Afternoon, good morning, good evening, depending on where you are participating in this press and analyst conference call on our interim report for the Q4 and the full year of 2017 for Atlas Copco. We are here in Naka, and that allows us to have some Q and A sessions physically here in the room after the first presentations. But I also, of course, as normal, invite the people attending on the telephone conference to participate in the Q and 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.
It means that myself, Hans Ola Neger, I'm the CFO of Atlas Copco Group And Mats Strahanstrom, our CEO of the group, will start and give some comments on the quarterly report, and then we will open up for questions. And we estimate that we will be about 1 hour for the 2 sessions. So without anything more to say right now, Mads, I hand over to you.
Thank you, Hans Ursula. And 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 tonne truck from Atlas Cocoa Mining or Epiroc as we say as well then. But 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. And I wanted to show you a little bit how we bring that to our customers in a real and tangible way. What we'd like to show is intrinsically what we can do today. So everything that you see in the video is actually something that we can provide to the customers, so products that actually have competence that we have. And this truck has now been on the route for 18 weeks.
They have done 70 events. And it generates a lot of interest. I think they told me the other day that they have ordered the 600 different leads from customers. So 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 we came back a little bit of revenues at the end of the year, catching up a little bit on the orders received. We say that there are high profit levels, but you also noticed 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 be a record profit level for us.
Also very pleased to see that we continue with a very broad growth. We have all the business areas doing really well even though vacuum technique and mining stands out above the rest. But I also think the other is worth mentioning as really good results. If you look at the different regions around the world, we continue to have double digit growth with the exception of Africa, Middle East, where we had 8. And I think also that's the really strength of the group to be present in all these areas.
Cash flow, dollars 5,500,000,000 which is really, really strong for us. If we compare it to last year, you can see that there are some difference in the tax we paid, especially then for that split. The Power Technique business area, have been working with the route construction divestments, and I think they have done a fantastic job. But I'm also glad at the same time to sign now, they can really start focusing on the products that they have in the product portfolio. The split project, Hansukule is actually very much a lead in this together with Hakan, Oswald.
It's on plan. We have done the legal splits globally. Now we are preparing for the carve out. Par, 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 Copodan until the test kit. This confirms the same thing as I just said, but in numbers then, 14% organic growth, and we were actually up against quite a strong quarter last year as well. So 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, we have the adjusted here on 21.5%, and you can see what I mentioned earlier than on the minus 4.7% from comparability.
That's really strong as well. And of course, that moves down also to the net profit and the earnings per share. We don't add that back. And then if you take a look at the year, I think if you take the profit and loss in principally, you have records on all levels. And I think that's a fantastic achievement for the group.
Record order, record revenues, record profit, I think that's really, really good. Internally, they 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 as well. So you can see that coming down as well. It's actually good for all the different business areas.
I mentioned the growth rate in the double digit, which is done for the year as well. Vacuum stands out, mining stands out, but they also have a little bit of tailwind. And I think the other business, I guess, is worth the recognition as well. I think they've done a tremendous job. We have done a number of acquisitions.
Like Atlas Cockadoo, we do a number of them, a little bit smaller from time to time. We integrate them. We make sure that we create value out of the things that we bring. Then I think the question that's been asked most during the year, what are you going to do with the cash? And then do you have the Board then proposed the distribution of SEK 18,200,000,000 that consists 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 Ulla 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 all these good numbers that come in.
But I can promise you that's been a lot of hard work in the teams to accomplish this, handling deliveries. So 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. And you can see basic earnings per share, it's up approximately 22%.
You can first see it's 30% almost of our business, which is really, really good because it's the biggest compressor market. It's the biggest vacuum market. It's the biggest auto market in the world. So you need to have a strong presence there. Now a little bit with the tailwind.
Transsemi, of course, helps us to get good numbers, but that is a really strong number for us. We're pleased about that. But you can also see the others. The light blue one is the 3 months. So 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 sales, we had a little bit more activity in South America. But I can now confirm, you can see 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 is part of that being a strong contributor. That's mainly in mining, of course. So that looks kind of promising.
