Atlas Copco's (ATLKY) CEO Ronnie Leten on Q1 2016 Results - Earnings Call Transcript

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Atlas Copco AB ADR (OTCPK:ATLKY) Q1 2016 Earnings Conference Call April 26, 2016 8:00 AM ET


Hans Ola Meyer - Senior Vice President, Controlling and Finance

Ronnie Leten - President and Chief Executive Officer


Klas Bergelind - Citi

James Moore - Redburn

Markus Almerud - Kepler Cheuvreux

Guillermo Peigneux - UBS.

Jonathan Hanks - Goldman Sachs

Sebastien Gruter - Exane

Peder Frolen - Handelsbanken

Ben Maslen - Morgan Stanley

Alasdair Leslie - Société Générale

Lars Brorson - Barclays


Ladies and gentlemen, welcome to the Atlas Copco conference call. Today, I'm pleased to present Hans Ola Meyer. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Speakers please begin.

Hans Ola Meyer

Thank you very much. And also from me and my boss, Ronnie Leten, the CEO of Atlas Copco is with me here, a very welcome to the first quarter conference call for Atlas Copco Group.

We have today also the Annual General meeting, just after this call. So as we have tended to do in previous years as well, we will try to keep it to an hour, this call. And hence, I would very much urge everyone that has questions in the Q&A session to take one question only per person, and then we might be able to make a second round even. Highly unlikely I think, but still we'll try to do that.

So without further ado, I leave the word over to Ronnie and he gives his comments on the first quarter.

Ronnie Leten

Thank you, Hans Ola, and good morning and good afternoon to all of you. As usual, I will go through the slides and try not to lose you during the presentation. So I will don't forget to refer to which slide I am talking about. So let's start immediately with the Q1 slide saying, the Q1 in brief.

We talk about the business. We have a stable order intake. I think as this one highlight, I would like to stress. And on the other hand and that I'm sure it's not a surprise for most of you following us, a weak mining. So I'm overall pleased with the stable order intake, giving the headwind we have seen in mining, but seems to be that we have found a lot of businesses, which are growing.

And one of them is service, which we keep growing on, although we see a little bit tougher times on the mining and rock excavation part that we see a reasonable good order income for the compressor side and a very strong one on the vacuum side. As you remember, a couple years back, we did this acquisition, which seems to be that we are on the right track with that one.

Then when it comes to profitability, given the lower revenue, we come out with a bit lower revenue, lower profit and profitability, mainly headwind from currency, as it says on the slide. It's also partly due to lower profitability on mining, which I will elaborate a little bit later on.

During the quarter and also early April, so as up to date, we have already announced five acquisitions. Most of them are smaller, except maybe the acquisition of FIAC, the compressor company in Italy.

Then I'm going to the next slide, the figures, where you see, it says also there the topline unchanged organically and it comes to be ceased. So I'm pleased to that. The revenue a bit softer, a bit typical. Not always that we saw that. It was a bit expected for us that Q1 would be a bit softer on output side and making an adjusted operating profit of close to SEK4.2 billion and a margin of 18%, with a headwind from currency and then a softer mining part.

The rest of the figures you can see, the operating cash flow we have here, but Hans Ola will also elaborate a bit further and that where it comes from. But I think gives a solid operating cash flow, especially for the first quarter.

We then look to the regions, and I'll start with Europe. We saw a very, say, solid development almost in all countries. If we just maybe make a bit of a detailed analysis, you can say that U.K. was a bit softer, but that is because we had a very large order last year. So the comparison was a bit tougher there. But if we take that away, I think it was rather a positive development overall in Europe and especially also in Russia to name that country too.

If I then go to North America, small minus-2. Also in U.S. we had a lower part, because we still have the comparison with the oil and gas part, which make it a tougher comparison. So we still have that area, which is low. And then also on the mining, of course, that is not moving ahead and where we had a bit softer construction part. If I then go to the Southern part, there you see a double-digit minus. Again, that is not a surprise for anyone of you. A very weak Brazil, which really break down the region.

If I then move to Middle East Africa, also there we get the tough minus-12. I think gives all there is it to explain. It's the oil and gas, which were then the Middle East part. And of course, mining where we have, yes, that sector is down. And of course, Africa is a lot about mining. So that is easy to explain.

