Good afternoon, good morning, good evening, depending on where you are participating in this press and analyst conference call on our interim report for the fourth quarter and the full year of 2017 for Atlas Copco Group. We are here in Nacka, and that allows us to have some Q&A sessions physically here in the room after the first presentations. I also, of course, as normal, invite the people attending on the telephone conference to participate in the Q&A session. However, I want to stress right away that we'd like everyone to restrain themselves to one question at a time, because we'd like to allow everybody to have a chance to put a question.
We will do this in the normal format, means that myself, Hans Ola Meyer, I'm the CFO of Atlas Copco Group, and Mats Rahmström, our CEO of the group, will start and give some comments on the quarterly report. Then we will open up for questions. We estimate that we will be about one hour for the two sessions. Without anything more to say right now, Mats, I hand over to you.
Thank you, Hans Ola. Once again, and welcome. I really appreciate you taking the time to come and see us and listen to us, if you're here or connect through the phone. This cool truck here is the new 54-ton truck from Atlas Copco Mining or Epiroc, as we say as well then. I wanted to show you something as a little bit of a starter. Everyone talks a little bit about digital and Internet of Things and Industry 4.0. I wanted to show you a little bit how we bring that to our customers in a real and tangible way. Oop, that stopped. What we like to show is in principally what we can do today. Everything that you see in the video is actually something that we can provide to the customers, so products that we actually have, competence that we have.
This truck has now been on the road for 18 weeks. They have done 70 events. It generates a lot of interest. I think they told me the other day that they had already 600 different leads from customers. It's really a successful way for us to come to the customer and show what we can do. If you look at a little bit on Q4 then, we have summarized it. You can see that we have had record revenues. I'm really pleased to see that it came back a little bit, the revenues at the end of the year, catching up a little bit on the orders received. We say that there are high profit levels, you also notice maybe if you read the report that there is a few one-time costs, option revaluation. You have some of the split costs and a smaller restructuring.
Otherwise, that will also been a record profit level for us. Very pleased to see that we continue with the very broad growth. We have all the business areas doing really well, even though Vacuum Technique and Mining stands out above the rest. I also think the other is worth mentioning as really good results. If you look at the different regions around the world, we continue and have double-digit growth, with the exception of Africa, Middle East, where we had eight, and I think also that's a real strength of the group to be present in all these areas. Cash flow, SEK 5.5 billion, which is really strong for us. If we compare to last year, you can see that there are some differences in the tax we paid, especially for the split.
The Power Technique business area have been working with the Road Construction divestment. I think they have done a fantastic job. I'm also glad at the same time to say now they can really start focusing on the products that they have in their product portfolio. The split project, Hans Ola is actually very much leading this together with Håkan Osvald. It's on plan. We have done the legal split globally. Now we are preparing for the carve-out. Per, the new CEO for Epiroc, will be on board in next week, and of course, that actually completes the management team as well. They will be present here and being part of Atlas Copco then until the split. This confirms the same thing as I just said, but in numbers, 14% organic growth, and we were actually up against quite a strong quarter last year as well.
We are really pleased with that number. You can also see on the revenues, as I mentioned, that we had strong revenues, catching up a little bit there, which is also good. The operating margin, you can see they have the adjusted there on 21.5, and you can see what I mentioned earlier on the minus 407 from comparability. That's really strong as well. Of course, that moves down also to the net profit and the earnings per share. We don't add that back. If you take a look at the year, I think if you take the profit and loss in principle, you have records on all levels, and I think that's a fantastic achievement for the year for the group. Record order, record revenues, record profit, I think that's really, really good.
Internally, we have also worked over the last few years a lot with the net working capital. I think there's a lot of good work that's been done there as well. You can see that coming down as well, and it's actually good for all the different business areas. I mentioned the growth rate in the double-digit, which is down for the year as well. Vacuum stands out, mining stands out, they also have a little bit of tailwind, and I think the other business areas is worth recognition as well. I think they've done a tremendous job. We have done a number of acquisitions, like Atlas Copco do, we do a number of them, little bit smaller from time to time. We integrate them, we make sure that we create value out of the things that we bring.
I think the question that we've been asked most during the year, what are you going to do with the cash? We have the board have then proposed the distribution of SEK 18.2 billion, that consist then of the SEK 7 as the normal dividend, and then we have the special mandatory redemption, which is then SEK 8. I know probably there's a lot of interest around that, and at the end of the presentation, Hans Ola will talk a little bit more and give you a little bit more on the redemption and dividend. I think this just summarizes a fantastic year for us. We always get spoiled with all these good numbers that come in. I can promise you there's been a lot of hard work in the teams to accomplish this, handling deliveries.
At the same time, we have done the split, we have done the divestment, so I really recognize my team out there, almost 50,000 employees that have made this happen. I think they've done a fantastic job. You can see basic earnings per share is up approximately 22%. Here you see the split in principally where we sell our equipment, and I know I tend to repeat myself, but I'm very proud of the development in Asia. You can first see it's 30% almost our business, which is really, really good because it's the biggest compressor market, it's the biggest vacuum market, it's the biggest after market in the world, so you need to have a strong presence there. Now a little bit with the tailwind from SEMI, of course, helps us to get good numbers, but that is a really strong number for us.
