Good afternoon, good morning, good evening. Depends on where you are participating from, to this third quarter release conference call and presentation of Atlas Copco's third quarter. We will do a very proven concept. We will take 10, 15, sometimes even 20 minutes of comments from Ronnie, our CEO, then we will all concentrate on the questions and answer session. We will take about an hour. Before we kick off with Ronnie, could we just have the operator repeat the procedures for the questions and answer session, please?
Yes. Ladies and gentlemen, if you would like to enter the queue to ask a question, please press zero one on your telephone keypad at any point. If you wish to cancel your question, you can do so by pressing zero two.
Excellent. Thank you very much. Of course, it's allowed to put questions also here in Nacka, in the Atlas Copco mine. With that, Ronnie.
Okay.
Take it away.
Thank you, Hans Ola. Good afternoon, all of you. Let's go immediately, as I'm used to do, straight to the slides. I will go immediately to Q3 in brief. I must say, when looking to the quarter, I'm pleased. I'm pleased with quarter three. Why? Solid order organic growth, solid profit, and last but not least, very good cash flow. That made me, when you got the figures, giving a bit of a smile. We also get, and that's a long time ago, in every business area, we got growth, and that was also a nice experience to get. Another event what happened during Q3 is, we announced that we will have a fifth leg, the Vacuum Technique. It was not a big surprise for most of you following Atlas Copco.
We have a new leader there, Geert Follens, which you will have the possibility to meet when you come to the Capital Markets Day. Of course, beside a couple other acquisitions, we also closed Leybold and CSK completely. In summary, a solid quarter and that is a time when you like to be a CEO to lead an organization like this. When you come to the figures, most of you have already seen it, so I will not spend much time on that. If you look maybe on the operating margin, what you see there, what is the difference between last year and this year, it's the dilution of the acquisition. The Leybold, CSK bring it a bit down, and maybe a bit surprise for you, but still a bit of a negative currency effect, especially in this quarter compared to last year.
The rest, I've already elaborated on that. Sorry that we missed the cash flow. SEK 5 billion would have been nicer, but okay, it's just not SEK 5 billion. The cash flow, the majority of the improvement is also coming from good work on the net working capital. Hans Ola will elaborate a bit more on that. If we look to the geographical part, I will start with North America. You see only a +1%. I think I need to give you a bit insight on that. You see Canada and Mexico were weak, and that comes from mining, where you had a weak, and most of the business is mining there, so it was weak in that area. When you come to U.S., we also had a weak mining and industry. In total, if you take it, was okay. Was definitely positive, that one.
We go to South America. I think it's not a surprise when I say that Brazil was weak. Weak overall. On the other hand, you had Andina region and Chile, which had a solid development, and that is driven again from the mining business. If I go, maybe I take Europe, where we see a +7%. A flat Industrial Technique, which is not a surprise because we are running at a very good level. Construction Technique was a bit mixed, but was positive. A couple businesses which were positive and a couple which were a bit negative. Also a strong East Europe and Russia in that area, where mining was solid, mainly in East Europe, Russia. CT was, in general, it was slightly up.
As you also have been able to read in the write-up, you saw also that the small to medium-size industrial compressors was a bit weaker. One country which was tough, weak, surprise, was U.K. If you go to Asia. A solid China, a solid India. Of course, that means you have a very solid region there. On top of that, held by a strong Korea, which is then semicon driven. Vacuum driven was good. If you go to China, more specific, you see that mining and construction is tougher, where the other businesses are okay. In India, you can more or less say everything was okay. We go to Africa, +22. More or less all businesses doing well with a bit softer construction business. Last but not least, Australia. Of course, the comparison was very easy.
As you remember, last year we had a cancellation, if you then get some orders, you come up to a +42%. That was on the region. The order quarter, I will not elaborate so much on the statistic. The sales bridge, it's very obvious what you see here, a +7% orders received. That's always nice to see, and that should result in more revenue in the period to come. If I go immediately to the business areas, which is slide number 10 here. Solid and even record order intake is a complete business area with a strong organic growth. Solid vacuum solution, even in Asia, strong. On the other hand, a tough situation in Gas and Process.
As I've been saying already several quarters, it continues to be tough, also here we will take more measure as we go into the next quarter to adapt to the new norm in that business area, which we have to do unfortunately, because I don't see immediately a turn up in that segment. Last but not least, a very solid service development. Profitability, given the dilution from acquisition, a very solid profit margin, Leybold and CSK, you have already seen that before. If I take Industrial Technique, also here a good organic growth. It continues to develop. Strong service, strong Asia, more specific China and India, we mean that. It keeps developing over there and we have a good presence and gaining share in that world. Record revenue, that's also good.
The margin, as you can see on the red curve, it is rock solid. We are definitely here predictable and even growing. What you want more? Mining and Rock, maybe for some of you a surprise. Organic growth, of course, don't forget we had a bit of cancellation, as you remember what I said when I was commenting on Australia. On the other hand, there are some replacement orders. I should not deny that part. There were some good equipment orders you have seen. I commented already on Russia, Chile, and a bit here and there, that's good. The service business year-on-year down, but sequential is up. We also know why it's year-on-year, why it's down. It's mainly from some closures which we had in the mines, of mines that closed where we had some service contract.