If we then go to Asia, and there we see a strong plus-13. So that is nice to see. And who is the champion? The champion is India this time. So there we had a very solid development in all the different business areas. So it's good on the industrial side, on the construction side and even on the mining side. We see on all the different areas a strong development in that country and it's always nice to see.

And of course, then we take the other big country, China, where we also saw in ore area a reasonable positive development, but of course that is mixed. Because again, there are a couple of sectors who were lower and some of them are higher, but it was a positive development. And again, maybe sure there will be a question I can elaborate a bit more on that one.

If I then go to next slide, where we see the organic growth, which is flat and that is the challenge we have in front of us. If we take down the next one, which is included structural changes or acquisitions, there you see a little bit more positive development, where in Q1 that is slight positive, but of course mainly coming from the acquisitions in previous periods.

If we then go to the sales bridge development there, currency have been -- you have already seen that how much it was. So that is changing compared to last year. And price, volume and all its receipts, as I already said before, it was a flat development, which I briefed you especially, given the headwind in some sectors and in some countries like Brazil and sectors like mining.

If we then go to the different sectors of different business areas and jump immediately to compressor technique, so -- I skipped one slide. So strong organic growth, 7% up. So with a long time we had that freedom to say, coming from very solid vacuum solution, where we see good development in the semi, in the flex screen and in the service. So a good development in that area.

On the compressors side, we see a stable order development in industrial compressors. And maybe one can say, why is Ronnie now so delighted about that, that they used to see that a couple of regions have tough situation, but I think we succeed to get back most on the positive side. So that's good.

And I think I'm sure we are working hard here in gaining share, which is great. But of course, unfortunately, the gas and process, so the big, bit ticket is still a tough area to be in. And compressor service is rock solid and developing further.

The acquisition on FIAC, I elaborated on that one also. We have deepened further over our go-to-market, so it will be done further developing and with the acquisition also of a couple of distributors.

And we are still on the filing of Leybold, when it comes to the empty trucks. So we would see when that will end. Will it be -- like it says here, third quarter, it will be a month earlier. We are doing the work, which we need to do with the authorities and we'll see when this comes in the books. In the operating margin, solid operating margin of 21.5%. So that was on Compressor Technique.

If we then go to in industrial technique, there I think it has a healthy demand level. It's off to good level. We got some headwinds from currency. And second, also when you make the comparison, once you know when we acquired Henrob, this self-piercing rivets business, which has sometimes, when you start up a big equipment order and then for many years it has consumables.

And of course, when you make the comparison with last year Q1, we had a big order from equipment. So when you make the comparison, it's different. Unfortunately, you don't get this big equipment orders every month. So from that point of view, it was a tougher comparison.

But on the other hand, business was robust. We had a stable order intake from general industry. So this is rock-solid and is growing at good level. And the operating margin looks maybe a little bit weak, but if you also know that this business has higher exposure to some currencies, which were negatively affected, I think if you make that correction, I think you'll see that you come up more or less at the same level of profitability. So for me, as the CEO, nothing to worry about that, just to make sure we get more of this.

Mining and rock excavation, another business area, where we have different thoughts about. And unfortunately, I should say, continue to be soft and weak demand that also on the orders from equipment still stay at tough level. Yes, I can only say weak. So this was also slightly negative.

And as we know, I think reading and following the whole situation in the mining area, we see some mines closed, we see some mines to slow down, but has an effect on service work, but also has an effect on the consumables. And of course that is happening as we speak.

Although, we still believe that all the order initiatives, which we take on the service side that over a period we can come up with good growth possibilities and good services to the mines, which we are doing as I am speaking. So on that side, when it comes to service and consumables, not over worried that that is a new brand that it will slide down for the next coming whatever quarters.

For the operating margin, yes, a bit weak 15.1%. Of course, one, the currency that's playing that part at this time. It is significant for them. But on the other hand, also the volume, which played against them. But on the other hand, if I make here the comparison, we should have had a little bit more on that part. And I'm not going to say that this is the new level on the contrary, I think this can be at a better level.

So we are taking also further efficiency measures, which we have also taken and which are also probably embedded in the 15.1%. But you know, we take these measures as we talk, and we do it continuously to make sure our organization is fit to create sustainable profitable growth for the future.