We're pleased about that, you can also see the others, the light blue one is the three months. You can see it's a strong growth in principally everywhere. What we have seen internally when we discussed this, is that in the beginning of the year, we had a little bit more activity in South America, I can now confirm you can see it for the year date, but also the ending of the year, that Brazil have been very solid for us over a number of months now, and that looks fairly positive. That is also Chile as part of that being a strong contributor, that's mainly in mining of course. That looks kind of promising. Middle East, you might say that with the oil prices coming back up a little again, that we could see a lot of activity.
We see a little bit more activity, it's not yet significant. This is the organic growth with volume and price. You can see now that we have six quarters with strong growth, and I mentioned it earlier, the last two quarters then in principally to go up against two good quarters last year. We thought that was really good in Q3, Q4, but of course, we are proud then to have this finish of 2017. You can also see that the Q1 last year then was really strong, and it was an outstanding orders received, especially from the Vacuum Technique business area. This is the sales pitch. We break it down for you how this looks like. If you look at the structural change, we have had Leybold in the main part of the year, but Leybold is now out, so that's now organic growth.
You can see currency, we have actually quite a lot of headwind with currency, mainly dependent on the U.S. dollar, and it's been negative for four of our business areas the last quarter, but this quarter it actually also have negative for Vacuum Technique. In principle, all our business areas have that, and also the strength a little bit of the GBP for Vacuum now. Price 1%, so that comes back then to the 14% organic growth. This gives you a little bit of the development of the group and what stands out here is the share of Vacuum. It was quite recent, actually, Vacuum Technique, Industrial Technique and Power Technique was almost similar in size, and now you can see that Vacuum really stepped up and being a significant part of our group. Look at that little product in the corner there. A new design for us.
Might not look so clean to you, it might look complicated, but it's actually a lot of standard designs that we knew how to do, that we built into a bigger machine, made it for our customer now easy to service, a big flow machine, and I think it has great potential a little bit for the future. Orders received-wise, you can see the 7%, but you can see the quarters for Can I use this one? Yes. You can see Q1, Q2, Q3, really strong and also strong finish of the year, but what's really pleasing is, of course, to see that the revenue came back up, and we know that we have some bottlenecks in manufacturing. It's getting better, but we are still struggling with some components from some suppliers.
I would say that we have beefed up our competence and our capacity ourselves, and we continue to work on that in Q1, and we believe that in the main part, we will be back on normal lead times during this quarter. Record revenues and record profit, I think operating margin on 23.3%. I think it's an outstanding result from the Compressor Technique business area. By looking at this, you might say, "How long can this go on?" It's a fantastic development now over many quarters, and once again, the record, the 38% growth for this quarter. I think that's brilliant, actually. Operating margin 25.8% versus then 24.4% last year. It was good last year, even better this year, and now there was a little bit of headwind in currency, as I said.
Looking at this industry, the SEMI industry then, we can see that our customers' revenue is growing quite rapidly. I think they launched a couple of quarter reports the other day, and you can see it's doing fairly well. You can see that prices for chips, logic, and memory is also keeping up on a good level, which is good for the industry. Of course, we look a little bit at the utilization in these factories. It's a little bit seasonality in this, but we can also see it's a high utilization of the factories that they have. CapEx investments, it goes a little bit up and down. In September, they said on a 12-month basis, we go up 4.4%, and now we see that the indication is closer to 20%, and I highlight it's not my numbers, it's just the statistics.
It can come and go a little bit. As a whole, it looks promising, it's really performing, and I must say, look at the revenue development there. What a fantastic job they're doing in manufacturing to keep up with customer demand. It's a challenge, don't take me wrong, but I think they do a fantastic job. Does this mean that every quarter is going to be this great? No, it's still a business with big orders, with key accounts, it can still come and go a little bit, but I think the basics for the industry over a long time is very solid. Service is developing in a positive way as well. I talk a lot about SEMI, but also the industrial vacuum is doing fantastically well, and the high vacuum as well.
It's easier for us to penetrate service on the SEMI side, where we have better penetration, but also on the industrial, we start step by step, making sure that we have the coverage to make sure that we can add value to our customers. Industrial Technique 7% up, I think it's good. The car industry, if I start a little bit with the industry this time then, it's been seven years, I think, with approximately 4% growth annually. If you look a little bit at external projection for the industry, we talk about that it might come down to 2%, but it's still growth. Of course, they need to little bit balance where they would put in their CapEx for the future.
I think you can see from a lot of the media, what's going on in this industry, it's about electrification, it's a lot about the hybrid and gas. Our product portfolio is pretty well lined up for changes in material. You have the SCA, which is the adhesive, which can work with mixed material. You have the Henrob, which do the riveting. Of course, if you do a lot of these changes, you will also need tools for the final assembly part. I think we have a good position for the investments to come over the number of years. 23.1% is profit, solid, good number. They had a negative currency on 0.7% there, but still very strong. I wanted also to talk about the little socket tray that we have there.