Middle East, you might say that with oil prices coming back up a little bit again, that it will see a lot of activity. You see a little bit more activity, but it's not yet significant. This is the organic growth with volume and price. You can see now that it has 6 quarters with strong growth. And I mentioned it earlier, the last two quarters standing principally to go up against 2 good quarters last year.
So we thought that was really good in Q3, Q4. But of course, we are proud then to have this finish of 20 17. But you can also see that the Q1 last year then was really, 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 label in the main part of the year, but label 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 4 of our business area the last quarter, but this quarter that we also have negative for vacuum techniques. So in principally all our business area has that and also the strength in a little bit of the pound for vacuum. 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 not quite recently actually vacuum 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 bigger machine, made it for our customer now easy to service a big flu machine, and I think it has great potential a little bit for the future. Orders proceed 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 a strong finish of the year. But what's really pleasing if, of course, to see that the revenue came back up. And we know that we have some bottlenecks in the manufacturing. It's getting better, but we are still struggling with some components from sub 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've seen 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?
I mean it's a fantastic development now in many quarters. And once again, they record 38% growth for this quarter. I think that's brilliant actually. Operating margin, 25.8 percent versus 24.4 percent last year. It was good last year, even better this year.
And now there was a little bit of headwind in Clarington, 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 ships, 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 the 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 indication is closer to 20%. And I'll highlight it's not my numbers, it's just the statistics.
So it can come and go a little bit. So as a whole, it looks promising. It's really performing. And I must say, look at the revenue development, 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. We 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 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. So it's 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 with the industry this time then, I mean it's been 7 years, I think, with approximately 4% growth annually. If you look a little bit at external projection for the industry, you 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.
And I think you can see from a lot of the media what's going on in this industry, it's about the electrification, it's a lot about the hybrid and gas. And our product portfolio is pretty well lined up for changes in material. You have the FCA, which is the adhesive, which can work with mixed material. You have the handrail, which do the riveting. And of course, if you do a lot of these changes, you will also need tools for the final assembly part.
So I think we have a good position for the investments to come over the number of years. 23.1 percent is profit, solid good number. They had a negative currency on 0.7%, but
dollars That's
still very strong. I wanted also to talk about the little socket trade 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. 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 traceability for all the tightening. But then you want operators to be error proofed, meaning that you can only do the right thing at the right time. Then you have the socket tray. And of course, you can only pick up the right socket for the right application. And normally this is fixed by a station.
But by making sure now that you actually have the battery socket. So imagine if you're a plant manager around the plant, and you say you like to do line balance and meaning you principally bump up or take down capacity. So then you can take your tool and the socket tray there, You can move it from one station to another station very quickly in the old time sector need to take everything down to come with a lot of costs. And this is a true virtual station. So it's really when you talk about digital and this, something that looks as simple as this, it leaves a lot of potential on the customer side.
You can also see that they have good invoicing at the end of the year. 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, it still see very little greenfield investments. It's mainly it's built on both replacements and also adjacent in the mine where they explore a little bit new then. So that's very promising.
We think there is still replacement out there for us to come. The industry as such, I mean 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 percent. So the main part, of course, this time is, of course, the equipment part. And we also had a little bit of negative currency there, but 20.3 percent is 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, glued 65 ton. This is a 45 ton truck. And when we launch it now, it has the Certik 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. But it's also the software in this is also prepared for autonomous drive. We don't offer it as a product, but we could refit it with the customer load like that over time.
Really compact and then lose 54 ton. And already now it's a big seller for us. Power Technique, this is the business that is a little seasonal for us. Orders, 5%, 14.5%. This is where we have the €30,000,000 restructuring.
So if you would add that back, it includes the 15% versus then the SEK 13,900,000 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 the it's compact, easy to service.
You can put it on your truck, which is the way they do it with the wheeler. That's another little innovation we bring to the market. So that's group in total. I think sales been fantastic for us over the years. If you look at the currency, it's getting a little bit more headwind over time.
And I will finish before I hand over to Hans Ulleva to say then 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 Ulla?
Thank you, Mats. Swap places a little bit. Yes, you see the numbers. You have seen them already. You have read them, most of you, I'm sure.