On construction technique, if I'm going down to that business area, the last one, equipment was softer. And if we can take it really two big areas, I think Brazil very tough. If we take it on the whole construction, it's extremely tough; if we take down on compresses and assembly systems, it's a really tough place to be now, when you are in Brazil and in construction.

But on the other hand, if you are then on the other side in the other continent, if you are in India, then you are dancing on the table, because it's really a fantastic development in India, and becomes one of our largest markets now in construction technique in India. And we do very well there, we have a good progress and good local presence. So we are also gaining share in that market.

Rental business, developing fine. As you also know, that business also has exposure to oil and gas, but we succeed to come up with good development in other areas. So I think in that division we are doing great work. And also the service business in construction technique is also developing at a good level.

So operating margins solid, even with negative volume effect, which we had in some equipment factories and currencies. We still are able to come up with a margin of 12%. So I think a good work in that business area. So they have adapted to the new level and increased where the possibilities are.

If you look to the picture, I would like you also to see, those who have been visiting Bauma, one of the biggest exhibition on earth, when it comes to construction equipment, also there we had a lot of new equipment shown and it was a very successful exhibition. Our visitors were delighted to see all the new innovated products. I am sure also that we will see in the quarters to come. We would see that in our growth level and in our profitability level. So I hope with this last statement, I was taken back by some of you.

But let's go then to the slide of the profitability, and then I'm handing over also to Hans Ola, I think to see operating profit. Yes, let's see the 18. I think it's more or less the figures I have already said. Maybe I can hand over at this time to Hans.

Hans Ola Meyer

Yes, let's make the usual few comments on the financials and on the tax situation before we move on. As you noticed in the report, both the interest net and financial net was lower than first quarter last year on the back of continuous interest rate reductions on the one hand and a little bit of better or less negative translation effects here and there out in the world, where we unfortunately need to borrow in foreign currency loans in some places. So that was it.

If we look ahead, I would estimate that we are still expecting to be close to SEK200 million negative for interest net, up to that amount, partly due to the payments that we have in front of us of the dividends, et cetera.

Then on that note, looking forward, we also have already actually, in April, we have made some repurchases of one of our outstanding bond loans, one that has a maturity in Q2 2017. And as a way of managing the refinancing risk and seeing the low interest rate levels currently, we have repurchased about US$300 million of that US$800 million loan, which of course will bring a certain one-time negative effect in the second quarter to the June of about SEK60 million, we estimate.

The benefit from doing that is because of the refinancing risk by borrowing longer money already today is, of course, one main benefit. But at the same time, we will also have a little bit lower run rate of interest cost in the next couple of quarters already.

If we move a little bit further down, on the tax, of course, the report spends a few words on the Belgium situation. As many of you are already very well familiar with, we made a provision of €300 million already in Q4, based on the fact that European Union has challenged Belgium for its way of handling excess profit rulings and they claim it to be an illegal state aid.

Since we talked in January, the Belgium state has appealed. And we also say here in the report that Atlas Copco is preparing its own appeal and that will happen in a few weeks time, we hope. So we don't know where this will end, of course. But in the meantime, we have taken the provision.

And we also believe that in the course of this year, we will pay the amount in the way of an escrow account, so that we are not risking, that more interest cost will be put on top of what we have already provided for. That would be the only reason for doing it, but it's also what we foresee will happen during 2016.

If we then move on -- and sorry, on that tax, I would also say that going forward, you saw that due to this new situation in Belgium, our tax rate is lifted by about 3 to 3.5 percentage points. And you saw that it was just about 27%, and that's also the level that we expect for the short-term future going forward.

If we then move on, I think, it's Slide 14, you have the, so called, profit bridge there. I don't want to dwell too much on that first page. You can see one element in the profit bridge is helping us and that's on the share-based long-term incentive programs, which was very negative last year and more or less neutral in this quarter. So that's healthy.

But then, of course, if we look at the next page, Slide 15, you can see the different business areas. And I would then, apart from this options effect, which is incorporate, you can see that we have a negative effect on currencies. You can see it's pretty severe on three out of four business areas, if you see the effect on the sales and the profit line.