It looks like a very simple little product, but it's actually something that release a lot of potential for our customers. If you look at the tool, it's a full traceable tool, so you get all the data. It's fully connected, you hook it up, you get all the data, you can service, you can do everything, you have the traceability for all the tightenings. You want the operators to be error-proofed, meaning that they can only do the right thing at the right time. You have the socket tray, and of course, you can only pick up the right socket for the right application. Normally this is fixed by a station, but by making sure now that you actually have the battery socket.
Imagine if you're a plant manager around the plant, you say, "I like to do line balancing," meaning in principle, bump up or take down capacity. You can take your tool and the socket tray there, and you can move it from one station to another station very quickly. In the old times, you actually need to take everything down, to come with a lot of costs. This is a true virtual station. It's really, when you talk about digital and this, something looks as simple as this, release a lot of potential on the customer side. You can also see that they had good invoicing at the end of the year there. Mining, strong order growth, 16%. It's normally, we talk a little bit about if it's a replacement in the mine or if it's adjacent or if it's a greenfield.
We still see very little greenfield investments. It's built on both replacement and also adjacent in the mine where they explore a little bit new then. That's very promising. We think there is still replacement out there for us to come. The industry as such, pricing for some of the key for us, gold, copper, stays up there, which is very promising. You can see the operating margin then on 20.3%. The main part of course this time is of course the equipment part, and you also have a little bit of negative currency there, but 20.3%, it's a good number there as well. I wanted to talk a little bit about the product because I think it's such a cool product. We have a 65-ton truck, loads 65 tons. This is a 45-ton truck.
When we launch it now, it has the Certiq digital on it, which means that you can take out data, you can sit with your customer to look at how much do I utilize this, can I do this in a better way? How many run hours do I have on the engine? You can do a lot of cool stuff to make sure that you increase your productivity. The software in this is also prepared for autonomous drive. We don't offer it as a product, but we could refit it if the customer would like that over time. Really compact and then loads 54 tons, and already now it's a big seller for us. Power Technique, this is the business that is a little bit seasonal for us. Orders, 5%, SEK 14.1, this is where we had the SEK 30 million reduction.
If you would add that back, it goes to 15% versus the SEK 13.9 last year. This little lightweight compressor, that's actually something else. This is making sure that we understand the market. This is actually perfectly designed to fit on Asian trucks. This is kind of. It's compact, easy to service. You can put it on your truck, which is the way they do it over there. That's another little innovation we bring to the market. That's group in total. I think sales been fantastic for us over the years. If you look at the currency, it's getting little bit more heavily over time. I by finish before I hand over to Hans Ola there to say, you can see that we had a real strong Q1 last year. That will be a little bit of a challenge for us.
We will take that challenge. Hans Ola?
Thank you, Mats. Swapped places a little bit. You see the numbers. You have seen them already. You have read them, most of you, I am sure. I will not comment more on the operating profit and revenue level than what has already been said. Between operating profit and profit before tax, there is obviously financial net, and that financial net is slightly more negative this quarter than last year. It is primarily related to FX changes on the financial aspects, not the FX that hurts the operational profit. That explains why the profit before tax increased 6% as operating profit increased 8%. In a similar way, if you move down, you come to the income tax. There you can see that when we have deducted income tax, we suddenly have a flat profit development on the net basis compared to last year.
The reason for that is partly this financial net and partly in tax. What is included in tax? Well, we have an effective tax rate of 28.7% in Q4, and last year we had just above 24. Both of them a little bit out of the norm. We have said, and we have had about 26%, 27% for quite some time, the last two years as a run rate. It was positive deviations to a certain extent last year, and we had some negative in this year. We have commented in the report that in these 28.7% effective tax rate in Q4 this year is included the taxes that we have paid for the restructuring of splitting the company in two, because that has been done already in 2007 as an internal restructuring. That is negative.
On the other hand, we had some one-off positive adjustments in Belgium, which compensated to a certain extent that. If I exclude those two, we would again have about 26% tax rate. Looking forward into 2018, we now know that there are changes in the U.S., as you have heard about. There is a new tax reform in the U.S. There are certain other changes that we know about. Belgium is one, and in a couple of other places. The best judgment we can have right now is that for the full year 2018, we are talking somewhere in the region of 25%-26% effective tax rate. We can also talk about the impact of the currencies.
Mats already mentioned that you saw that there is a SEK 500 million negative, or in the report you saw that there is a SEK 500 million negative impact compared to Q4 last year of about SEK 500. If knowing today that we have one of the worst currency basket situations that we have had in many years in Atlas Copco means that if we weight everything together, we are at almost equivalent basket levels than we were in 2009. You remember what happened in 2009 when there was havoc in the financial market. What I am trying to say is that we are not really producing the record results with the help of currency. It has been weighing quite negatively. If I look at the U.S. dollar today, it is even worse than it was in Q4.
We expect that when we come in April and talk about the first quarter, we will probably have somewhere of about SEK 600 million in negative comparison with Q1 2017. It is not getting better before it gets worse, so to speak. That is a little bit on that. Here you can see what I talked about. We tried to separate what is volume price, mix, and other types of efficiency improvements, what has that contributed, what has contributed from currency changes on revenue and profit, and so on and so forth. We have a couple of negative one-time items that Mats talked about. Here you can see the bridge.