So 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's obviously financial net. And that financial net is slightly more negative this quarter than last year. It's primarily related to FX changes on the financial aspects, not the FX that hurts the operational profit. And 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. And 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. And the reason for that is partly this financial net and partly in tax. So what is included in tax? Well, we have an efficient tax rate of 28.7 percent 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 as the last 2 years as a run rate. So 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 2, because that has been done already in 2007 as an internal restructuring. So 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 2, we would again have about 26% tax rate. And 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 1 and in a couple of other places. So the best judgment we can have right now is that for the full year 2018, we're talking somewhere in the region of 25% to 26% effective tax rate. We can only also talk about the impact of the currencies.
Mats already mentioned that you saw that there is a $500,000,000 negative or in the report you saw that there is a $500,000,000 negative impact compared to Q4 last year of about $500,000,000 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 2,009. And then you remember what happened in 2,009 when there was havoc in the financial markets. What I'm trying to say is that we are not really producing the record results with the help of currency. On the other hand, it's been weighing quite negatively. If I look at the dollar today, it's even worse than it was in Q4.
So we expect that when we come in April and talk about the Q1, we will probably have somewhere of about 600,000,000 in negative comparison with Q1 2017. So it's not getting better before it gets worse, so to speak. So that's a little bit on that. Here you can see what I talked about. We tried to separate what this volume, price, mix and other types of efficiency improvements, what contribute what has that contributed, what has contributed from currency changes on revenue and profit and so on and so forth.
And then we have a couple of negative one time items that Mats talked about. So here you can see the bridge. If we look a little bit by business area and you focus on the 2nd column from the left, this is what we'd 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, etcetera, etcetera. 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.
So 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's 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 techniques. 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'll move over to the balance sheet, and I don't want to spend too much time. I'll just highlight that from last year same time, you can see that the cash holdings have increased by $13,000,000,000 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 don't consider true operational cash flow. So acquisitions is obvious, dividends is obvious that we don't consider operational, but 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, etcetera. So these are the numbers. €5,500,000,000 in the quarter is the strongest one of the quarters in 2017 2017, sorry. Now end of it all, what is the bottom, bottom line? Well, this is what the earnings per share look like from 2,007 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. And 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. And if indeed cash generation continues to be as strong, which we don't hesitate it would be.
They, 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.
And that process has actually just started or is starting in a few days. In the middle or around the 20th March, there will be a notice to the Atlas Copco AGM where information about the new company, balance sheet, dividend policy, capital structure, etcetera, will be explained and informed about. Then 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 1st 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 Q1 report in April for Atlas Copco, you will have Atlas Copco continuing operations and then you will have Epiroc as discontinued operation. So just so that you are prepared that the numbers will not be comparable to Q4, if you don't look very closely. So with that, I think I hand it back to you, Mats, for the final slide.
Yes. This is the near term outlook for the group, including mining Epiroc as well. And how we do this is in principally that the when we're meeting in the mine management meeting, we check a little bit 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.
So we have maintained this stand down. The overall demand for the group effect remain at current high level, which we think is a very good level for the group. The unpredictability in quarter 1, I would say that it's a little bit on the Chinese New Year that seems to be extended a little bit year from year. And of course, being so strong in Asia, it has an impact on our number. But on the other side, it happens every year or so.
Great. Thank you, Mats. So that brings us to the Q and 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. So with that, we will alternate between NACCA and the telephone conference.
So I suggest we start with the telephone conference and I look for someone to help us out here. Yes, you do. Okay, perfect. That's already prepared. Thank you.
So but we still start if I can then ask the telephone operator to repeat the instructions for the Q and A session, please.
Thank you. And our first question comes from the line of Klas Bergelind from Citi. I'll take
the first question here. Natka? Yes. Is there anyone already lined up for a question here? We have 7 in line, so we'll just perhaps they don't need any introduction or so then we can just let the first person on the call.
Yes. Hi, Matsen. I was always glad I'm sitting. Can you hear me?
Hello? We have a problem. Yes, yes. No, I imagine but we need to hear them as well.