You can also see that we have on compressor technique handle the revenue drop pretty well in this quarter. The opposite perhaps could be said about mining and rock excavation. And when it comes to industrial technique, the numbers are so close to zero. So I don't think that you should be too much into it. And then when we come to the construction technique, they have actually improved, if we strip out currency and one-time items, whilst revenue has dropped. So that is a little bit summary of.

You can almost say it like this, that in the bridge versus last year, the profit is down about SEK350 million for the group. SEK250 million is helped by this not having the negative on the options. So the rest SEK600 million to explain is SEK400 million from currency and about SEK200 million is related to mining and rock excavation, you can say.

If we then move to the balance sheet, I'm trying to speed up a little bit, as I don't want to say it too [indiscernible, its not much to say, we have a seasonal build up of inventory in Q1, which we expect and we have seen it every year, and then I am comparing December 31 with March 31, 2016, otherwise pretty undramatic. We generate cash of course, so that is increasing the balance sheet a little bit.

And finally, put it to cash flow. We have slightly lower operating cash flow, but still more than SEK3 billion in the quarter. It would have been more or less the same as last year, hadn't it been for the fact that in the first quarter we pay a little bit more of preliminary types as then we did last year, as you can see, otherwise it's pretty comparable with last year.

So with that, I hand it over to Ronnie, again, for the outlook.

Ronnie Leten

Yes, and that is no change. So it's same as last time. So we believe that looking to market that demand of the mix of our business will remain more or less at the same level. And by this, Hans Ola, I think we can better go to the questions.

Hans Ola Meyer

Yes. We're ready for the question. I repeat, and due to this with the AGM, we'd really like you to restrict yourself to one question. If absolutely needed, of course, there could be a short quick follow-up, but that's it. I will try to get that in order.

So with that, I hand over just to the operator to repeat the questions.

Question-and-Answer Session


[Operator Instructions] And our first question comes from the line of Klas Bergelind from Citi.

Klas Bergelind

If from the margin in mining and rock, out of the decremental margin they drop through 44%, how much was mix or weaker aftermarket in for out versus just factory load?

Hans Ola Meyer

We don't have it exactly split like that, Klas, that it is not the way we distribute. Of course, you will have the combination about -- Ronnie pointed out that in the first quarter we had a little bit of softer topline development also for the service, which is the first time we have seen that for a while. And of course, seeing the difference in profitability, of course, that gives an extra effect, so to speak, this time. But otherwise, as Ronnie alluded to, we take a couple of measures, that is preparing ourselves also for being sustainable bet to profitability going forward and that is weighing a little bit, and top of the norm of the expected under absorption as you pointed out yourself.

Klas Bergelind

Then just a very quick follow-up on gold, still mining, so I'm not cheating. A big jump here in the price here-to-date. You talk about better underground quarter-on-quarter, but Africa and Middle East is showing orders down 12%. I'm trying to understand that comment on underground a bit better. Is it outside of gold do you see the improvement?

Ronnie Leten

Yes, I think, of course, we see some improvement on this part, but I think these are no big, big orders. That's here and there that we see. We see some activity coming and you have also seen the price development. And there is definitely a little bit more positive talk about when it comes to quotation level, that doesn't mean that it lends. And I think we got a couple underground orders that we get.

But of course, I have not looked to the detail of all the different compares and country-by-country, because I think if we take the sector of the geographical area, I think you have better Chile, if you go on that one, South America, than you see more in India. You get a strong Russia when it comes to mining, so it's a bit spread everywhere.


Our next question comes from line of James Moore from Redburn.

James Moore

I think I'd also like to ask about mining margins. If 15% is not the new normal, can you perhaps help us with what you are thinking might be the new normal? And in particular, I'm trying to get my head around mix, as to whether that service point was particularly bad or not? Could you maybe help us when you look at the 3.8% drop in margin year-on-year, what is it similar across equipment consumable service or do one of those three say, materially bigger decline? I know you don't disclose the numbers, but just in terms of the change, because there was a particular story there?

Ronnie Leten

Yes. I don't have all the number details with me, James, either. I think, of course, first -- and you know me I think 15 -- no one will be happy with that, so that was for sure. And that's definitely not the new normal, but as Hans Ola already said, when we has answering the question of class, I think we have taken measures.

