably abnormally low. If this is the case can you please quantify the expect of the likely increase in valuable costs in the coming months, that’s my first question and the second one is about your outlook statement, does it imply that you expect the Q3 sequential trend in demand to continue in the coming months, I am just trying to get a better understanding of what your outlook statement really means.

Ronnie Leten

I think maybe I can give them the outlook and you take the margin, I think that’s the most difficult the margins. We give it always the Hans Ola the most questions, the most difficult ones. Now on the outlook what we want to say is that we see a positive outlook, we see a positive continuation if you also compare Q2 with Q3 where we see that we have more or less in volume terms between 4 or 5% going up, if you would take it away from currencies and that is what we more or less see to continue. We should also be, may be calibrate a bit as we comparing with very week 2009, you cannot expect that it goes on with 30-40% I would love to do it and to stay here next year and to say it goes 30-40%. We should recalibrate each other a bit on that one but that is what we see it is meant as a positive trend this outlook.

Hans Ola Meyer

Just to be very clear it’s always the outlook is always trying to give the sequential outlook but not necessarily exactly trying to pinpoint our orders in that respect but looking at the customer activity from where we stand now looking three months ahead that’s how we try to do it.

You ask we come from a very perhaps as you said natural low cost base coming out of the crisis and structuring and so on and whatever words we use for how low it was. It’s true of course that we took out a lot of cost and we acknowledge that the company of Altas Copco the group has a lot of outsourcing when it comes to the manufacturing of products. So of course there will be variable cost that comes back when the volume comes back from customers.

That’s for sure what we have tried to say in a couple of question is we expect that the very strong flow through of profit from revenue growth that we see in this quarter and the last couple of quarters to be honest cannot continue forever and that is what we mean. That doesn’t mean that cost will start to increase more than revenue or anything like that but of course there will be an adjustment along those lines. So does that mean that margin improvement is not never going to happen anymore well that’s for the future to tell and there is other impacts of that but from this we are confident that the rise of the cost is not uncontrolled but of course the relative impact on profit cannot stay as high as we have seen the last couple of quarters

I don’t know if you want to add anything more to that Ron.

Ronnie Leten

And then maybe to strengthen that I say of course we are not after hunting the top margins and we are hunting after real value and that is maybe the statement to close this day and…

Hans Ola Meyer

Excellent closing remarks so we are hunting for value creation with that remark from Ronnie Leten we close the conference and thank you very much for participating.

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