Hello. We have Claus Bergeleid from Citi on the line. Can the speakers in the room hear him?
Yes. Hi, Madsen. Hans Ola.
It's a few that we expect to come.
Okay. Hans Holger, it's Glaser and Sitte, can you hear me?
Please hold while we reconnect
And 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. So it's good if you can present name and then
Hi, Mats and also let's go from Sitte. Can you hear me?
Have I dropped off? Specific article number also ends up as you actually have a 2% improvement over the year there. So that is improvements in price even if you don't see it in the bridge.
So the effect of what Mats said, which is quite right, the new product, why would you find it in the bridge in the volume? So you can debate that, but there is very difficult with such a massive exercise to trace all the different individual deals. So this is what we have come to do, but it can give an impression that no one spends time on price. But 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. End of. Yes. You dividend a lot of the profit. What are the chances that you can find something adjacent to the remaining business?
I mean, I don't expect you to find a vacuum business tomorrow. But how do you see upon the opportunities to find adding businesses?
For the Atlas Copler part and the Epiroc part.
For the Atlas Copler.
What we do is a little bit what we believe is a strong DNA and what we can be successful at. One of those things that we really take a look at is there a possibility have the technology lead and be positioned number 1 and number 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 an important part of this process to make sure that we bring some real tangible value to the customer.
So that's another criteria we think it's really important. We also like to come back to the customer and helping with service to make sure that they have got a lot of uptime on their product. Being an important product, the service content is also important. So we look first for the core of what we do. Can we do something somewhere else, just another compressor company in the geographical area?
But then we'll also look at service opportunities, but we also look at different and new technologies. One example is in industrial technique where we said both principally about grinding and tightening at the time. But today, we also do adhesives and we do riveting as well. So there are other assembly technologies that we could evaluate as well. So that is led a little bit the way we go and look at this.
And we have then 27 divisions including Epiroc today and they present a strategy of what they like to do. And we say does it fit the way we can add value? Is it a good standalone attractiveness in this segment? And then we start looking at candidates then, and that always goes back to the Board, and we look at them 1 by 1. And we'll make sure that there's something where we can create real value for our shareholders.
And I understand your question. You asked specifically about Atlas Copco, but I certainly hope that there are many shareholders that also will have 2 shares going forward rather than just the Atlas Copco share. So we don't see it as a selling, as you say. It's really splitting, and then both of them should be able to carry out these type of strategies that much.
And I think in mining and Epirocta, we showed a little bit of direction that we think there is extra potential in service. In having 3, 4 smaller acquisitions now that adds a little bit of coverage and also the product portfolio for service.
I think now that the telephone line seems to be working, so perhaps we go to that now.
Okay. Once again, Klas Bergelind from Citi. Your line is open to ask your question.
Yes. Hi, Mats Sena Soles, Klas from Citi. Can you hear me now? Yes. Very good.
So 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. So where did you see the strength versus weakness?
Yes. Well, first of all, I think that it's 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. But I think one reflection when you look at the all the business areas growth numbers in Q4 And you see what you point out that it was more than it was double digit organic growth in all business areas in Q3, and that is not exactly what you see in Q4. But it's also important to look a little bit longer than that. And 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.
So 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.
I mean, for compressor technique, we especially noticed North America. And there we can really see how both in Atlas Cocoa, 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. And hopefully, that tailwind continues a little bit. But the drive here is a lot about new product.
The reason for asking is that in China, we're hearing a little bit of a sort of mix picture towards the quarter end on the industrial side. And obviously, the 21% growth that you report in Asia, I mean, that could be largely linked to the tea, I would assume. So is it right that China in industrial comparison slowed as it went through the quarter in China?
That's not what we see. But again, when you see reports, there is always 2 things. It's what happened in the comparison period and it's what's happening right now as we speak. And your interest is, of course, the latter. I understand that.
But do you see a new trend? But the short answer, no, we can't see that in China. Okay.
I think China has been fairly strong for us in all business areas with good business. Looking forward a little bit now, we know this is the strongest out market in the world and with strong gross numbers. But I think the expectation for the coming years is a little bit of more modest numbers around 2% growth. And we see though, although a lot of activities around electric vehicles, battery production, I think a lot of money goes into this and hopefully it is then to correct a little bit environmental issues they have in some situation. Thank you.