We are taking people out. We are moving operations around. You have seen also our announcements. So these things are happening. Mines are closing or slowing down that means that you have to reduce your work force in one area. And of course, you've got opportunities in other area, where you need to start up, so you get inefficiency in starting up and you've got releases of people in the other part, which you don't see, because at the end of the day, you only see the balance, so this is happening, as I speak.

And as Hans Ola also already alluded, I think of course we had expected a little bit better service part, and due to that, of course, you get those in services, first is one of the biggest entity in our operations, second is also the most profitable one. And if that drops, you are better in maths than me, so you can easily make the calculation. And that is also where we need to take the measures to compact to the new normal of the normal where we should be. And that is more or less, but you also hint at which is also my expectations, where we should be.

James Moore

And just a follow-up on that. You talk of more efficiency. Can you help us maybe on timing and magnitude? Is this more of a same sizing or an even faster sizing?

Ronnie Leten

You've seen where we have announced, I think, it was the month ago, that we will close two or move two operations in U.S. We do that. I think we are doing a couple more which even we didn't announce, which is going on. So I think you need to give us a couple of months more to do that, and we need to work harder on that to get it back to where it should be.

This is definitely -- and then another one, just to give them a bit of respect of the mining, I think we should not forget we have a bit of the currency part, which is also giving a bit of a hit. But I don't want to hide behind that. I think we could have done that on the profitability side.


Our next question comes from the line of Markus Almerud from Kepler Cheuvreux.

Markus Almerud

I want to move on to the regions and ask a little about the China and the U.S. Could you elaborate a little bit on China, I mean, which area is stuck out? You saw positive growth year-on-year, the online demand sequentially, was it also a positive feel through? The same thing with U.S., you were talking about positive growth in the U.S., what sticks out there and what did you see sequentially?

Hans Ola Meyer

I think on China, it's rather mixed. Of course, one should also see the first quarter in China with Chinese New Year and party moving here and there. So it's not always easy to read the full quarter, because the first two months are, especially, in our business are rather difficult to read. Of course, then you have a full March, which gives then a better view, but of course, you have the three months together.

I think what I see is still a solid motor vehicle business in China, still very solid flat screen development in China, still a very solid medical business in China, even also we see on break compressors where we see still a good development in China. So I know I am taking all about the positive side on China, because you were hinting a bit on that. So these areas are there and they are not small. Of course the ones who are weak, stays weak, so in the comparison it gets easier. Let's be honest. But there is definitely activity in China.

I am less negative towards China today than I was three months ago, but would see if I was right or was wrong on this part, so of course, when it comes to mining, still difficult. But on the other hand, you've also have read about all the big investments on the construction, which gives us opportunities in tunneling, it gives us opportunity in bigger compressors, especially on the portable side. So these are the tractions we see.

And China for us is all about market share and to be much more dynamic and much more, yes, working harder there. When it comes to U.S.; of course, oil and gas still difficult, although within couple of months, the comparison becomes easier. So from that point of view, maybe not the second quarter, but the third quarter will be a bit easier, of course, if nothing happens. So that is still tough. Houston is still tough.

Rental, I've also said that last time, when I was talking construction, yes, we haven't seen really strong ordering from them. Although, they don't say that it will come. But okay, first see the orders and then we talk. What is still solid is automotive vehicle. I think that keeps doing great. I think we see a good development in our business, but that's more internal hard work.

We see also good on the high-tech tools where we do a good development. We did a couple of acquisition a couple of years ago, and I think our work on that part is against this stream, but its working fine. And that is, of course slower. And last but not least, our service business is growing in U.S.

Markus Almerud

And the industrial compressor sequentially?

Ronnie Leten

The small-to-medium size compressors, because you should take away the oil and gas, because if I answer it really straightforward, then I should say it's negative. Of course, if you start to make -- and excluding the oil and gas, and you remember the Quincy, because we had that big exposure to oil and gas indirectly when it comes to the Quincy. And I have said that, I think, one or two or three quarters to go. If you take that away, I think the business is now back. There is activity. There is activity.


Our next question comes from the line of Guillermo Peigneux from UBS.

Guillermo Peigneux

I wanted to ask about pricing trends actually. I think it's four out of the last five quarters you have close to zero ores to your pricing. And I was wondering whether this is kind of a message to the organization saying that never decline prices you walk away from price decreases, prefer to lose the volumes, or will you be pushed. That's one point to enter the debate on declining prices?