If we look a little bit by business area and you focus on the second column from the left, this is what we would like to focus on and say, what is the real operational improvement or worsening that has happened in the quarter if we separate out currency and one time, et cetera. You see very important positive contribution in CT and in Vacuum Technique, Compressor Technique and Vacuum Technique. Short comment on Compressor Technique that actually last year was not the strongest comparison. There, the improvement in profit in relation to revenue is very strong, but it more relates to how Q4 last year was. In Vacuum Technique, you can see that it is a very hefty profit improvement from revenue growth as well. Here it is really related to this fantastic achievement to produce so much higher output with relatively less investments during the year.
You can also appreciate that currency has been extremely negative on profit compared to revenue for Vacuum Technique. Industrial Technique, more or less normal, I would say, and the same goes for Mining and Rock Excavation and Power Technique. You can see there how the different components come together. I move over to the balance sheet, and I do not want to spend too much time. I just highlight that from last year same time, you can see that the cash holdings have increased by SEK 13 billion in spite of the growth of the business that we have seen, which of course then is reflected in a very strong cash flow. For the year, we reached a record operating cash flow, which is at the second line from the bottom, where we eliminate everything that we do not consider true operational cash flow.
Acquisitions is obvious, dividends is obvious that we don't consider operational. There are also certain other things that we adjust for. For the quarter, we did not reach the record high level last year, but it is basically to be found in the timing of taxes paid, et cetera. These are the numbers. SEK 5.5 billion in the quarter is the strongest one of the quarters in 2017. End of it all, what is the bottom line? This is what the earnings per share look like from 2007 to 2017. You can see that the last column includes a SEK 7 per share proposal by the board of directors to the AGM.
You can also appreciate the board's and the owner's intention to keep a very steady, perhaps someone would call it slow compared to other numbers, but steady improvement and increase of the annual dividend. Occasionally, as you can see from the history, there has been a need to do an extra capital distribution, and that's exactly what the board has proposed for this time, SEK 8 per share. Behind these proposals lies, of course, a couple of things that we have explained before. There is a strong belief that Atlas Copco should have strong financial numbers in order to be able to carry out all the growth investments, whether it's organic or acquisitions, that fits our strategy.
If indeed cash generation continues to be as strong, which we don't hesitate it will be, the board don't have any problems with adjusting like we do with the mandatory redemption, and that's why the proposal is like that. Before I hand it back to final words from Mats, on the split where Epiroc shares will be dividended out according to the proposal to the AGM, you can see where we are today. If we go a little bit further on, you also see that we will enter the period where we are audited by the Nasdaq stock exchange, and they will look at Epiroc and see whether they are really fit to be a separate listed company. That process has actually just started or is starting in a few days.
In the middle or around the 20th of March, there will be a notice to the Atlas Copco AGM where information about the new company, balance sheet, dividend policy, capital structure, et cetera, will be explained and informed about. We have the AGM, and finally, we are targeting. It's a bit of a span in this graph, but we are targeting somewhere in the middle to the late June to be the first listing of Epiroc, following, of course, a positive AGM decision and a positive decision by the listing committee of Nasdaq. We hope for that, of course. I could also here already say that as this is now the plan, it also means that when you receive the first quarter report in April for Atlas Copco, you will have Atlas Copco continuing operations, and then you will have Epiroc as discontinued operations.
Just so that you are prepared that the numbers will not be comparable to Q4 if you don't look very closely. With that, I think I hand it back to you, Mats, for the final slide.
This is the near-term outlook for the group including mining Epiroc as well. How we do this is in principle that when we meet in my management meeting, we check a little bit the activity level at customers, we check a little bit external data, what is to come, and we have no real reason to increase and say we have operated on a very high level in 2017. We believe that there's still a high activity level among our customers. We have maintained this stand on the overall demand for the group effects remain at current high level, which we think is a very good level for the group. The unpredictability in quarter one, I would say that it's a little bit on the Chinese New Year that seems to be expanded a little bit year from year.
Of course, being so strong in Asia, it has an impact on our number. On the other side, it happens every year or so.
Great. Thank you, Mats. That brings us to the Q&A session. I repeat again that I would be very glad if we could keep it to one question per person, and then we try to circle back as quickly as we can if you have more questions. With that, we will alternate between Nacka and the telephone conference. I suggest we start with the telephone conference, and I look for someone to help us out here. You do? Perfect. That's already prepared. Thank you. We still start, if I can then ask the telephone operator to repeat the instructions for the Q&A session, please.
Thank you. Ladies and gentlemen, if you wish to ask an audio question, please press 01 on your telephone keypad now.
Is there an operator on the telephone conference listening?
Our first question comes from the line of Klas Bergelind from Citi.
I think I will quickly adjust to the new situation and take the first question here in Nacka.
Yes.
Is there anyone already lined up for a question here?
Yes, sir.
We have seven in line, so perhaps they don't need any introduction, so then we can just let the first person on the call.
Yeah. Hi, Mats and Hans Ola. It's Klas from Citi. Can you hear me? Hello?