Good.
Next question on the line, please.
Thank you. Our next question comes from the line of Graeme Phillips from Jefferies. Please go ahead Graeme. Your line is open.
Thank you very much. My question is around VAC team 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's been around last quarter and for very high numbers this year, We can all try and forecast what we think the revenue line is going to be for this business. But 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. But at what point did that come back down?
You mean the cost implication of investing for
that's obviously what's relating to that incremental 56% margin.
If I start, Mats, and then on that, we commented last quarter, I think, as well that every quarter we have a a follow-up 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. So 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 Q1, Q2, Q3 and so on and so forth.
So I don't think you should be looking for a drastic step change in 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 a dollar. So the positive strong dollar is very positive.
But in their numbers, it's pound sterling and Korean won and Czech krona are suddenly a rather big cost currency. So 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. But now they get it in an extra negative when the dollar to the pound sterling, the dollar to the euro and the dollar to the rest is developing negatively or the dollar is weakening. So it's not that we mean that for every krona 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 that 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 on from 1 quarter to another. But this is our best estimate.
Well, thank you. And I guess in the $600,000,000 you indicated for the group, is that including Epiroc, I mean, because that would have made that could be at least 500 or 550 just for vacuum technique of that 600, no?
You're right. That rough guidance that I gave was for the complete business. That's true. 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. And I would say that the latest investments is mainly in China, where we expand our production. We have spoken earlier about that there is an interest to establish China as one of the leading suppliers in semi. And actually, over the last two quarters now, we have seen capital quite significant orders from Okay. Thank you.
Thank you. Next question, please.
Okay. Thank you.
Thank you. Next question please.
Thank you. The next question comes from the line of Peter Frode from Handelsbanken. Please go ahead. Your line is open.
Okay. If I only have one question, I would like to focus on the APPROC business. In order to get the feel for the mix affecting profitability here in the deliveries, but also to see what happens ahead. So could you help us with any sort of guidance of the part of sales that is linked to equipment versus consumables, service and spares and civil? And if not, maybe you could help us to understand how much the actual mix affected the profitability year on year basis points?
And please also tie to that. On the large orders, you mentioned that's slightly low in the 4th quarter versus the 3rd. Was sort of the 4th quarter the abnormal one? Or is the Q3 the abnormal one? Thanks.
Yes. I might come and ask you for the last one, but then to repeat it. If I start with the first, we don't give a breakdown, let's say, exactly what is service and equipment. 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. So 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.
Then, 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. And also importantly, they don't have the same difference in profitability between equipment and service either. So that impact is not the main explanation there.
But 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.
But I realize that you don't want to give the sales split. I've never done that, but it's not that far away from you. We'll release a prospectus on the Epiroc 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 then, 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?
No, we yes, again, it's trying to dissect the wording, etcetera, but 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. But there was a clear difference between Q3 and Q4. That's the only thing I think.
Okay. I'll get back in line. Thank you.
Thank you.
Thank you. And our next question comes from the line of Lars Dawson from Barclays. Please go ahead, Lars. Your line is open.
Hi, thanks. Hi, Mats, Hanzola. 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. So I think that what you have seen in Q4 will continue in terms of activity levels. We don't see shifting dramatically one way or the other. Of course, the comparison, the comps will be different going into Q1.
And what was outstanding last year was, of course, the vacuum orders received in Q1 that we could not repeat in Q2. But otherwise, I don't see a big shift.
And just on the mining side, because for me, there was I mean, the sequential drop you see about 5% versus Q3. I know we're still running at relatively high levels from the year prior. But do you think we continue in mining to decline through to sequentially through 2018? 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 brown field, which I think looks more like a 2019, 2020 driver?
I think for mining, we see steel 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 opportunities in the same mine. But I keep repeating myself and saying that the greenfields, no, there's not much business at this point in those areas. Also, 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 the 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 instructions. Could you repeat what you said there, please?