Ronnie Leten

You can come and work with us. Actually yes, and of course, this happened, because in some areas, of course, the growth is again on the purchasers, because it becomes a supply market. And consumptions are back in place and the purchasers take the power. And this happens in certain areas, but you don't see it globally. Of course, on the mining side, you have a couple of areas, but there is not much equipment to negotiate about, so it's not a big thing.

But it's getting tougher or it is tough in this air because otherwise we will report different. But you also know that there is low inflation, which does not help us on the service side, so that's one thing. We will get some price pressure, but in the other hand we fight back hauls with innovation, because that's the only way, which justify you to get the price compensation, because you cannot just tell a customer I increased the price for the same product that doesn't work, so it's only by new products. If you take as an example, in the construction business, we come up with new equipment, which gives more value for the customer. These products we will sell, we will tell the value, we will get definitely the right margin on that.

Guillermo Peigneux

And maybe a follow-up. If I use an example on the same line, basically I am talking about pricing, am I reading maybe some of the market see most correctly, when I see that maybe in consumables, and maybe in Europe, some of your closest competitors have been misbehaving in relative terms, when you compare to history and on recent pricing trends?

Ronnie Leten

But, you will need to comment on that -- of course, if I listen to our sales people there, always when they're losing order its always price, and I am sure when I would be with the competitors and listen to their sales people, they would say the same about us. I think it happens. I think we should not be silly on this part. These things happen.

But I think in Europe, I think it happens maybe once here and there. I don't see that. I think when it comes to price, where its always getting tougher is China. I think there is where you have a less sophisticated supply chain, where price is really number one and selling is still less developed there. There you have that, so I don't see that -- and I will not hide behind that. That is a big thing in Europe and a big thing in U.S. There it's much more value-selling.


Our next question comes from the line of Jonathan Hanks from Goldman Sachs.

Jonathan Hanks

Just a question of clarification really. Did you see demand improved during the quarter from the U.S. and China? I know China is harder to say given the New Year effect, but in U.S. in particular, did demand accelerate from January to March?

Hans Ola Meyer

First of all, we are not particularly happy to say, this week was good, this month was bad, and so on, because if we are not even capable of seeing whether it's a trend or not, so we'd rather refrain from spreading that as a truth so to speak. The year started poorly, let's at least say that, and that sometimes happens, but it wasn't a very good start after the New Year's festivity, as it looked like that.

Ronnie Leten

If we divide the quarter in two, the first six weeks and the second six weeks, I think second weeks were better than the first, and that is for sure, for sure, and that is what we are seeing.

Hans Ola Meyer

But as we said, I mean that has happened other years as well, that that is the fact, so we're careful not to draw too many, as we say in Swedish, [foreign language], I don't know what we say in English on that, but anyway, best leave it with that.

Ronnie Leten

But that's also an hint that -- I think not hint, but say when it comes to the revenue, if you see the invoicing was a bit softer, and I think in some years we see that, and that is what harms all us that. I think January was some times hopeful and some times when does the year start.

Hans Ola Meyer

Sorry, not to give you a better arms there, but that's what we can manage today. Sorry about that.


Our next question comes from the line of Sebastien Gruter from Exane.

Sebastien Gruter

One question on the Compressor Technique order intake. How do you explain the very strong order intake for vacuum, given the news there has been not great on semicon CapEx, are you just thinking of order intake or market share gain. What's your take on this order intake in vacuum?

Ronnie Leten

No, I think when it comes to the semicon and flat screen, I think that business, there are some players, and you know the name of the four or five players, basically on the semicon. They are investing. They are definitely putting there heads up, and that this one part. Although, of course, I'll also read that they reduced their CapEx even there, but it doesn't affect that part of the business that's one.

I think second, I think we do well when it comes to our share of the market. I'm not saying that we 30% market share and we'd love to have it. But I think we do well. I think we have invested a lot of new products. We have invested a lot in in-service and invest in a lot in the right capabilities. So where the facts are is also where we are, so from that point of view we do right. Also, I think when it comes to high vacuum I think we are there, as we promised to do that. And as like they say in Texas, we are whipping the right horses.