We have a problem. I imagine that. We need to hear them as well.
Hello, we have Klas Bergelind from Citi on the line. Can the speakers in the room hear him?
Yes. Hi, Mats and Hans Ola.
We'll take a few that we expect to come.
Okay. Hans Ola, it's Klas from Citi. Can you hear me?
Please hold while we reconnect to the speakers.
I repeat again, if there is someone in the audience here that really would like, we have one question here while you try to connect technically. It's good if you can present name and then
Yeah. Hi, Mats and Hans Ola. It's Klas from Citi. Can you hear me? No, I can't hear anything. Have I dropped off?
Specific article number or send [inaudible] you actually have a 2% improvement over the year there. That is improvements in price even if you don't see it in the bridge.
The effect of what Mats said, which is quite right, the new product, why would you find it in the bridge in the volume? You can debate that, but that is very difficult with such a massive exercise to trace all the different individual deals. This is what we have come to do, but it can give an impression that no one spends time on price. We do spend a lot of time on price when it comes to introducing new products at the right price.
Another question is, now that the mining business is divested or taken apart.
Spinned off.
Yeah.
Yeah.
You dividend a lot of the profit. What are the chances that you can find something adjacent to the remaining business? I don't expect you to find a vacuum business-
Yeah
tomorrow, how do you see upon the opportunities to find adding businesses?
For the Atlas Copco part and the Epiroc part?
For the Atlas Copco.
What we do with a little bit what we believe is a strong DNA and what we can be successful at, one of the things is that we really take a look at, is there a possibility to have a technology lead and be position 1 and 2 in the world? As we said, this is important for us. We also look a little bit, is it important to the customer? Is it important part of his process? To make sure that we bring some real tangible value to the customer. That's another criteria we think it's really important. We also like to come back to the customer and help them with service to make sure that they have got lot of uptime on our product. Being an important product, the service content is also important. We look first for the core of what we do.
Can we do something somewhere else, just another compressor company in the geographical area? We also look at service opportunities, we also look at different and new technologies. One example is in Industrial Technique where we said, well, principally it was grinding and tightening at the time, today we also do adhesives, and we do riveting as well. There are other assembly technologies that we could evaluate as well. That is a little bit the way we go and look at this. We have then 27 divisions, including Epiroc today, they present a strategy of what they like to do. We say, does it fit the way we can add value? Is it a good stand-alone attractiveness in this segment?
We start looking at candidates then, that always goes back to the board, we look at them one by one. We make sure that it is something where we can create real value for our shareholders.
I understand your question. You asked specific about Atlas Copco, I certainly hope that there are many shareholders that also will have two shares going forward rather than just the Atlas Copco share. We don't see it as a selling, as you say. It's really splitting, both of them should be able to carry out these type of strategies that Mats-
I think in Mining and Epiroc, that we showed a little bit of direction that we think there is extra potential in service. We having three, four smaller acquisitions now that adds a little bit to coverage and also the product portfolio for service.
I think now that the telephone line seems to be working, perhaps we go to that now.
Okay. Once again, Klas Bergelind from Citi, your line is open to ask a question.
Yes. Hi, Mats and Hans it's Klas from Citi. Can you hear me now?
Yeah.
Very good. The first one is on demand on the industrial side. Last quarter it was broad-based strength versus expectations in the market, compressor orders beat expectations, so did mining and vacuum. This time it's vacuum that stands out, industrial and mining, less so. I'm trying to gauge what happened, particularly on the industrial side as we went through the quarter, if we leave MVI out for a moment. Am I right to assume that North America accelerated through the quarter, but the picture was a bit more mixed in Europe and in China? The reason for asking is that you write in the report that order intake increased in most regions in industrial compressors versus all regions last quarter. Where did you see the strength versus weakness?
You had that on top of your mind.
Yeah. Well, first of all, I see where the question comes from because, of course, you find words, sometimes I can assure you after many years, you struggle to find exactly the right words, and sometimes they get interpreted more than what you would expect, probably. I think one reflection when you looked at all the business areas growth numbers in Q4, and you see what you point out, that it was double-digit organic growth in all business areas in Q3, and that is not exactly what you see in Q4. It's also important to look a little bit longer than that. If you then bring up the Q2 report, you see that it was not as strong in the industrial space growth at the time either, in spite of having easier comps in Q2.
I don't think that our discussions internally have not led to any change of pace as the main theme. That at least is our take on the numbers, so to speak.
For Compressor Technique, we especially noticed North America. There we can really see how both in Atlas Copco, but also in the Quincy brand, how new products and a little bit of tailwind from the market has really got good traction during the quarter. Hopefully that tailwind continues a little bit. The drive here is a lot about new products.
The reason for asking is that in China, we're hearing a little bit of a sort of mixed picture towards the quarter end on the industrial side. Obviously, the 21% growth that you report in Asia, that could be largely linked to VT, I would assume. Is it right that China in industrial compressors slowed as we went through the quarter in China?
That's not what we see.
Okay.
Again, when you see reports, there is always two things. It's what happened in the comparison period, and it's what happening right now as we speak. Your interest is, of course, the latter. I understand that. Do you see a new trend? The short answer, no, we can't see that in China.