I'm not sure, but I will try. What I said in the bridge, you could see 1% improvement. We don't break it down. But what you see in that bridge is actually just the same product 1 year to the next year. So in that bridge, you actually don't get any of the new products that we have introduced.
And 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. So that is kind of a missing link in that bridge. And 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 answer it.
Understood. Thanks. Thank you. I'm looking here in but no hand in the air. So we continue with the telephone conference questions.
Thank you. The next question comes from the line of Sebastian Gritte 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, I mean, they have put 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. So 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 infected? Or can you give us some color on the price environment for MR? Thank you.
Yes, 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 this favor 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. But 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.
And of course, there is a competitive. What comes back from the market is that the competitive situation on consumables, etcetera, is very strong. And 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. But there certainly, we get evidence from the business that there a very strong competitive situation out there in specifically in Asia. But in order to go further and then start to compare with a certain competitor and so on, I think we refrain from that.
And 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.
No, no, Ben. I was just thinking, I mean, with 0%, given the wage inflation you face in your service and the cost inflation we see from raw material, I mean, the net pricing must be negative in for MR today and where is on the margin?
Again, I mean, that is the conclusion. What we look at the 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. And hence, that combined with whatever price is there, it gives us the unadjusted gross profit margin as Mats alluded to. And there, we don't see these negative trends. So that's the way we look at it.
Okay. Thank you.
Thank you.
Thank you. And the next question comes from the line of Andrew Wilson from JPMorgan. Please go ahead, Andrew. Your line is open.
Hi, everybody. Just a quick actually follow-up on pricing, specifically in vacuum. Thought the positive pricing there was a good development given that it's kind of been up and down over the last couple of years. Can you just talk about whether this is a function of just
a very good volumes in the Or whether you
think this is something sort of sustainable that the customers are, I guess, prepared to pay for the kind of higher value product, please?
It was a little bit difficult to I didn't catch exactly the edge of your question, to
be honest. Can you What is operating margin, Arren? That was the question.
Yes. Maybe if I try again. Just on the vacuum pricing being positive, I'm 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 pricing, some pricing pressure in some of the markets in vacuum.
Yes. Again, I mean, of course, we are referring to whether it's around at 0% or whether it's around at 1%. We shouldn't overestimate that there is a big difference in how vacuum has coped on pricing compared to others. But of course, it can differ from one quarter to another and between business areas in this respect. But the and 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, etcetera, over time, the same product have a decrease in price and they expect that from us. So there we are even more anxious to deliver new better products, really value selling products, high end value selling products. So it goes against your question perhaps, but that is if anywhere it's true, it's also in vacuum.
So 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. So you constantly need to challenge and improve the processes. And what our teams are excellent at is actually not only to understand our product, but it's a 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. And this also comes back to the service schedules we do depending on the process that they have.
So 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.
We're starting
to come to the
end, yes. But we'll take 2 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, yes? Yes. Perfect. I have a question on Mining and Rock Excavation and mining equipment in particular.
So 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. And as you said earlier, we don't see any greenfield activity really. So the equipment demand is currently split between replacement and extension. So firstly, if you can give us a sense of the split between the 2.
And then also in 2017, we have seen a very strong increase in demand for replacement equipment. And 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? And 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. But we made a statement was that we do not think that the replacement cycle has come to an end at this point, and 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 fifty-fifty or?
Not in terms of contribution, but in terms of equipment deliveries.
Yes. But not only don't we disclose it, it's not 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 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.
And each of the salesmen, each of the business line managers, I'm sure, have a good understanding of his territory in this respect. But 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.
Yes. I understand. But 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'll 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 meeting. Thank you.
Thank you. The last question sorry to interrupt you, but then we need to go further with the program. So the last question from the telephone conference, please.
Thank you. Our last question comes from the line of Adam Sandberg from Carnegie. Please go ahead, Adam. Your line is open. And Adam has just dropped out of the queue.
So our
Great. Thank you, Anders. So with that then, I thank everybody. There might be some further questions popping up, but then we have our excellent Investor Relations team here in Naka, of course, ready to answer any questions after this call. But 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 Q1 report.
Thank you. Thank you.