Sebastien Gruter

And just a follow-up, I mean help us on, I think on service, it's not far from 31% the vacuum share. In the order intake, are we talking about the same or is it much higher than the 30% in Q1?

Ronnie Leten

On total compressors you mean?

Sebastien Gruter

Yes. Total Compressor Technique and how does the other intake?

Ronnie Leten

Yes. I don't know or I don't know have that figure, because I'm not looking from that way to the business. But I can say that if you take Compressor Technique, as we name it, and you take out the vacuum part, the compressor part, so the original one was not that. Of course, it was not really blooming, because we've got the couple of headwinds, but I was not disappointed in the development, but I have seen there. I think like I hinted a little bit when I was elaborating on the business areas, on the compressors and then [indiscernible] compressor, I think we're regaining our foot back of our days back where we should be or should have been a couple of year back. I think we're coming back.


Our next question comes from the line of Peder Frolen from Handelsbanken.

Peder Frolen

I have a couple of question on the after-market. I want you to talk about the rock solid growth for the service side in compressors, are we talking about high single-digit growth year-on-year? And tied to that a question on the after-market for both consumables and services and spares in mining, what's the magnitude of the dropping to -- you used wording of down and slightly down, what does that mean basically?

Ronnie Leten

I think when it comes to the last one, it is slightly down, so you should not look in the big numbers. So it's slightly down, that overall percentages. You can see that. When it comes to CT there you can see that we are couple of percentages up, I can say that.

Peder Frolen

Rock solid is the same thing as slightly down, I can't understand this Ronnie?

Ronnie Leten

It's the plus on the one side and negative on the other one.

Hans Ola Meyer

The CT is the plus one and the MR is the minus one.

Peder Frolen

So very slight growth in CT service that's what you're saying.

Ronnie Leten

Yes, I think with a couple of percentages that you get on that one.

Peder Frolen

Maybe you could offer some FX guidance as a bonus?

Ronnie Leten

Actually I should have said it, I actually forgot this, so thanks for reminding. We have the $400 million plus negative as you saw in the first quarter and then that was actually a little bit more than what we expected three months ago, but now looking in the same way Q2 versus Q2 last year, we don't expect it to be that much negative as in Q1, but still perhaps something to $250 negative, if we would have to do the math today, so to speak. But again, it is very sensitive to what happens at the end of the period, if it's suddenly a drop of the dollar like in March, for example, or these kind of thing. But that's the best estimate I see.


Our next question comes from the line of Ben Maslen from Morgan Stanley.

Ben Maslen

Maybe if we can just come on to industrial technique and the slower demand you talked about in the auto side, large projects. How does the pipeline in that business look going forward? And given the very elevated levels you see globally in terms of auto CapEx, do you think you continue to grow from here, from this base?

Ronnie Leten

Ben, one thing is, I'll repeat a bit, but what I said about Henrob, which is then acquisition about rivets where we have a bit of a tougher comparison, because we were selling lot of equipments in first quarter last year, so which that order doesn't come, because it takes you maybe every four years you do that when you do a line built, you do that. So from that point of view -- and it was a big quarter, so from that comparison.

But if you then take that away and you look to -- and you take the motor vehicle, you have heard me saying when I was elaborate about China, China is still strong; when I was talking about U.S., still strong. I didn't say much about Europe, but as you're asking our value, I think, Europe is a bit tougher. There are a couple of European players who have a bit of different challenge and also reviewing their mobiles, which makes them also a little bit tougher for us. So there we see some, yes, some less activity. So there is, you can say, there it's a little bit negative whereas the other twos are positive.

But I think on the other hand, if you look to industrial technique, you also have the aerospace, which is still solid. And then we're also coming up with a new product. You've heard me saying when I was elaborating on U.S. about oil and gas and high-talk, I think that is solid. And then you have the service part. But industrial I think also has a bit of currency headwind, and that was also what was negative on the profitability. But the big part, motor vehicle Europe is something to watch.

Ben Maslen

I have a follow-up, maybe just very quick one on compressor technique. Is there a big difference in margins now between vacuum and the traditional compressor business?

Ronnie Leten

It's slightly lower in the reported margin, not in cash flow, because you know we do amortization. But if you say that's the way, and I'm looking now also to Hans Ola, because I've not looked recently on that, but I think we are more or less -- I think maybe compressor is maybe one digit higher, but that's maybe everything as it is today.