Okay.
I think China's been fairly strong for us-
Yeah
in all business areas-
Yeah
with good business. Looking forward a little bit, now we know this is the strongest auto market in the world with strong growth numbers. I think the expectation for the coming years is a little bit of more modest numbers, around 2% growth. We see, though, although a lot of activities around electric vehicles, battery production, it seems a lot of money goes into this, and hopefully it is then to correct a little bit the environmental issues they have in some cities.
Thank you.
Good. Next question on the line, please.
Thank you. Our next question comes from the line of Graham Phillips from Jefferies. Please go ahead, Graham. Your line is open.
Thank you very much. My question is around Vacuum Technique. Could you talk a little bit about the FX situation there? Because it appears that the FX outflow and operating profit was even greater than the revenue. What are the more important currencies here we should be thinking of? What would sort of the guidance be given where we are today? And also, again, just on the incremental margin, the sort of 56% that has been around last quarter and for very high numbers this year. We can all try and forecast what we think the revenue line's going to be for this business. In thinking about needing to invest, you said that you've been reaping the rewards of not having to invest and just expanding out the capacity utilization of your plants. At what point did that come back down?
You mean the cost implication of investing for Vacuum?
Yeah. That's obviously what's relating to that incremental 56% margin.
If I start, Mats, on that, we commented last quarter, I think as well, that every quarter we have a new set of investments for approval, which means that they understand that they need to increase capacity compared to how the world looks, and that we don't see any change in the strong demand that these mobile phones and all the devices and everything is pushing the SEMI industry primarily. They are, on a continuous basis, putting new capacity in place. It's not that we expect that at a certain quarter next year, you will suddenly see the impact of the cost. It's coming as we speak because there were decisions taken a year ago as well on new investments, and they were taken in the first quarter, second quarter, third quarter, and so on and so forth.
I don't think you should be looking for a drastic step change because of that. The big impact you started with in the quarter, in spite of a fantastic margin, was that it was done in spite of a very negative currency situation. Vacuum Technique has a little bit of a different mix than the rest of Atlas Copco. It is very much affected by the dollar, so the strong dollar is very positive. But in their numbers, it's GBP and KRW and CZK are suddenly a rather big cost currency. It's not so easy to see, but when you consider the swings over this year, you can understand that they were very much helped by the currency in the beginning of the year and last year.
Now they get it in an extra negative when the dollar to the GBP, the dollar to the EUR, and the dollar to the rest is developing negatively, or the dollar is weakening. It's not that we mean that for every koruna they lose on revenue, the currency explains more than 100% on the profit like it looked almost in this quarter. I should have said when I showed that slide, don't take this as an absolute science. We have a basket of 60, 70 currencies, and it's very difficult to come to a specific exact answer on how much the effect has been from one quarter to another. This is our best estimate.
Well, thank you. I guess in the SEK 600 million you indicated for the group, is that including Epiroc? Because that would have made that-
Yeah
It could be at least SEK 500 or SEK 550 just for Vacuum Technique of that SEK 600, no?
You're right. That rough guidance that I gave was for the complete business. That's true.
Okay. Thank you.
I think to add on the Vacuum as well, on the manufacturing footprint, of course, we have operations in Japan, Korea, and also in China then. I would say that the latest investment is mainly in China, where we expand our production. You know we have spoken earlier about that there is an interest to establish China as one of the leading suppliers in SEMI. Actually with the last two quarters now, we have seen a couple of quite significant orders from Chinese manufacturers. It seems like it's coming to fruition and reality now.
Okay. Thank you.
Thank you. Next question, please.
Thank you. The next question comes from the line of Peter Frölund from Handelsbanken. Please go ahead. Your line is open.
Okay. If only one question, I would like to focus on the Epiroc business. In order to get a feel for the mix affecting the profitability here in the deliveries, but also to see a bit what happens ahead. Could you help us with any sort of guidance of the part of sales that is linked to equipment versus consumable service and spares and civil? If not, maybe you could help us to understand how much the actual mix affected the profitability year-on-year in basis points. Please also tie to that, on the large orders, you mentioned a slightly low in the fourth quarter versus the third. Was the fourth quarter the abnormal one, or is the third quarter the abnormal one? Thanks.
I might come and ask you for the last one again to repeat it. If I start with the first, we don't give a breakdown, let's say, exactly what is service and equipment, but in the comments you can read that, take Mining and Rock Excavation, for example. You certainly have an effect, a negative mix effect on the profitability because they have such a big share of service and consumables compared to equipment. Now that we have a return of the equipment sales, investments are coming along again, and we don't have the same high margins on the equipment side as we have on service and consumables. Of course, we are suffering a bit on the Mining and Rock Excavation side. When we look at the other one that has very strong growth numbers, Vacuum Technique, it's not really the same.
They don't have the same big share of service compared to equipment like Mining and Rock. Also importantly, they don't have the same difference in profitability between equipment and service either. That impact is not the main explanation there. Again, I don't want to
Sound as if mix is one of the key explanations of the profit margin from last year to this, but it certainly is noticeable in MR.
I realize that you don't want to give the sales split. I've never done that, it's not that far away from you will release a prospectus on the [appropriate] business, and I sincerely hope that we will get some more insight to the different revenue streams at that point at least. On the order side, you mentioned that large order was slightly less in Q4 versus Q3. Would you see that the new equipment orders were unusually large in Q3? Or were they unusually low in Q4?
Again, it's trying to dissect the wording, et cetera, it was purely less. I don't want to make a judgment whether there could have been large orders that has come early in Q3 or indeed comes later in Q1. There was a clear difference between Q3 and Q4. That's the only thing I can say.
Okay. I get back in line. Thank you.
Thank you.
Thank you. Our next question comes from the line of Lars Brorson from Barclays. Please go ahead, Lars, your line is open.
Hi, thanks. Hi, Mats, Hans Ola. I would be interested to understand, Mats, what's embedded divisionally in your demand outlook into Q1. Would you say in broad terms that all divisions are flat, or is there an expectation from your side that perhaps your industrial divisions might accelerate and offset a further deceleration or decline in mining?
No, I think what we have seen in Q4, well represents that activity level going forward as well. We don't see a big deviation in terms of activity, between Q4 and Q1. I think that what you have seen in Q4, will continue in terms of activity levels. We don't see it shifting dramatically one way or the other. Of course, the comparison, the comps will be different going into Q1. What was outstanding last year was, of course, the vacuum orders received in Q1, that we could not repeat in Q2. Otherwise, I don't see a big shift.
Just on the mining side, because for me, the sequential drop you see about 5% versus Q3. I know we're still running at relatively high levels, from the year prior. Do you think we continue in mining to decline sequentially through 2018 as should we say the replacement cycle starts to fade, particularly on the rig side? I presume there's more to go on the load and haul, which I think you alluded to, until we start to see a more material pickup in greenfield and brownfield, which I think looks more like a 2019, 2020 driver.
I think for mining, we see still replacement. We still think there is potential for replacement, going forward. We also see a significant part being where they actually explore a little bit other opportunity in the same mine. I have keep repeating myself and saying that the greenfields, no, there's not much business at this point in those areas. I think it's fair then to look at mining maybe over the cycle of Q4 and Q1, and then you can draw some conclusion about trends as well.
Sorry, just a final follow-up. Would you mind just repeating what you said earlier, I think to the first question in the room on pricing, because the telephone conference cut out. I was interested to understand your pricing trends, particularly in CT and in mining. I had expected a little bit stronger pricing. I think you mentioned pricing partly reflecting some product introductions. Could you repeat what you said there, please?
I'm not sure, I will try. What I said, in the bridge, you could see a 1% improvement. We don't break it down. What you see in that bridge is actually just the same products one year to the next year. In that bridge, you actually don't get any of the new products that we have introduced. You don't either get, if you have sold it as a project, which is quite normally in the car industry, in the mining industry. That is kind of a missing link in that bridge. What I said was that the operating gross profit, we can see improvements, which is price, built on that we add more value in innovation and new products. That's a little bit the way I answered.
Understood. Thanks.
Thank you. I'm looking here in Nacka, but no hand in the air. We continue with the telephone conference questions.
Thank you. The next question comes from the line of Sebastien Griter from Redburn. Please go ahead, your line is open.
Hi. Good afternoon. Thanks for taking my question. Just one question on MR pricing. If we look at your U.S. competitor, they have put a mid-single-digit price increase or reported mid-single-digit price increase in the last two quarters. If we look at pre-crisis, pre-downturn, there was not such a gap between MR and the U.S. competitor. How do you explain this 0% price, more or less, around 0% you reported over the last few quarters? Is it driven by competitive dynamics? Is it self-inflicted? Can you give us some color on the price environment for MR? Thank you.
I think I would repeat what Mats talked about generally also for them, of course, that the impact of the strong pipeline of new products is not reflected in the pricing number that we see. I think last time we had this conference in October, we talked about that perhaps we're doing you a disfavor by separating it out. We should rather talk about organic contribution and so on, because it's certainly difficult also for us to know exactly what is the mix impact and what is the true price. Again, we can only repeat that on like-for-like offering, we have not achieved more than very marginal, i.e., rounded to 0% effects on it. Of course, there is a competitive. What comes back from the market is that the competitive situation on consumables, et cetera, is very strong.
That is, of course, impacting since that different from equipment would be theoretically one area where you could say that there should be some kind of a normal type of price increase coming from. There, certainly, we get evidence from the business that there is a very strong competitive situation out there, specifically in Asia. In order to go further and then start to compare with a certain competitor and so on, I think we refrain from that, and then we don't have intelligent information enough to say that, "Yes, we understand that Sandvik is doing a better job or whatever." That, I'm sorry, we can't comment it on like that.
I was just thinking, with 0%, given the wage inflation you face in your service and the cost inflation we see from raw material, the net pricing must be negative for MR today, and where is on the margin?
Again, that is the conclusion. You can draw that conclusion, but what we look at is how is the cost development, input values, as you say, but we also look at what type of efficiencies can we achieve. Hence, that combined with whatever price is there, it gives us the unadjusted gross profit margin as Mats alluded to. There we don't see these negative trends. That's the way we look at it.