Hans Ola Meyer

And of course, a good quarter is good for absorption and what not. So that is helping on that part of compressor technique.

Ronnie Leten

And a little bit lower; a little bit, but not much.


Our next question comes from the line of Alasdair Leslie from Société Générale.

Alasdair Leslie

And can you talk a little bit about the rate of service growth in China in compressor technique, whether that was negative in the quarter? And generally, whether you are seeing any directional change to utilization rate service intensity in China that can maybe support return for stronger growth from here?

Ronnie Leten

Yes. And that is not -- it's not, let's say, good to throw a real conclusion, it's not so easy on China, no. If you would ask me that same question next quarter, I think I will be much more confident to talk. And the reason is, but Hans Ola also mentioned in the beginning, you see you have Chinese New Year, factories saw branch closed, not started up. So that is one reason why I am a bit careful.

But on the other hand, services in China, it's not so easy for a couple of sectors, and that is if you take shipyards, steel plants, coal, which are big compressors, and you know these sectors, I just said, they are all very low. So if you go to visit some shipyards, you would see maybe 10 compressors and only three are running. Yes, you know, what this time and then it's less service. But on the other hand, there are other areas for growth, where we have inroads, where we do better job. So that is happening in China, as I am speaking today.

Alasdair Leslie

But could just have a quick follow-up question on MR and commented in the comments around the downsizing of mines. So I mean did you see that trend accelerate for the quarter? And when you see that, is some of that equipment fungible? I guess, some of it is stranded, but other pieces of equipment can be redeployed elsewhere. So are you seeing an increase in used equipment inventory cannibalization, et cetera?

Ronnie Leten

I think when it comes to the growth and acceleration, I don't think so, because I have not started to count when it happens and how much, I think that I cannot say. Of course when a mine is slowing down or closing and its part of a concern, of course, material of equipment is moving around, that happens. But most of the time, what this step means that you need to do a mid-life upgrade today, they do further automation and that is what I was hinting when we talked about service.

On one hand, you see closing where you need to adapt, but you need to layoff the people. And on the other hand they give you the machine and they want to upgrade that, then you need other machine, other people. So that is what is happening today in our business. And that gives on one hand opportunities, but on the other hand it gives also challenges. And of course, especially, as an investor and as a CEO, you want to happen this in smooth nice balance, that's the challenge what we have faced today.

Hans Ola Meyer

I am looking at the watch. I think we have time for one more question.


Our next question comes from the line of Lars Brorson from Barclays.

Lars Brorson

And one minute, I'll keep it short. Just on the divisional outlook from mining services, Ronnie, did I hear you -- I was a little late on the call, sorry about that, did I hear you say you are not worried about the business in new trend and what are you seeing sequentially from mining service?

I mean, obviously, we haven't seen a down quarter in services for a very, very long time here, even 2013. I wonder whether the difference here is that it's your couple of business that's starting to hurt. It's obviously about a-quarter of your business, and I appreciate your customer concentration here is quite a bit higher than it is elsewhere in your mining business.

Ronnie Leten

And this is also a question I would like to answer within three months. It's also for me difficult, of course, where we are heading. If I do an analysis and talking to the Head of Service, he talks, like explained in the previous question. He said, yes, here is the list of all the mines, where we are active, which are slowing down or closing. And then, of course, I start to elaborate a bit further, and then he comes up with this initiative sand that opportunity and that order. Yes, at the end of the day you have to make the summation to see that, yes, you have a positive level.

I personally don't see this as a new trend. But of course I'm also asking that question that I asked a couple of weeks earlier, because I have seen the figures a little bit earlier than you. But of course that is what we have to prove in the next coming three to six months. I cannot give you a full straightforward. You see I sound cautious, but I see opportunities.

End of Q&A

Hans Ola Meyer

Thanks, Lars. Thank you everybody for participating and for posing your first questions at least. I am sure you have more. We'll try to deal with that in the next couple of hours, days and weeks.

With that, again, thank you from us. And hope to see you, if not before, at least in July, when Ronnie will comment more on these service trends that he just spoke about. Thank you very much everybody. Bye-bye.


Thank you. This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.

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