Okay, thank you.
Thank you.
Thank you. The next question comes from the line of Andrew Wilson from JP Morgan. Please go ahead, Andrew. Your line is open.
Hi, everybody. Just a quick actually follow-up on pricing, specifically in Vacuum. I thought the positive pricing there was a good development given that it's just kind of been up and down over the last couple of years. Can you just talk about whether this is a function of just the very good volumes in the market, or whether you think this is something sort of sustainable that the customers are, I guess, prepared to pay for the kind of a higher value product range?
It was a little bit difficult. I didn't catch exactly the edge of your question, to be honest. Can you?
Also the operating margin or? That was also the question.
maybe if I try again. Just on the Vacuum pricing being positive, I was just trying to understand whether that was just a function of the volumes being as strong as they are, or whether you think it's sustainable in terms of customers being prepared to pay the higher prices for the quality of products. I think previously you've talked about some pricing pressure in some of the markets in Vacuum.
again, of course, we are referring to whether it's a rounded 0% or whether it's a rounded 1%. We shouldn't overestimate that there is a big difference in how Vacuum has coped on pricing compared to others. Of course, it can differ from one quarter to another and between business areas in this respect. That might be not answering your questions at all, but what we know when it comes to Vacuum is, of course, that there is a very strong expectation from big customers that we should be able to reduce prices, because that's what happens when we buy their equipment, mobile phones, et cetera, over time, the same product have a decrease in price, and they expect that from us. There we are even more anxious to deliver new, better products, really value-selling products, high-end value-selling products.
It goes against your question, perhaps, but that if anywhere it's true, it's also in Vacuum.
I think the only way really to work on pricing there, they would not accept the price increase on a standard product that is a couple of generation old, not even inflation. You constantly need to challenge and improve the processes. What our teams are excellent at is actually not only to understand our product, but at the customer process, and in many times that's kind of a confidential process, but we need to work very close to customers to bring new technologies all the time. This also comes back to the service schedules we do, depending on the process that they have. They have actually done a fantastic job to increase the value for our customers, which you also see in the bottom line.
That's very clear. Thank you.
Thank you.
I think we're starting to come to the end. We take two more questions, please.
Thank you. Our next question comes from the line of Andreas Koski from Nordea. Please go ahead. Your line is open.
Thank you. Can you hear me? Yeah?
Yeah.
Perfect. I have a question on Mining and Rock Excavation and mining equipment in particular. I think we can split the equipment exposure into 3 categories. It's replacement demand, it's demand for mine extension, and then we have greenfield demand. As you said earlier, we don't see any greenfield activity, really. The equipment demand is currently split between replacement and expansion. Firstly, if you can give us a sense of the split between the two, then also in 2017, we have seen a very strong increase in demand for replacement equipment. Now when the replacement cycle is probably coming to an end soon, do you think there is a risk that replacement demand could come down year-over-year in 2018? Should we expect that to be offset by stronger demand for expansion and potentially also greenfield? Thank you.
I think on the replacement versus the adjacent, if you call it that, I think they're both contributing in still a very good way. I don't think we have exactly disclosed the split, and we don't follow it 100% either, but they both contribute. What we made a statement was that we do not think that the replacement cycle has come to an end at this point. We still see a lot of activities around that as well.
May I just, maybe to clarify, replacement versus extension, would you guess it's 50/50 or? Not in terms of contribution, but in terms of equipment deliveries.
Yeah, not only don't we disclose it's also that we don't follow it in a statistical manner, if you see what I mean. There is an activity you could say that, or don't you know your business? Well, we think we do, but to consolidate everything and grade what is a true replacement and what is a mix of a replacement order and an adjacent extension, and in certain cases, even a greenfield, it's not something that we spend a lot of time on digging into. We follow the business from a growth, from a profitability point of view, and we try to understand. Each of the salesmen, each of the business line managers, I'm sure have a good understanding of his territory in this respect.
It's not something that we do a lot of exercise of consolidating into a number, because we don't think it's the most important thing to drive the profitability and growth going forward. That's why we are vague. That's why we can't give you a straight answer, Andreas. That's the reason.
Yeah, I understand. Maybe if I just ask, do you think replacement demand will be as high in 2018 as in 2017?
I don't really have a comment on that. We just come back. We don't see, we don't hear that the replacement cycle is over. That's not what we get.
Okay. Thank you very much and have a good weekend.
Thank you.
Thank you.
I think we have the last question. Sorry to interrupt you, we need to go further with the program. The last question from the telephone conference, please.
Thank you. Our last question comes from the line of Adam Samberg from Carnegie. Please go ahead, Adam. Your line is open. Adam has just dropped out of the queue, our next question comes from Anders Roslund from Pareto Securities.
My question has been answered.
Great. Thank you, Anders. With that I thank everybody. There might be some further questions popping up, we have our excellent industrial relations team here in Nacka, of course, ready to answer any questions after this call. For now, thank you very much and have a nice weekend, and I look forward to talk to you and see you in April for the first quarter report. Thank you.
Thank you.