Preemptive question, do you see more closures? No, I've not seen any more. I've not heard any more. That's maybe also why sequentially we are gradually up. Last but not least, it's also good to see that we have consumables up. I'm very pleased to see the profitability. Remember, the magic 18 is reached, so now I have to think about a new target for them. I'm very pleased that they made that. I think congratulations to the organization that they really worked on that. Of course, that comes from hard work, unfortunately adapting the suit. On the other hand, also a bit better absorption because of a little bit more volume, which helps on that. It's not so much currency, so it's really the hard work and the absorption. Construction, organic growth. If we take that total was +1. Not organic.
The order growth was +1. Organic was slightly down. That was supported by the acquisition. Equipment was up, but what we see is here specialty rental is a bit lower and that comes mainly from the oil and gas business. You see that in the Middle East. You see that in the Texas region, if I can call on that, which were good markets for specialty rental, which is a bit weaker, and that is low. That also is pulling down or makes the operating margin a bit tougher to reach for construction. They can only make it 10.89%. By this, Hans Ola, I'm coming to your territory, because the rest I think I have said, I suggest you take over here.
A few comments on the income statement and balance sheet and cash flow, as we normally do. What you can see here is, of course, the total numbers, but the few comments, perhaps what is buried inside, some of it is written in the report and some I will give you now. We always talk about the FX effect. Compared to last year, we had a negative impact on the operating profit with Q3 last year of SEK 75 million. You are all following what is happening as we speak on the currency side. We have two currencies right now that are oversold. I shouldn't say that because oversold is a judgment, but are very much sold, and that's the Swedish krona and the pound sterling. You have seen that that is positive for us.
We have a strong connection with the strong dollar is good for us, and a weak Swedish krona is not hurting us. I don't know how that will play out, but if we take that as today's situation, it indicates a much more positive bridge with Q4 last year going forward, probably somewhere in the region of SEK 200 million-SEK 300 million positive compared to the slight negative in Q3 over Q3. That is judging what we see today on the currencies, and we don't know if that sticks.
If we move down a little bit from the operating profit, financial net included a little bit of extra cost from buying back an old bond loan that we had in the market, and we used most of those proceeds. Sorry, we used proceeds of a new loan that we managed to get at a very low interest rate, 0.6% roughly, for 10 years fixed. We used those proceeds to pay back the old bond loan. That had a certain one-time cost of about SEK 70 million-SEK 80 million in the quarter. If we then move further down in the. Underlying, you could say that the financial net was really pretty well in line, or the interest net was pretty well in line with last year.
I also expect that going forward, we will see roughly a close to SEK 200 million negative is a good expectation for the interest net. I should say also that we had, of course, in the operating profit, as you have read in the report, we also had a negative from the revaluation of the long-term incentive program or the option plan program that we have, which affected us negatively SEK 166 million in the operating profit already. On the tax side, a 28% tax rate in the quarter, which is roughly where we have expected to be in 2016, and I think that's the level that you should expect also going forward. Of course, you see that it was much lower in 2015. The reason is, of course, the debate in Belgium that Belgium has with the European Union about the deductibility of certain costs in Belgium.
That has an effect of 3%-4% on our tax rate in itself. With that, we can move on to the next page, which is the profit bridge. I don't think it's very dramatic on the group total level. Normal flow-through, if you look in the column which says volume price, mix and other. We lose a little bit of volume on revenue when currency and acquisitions are eliminated. The effect on the profit is pretty normal from that. The currency numbers are pretty small, so don't read too much into a plus on the revenue and a negative on the operating profit. If we then look a little bit more to the different business areas, you can see that we have a very strong result, if you like, or a flow-through on the Compressor Technique business area.
I would say we've also had quarters where it has been a pretty low flow-through, and this oscillates a little bit between one quarter and another. It's also true that particularly in the vacuum business, we've had a good flow-through to profit of the very strong revenue development that we have had lately. Industrial Technique is perhaps the opposite reflection. Not so much profit from the SEK 140 million in extra revenue compared to last year. They are taking some investments into the organization, but it's because they have continuously been having organic growth for quite some time. I don't read too much into that as an indication of a poor development of profit going forward, but it's just a note. Mining and Rock. Not much to say. They are negative on the revenue, and that filters through to the profit.
Construction Technique, they are working with adjustments as we speak on certain things, consolidating certain operations to try to adjust the suit to the lower revenue volume that you have seen coming in the numbers that Ronnie already showed. That looks like a little bit of a big flow-through. That's on the profit side. On the balance sheet, of course, it looks like a hefty increase. In nine months, we've gone from SEK 103 billion to SEK 116 billion. It's roughly the cash generation is about SEK 2 billion of that explanation. Acquisitions have increased assets with about SEK 8 billion and currency, another SEK 3.5 billion. It's really acquisitions and currency that take up the big part. Other things to comment, I don't think. We can see if you have any more questions later on. Moving on to cash flow.
A strong one, as Ronnie said. Not so much stronger than last year, which was already a very good cash flow quarter. You can see that it's the release of working capital that is extra helping this year. Then there are a number of other things that go back and forth, but that is basically the big explanation why we are even higher in cash flow this quarter than last year. Year to date, as you can see, it's almost exactly the same number as last year. With that, we have a joint point.
Should I take it?
You take it.
Okay. November 15th, a big day. You're all welcome. We have our Capital Markets Day. Why do I take it up here? We will be at the center of the universe of Compressor Technique. We will spend time with you in visiting, say, the levels and the plant and then showing you innovation and why is this business area doing so well. Second one, what we also do, we will also lay out the vacuum strategy. Geert Follens with a couple of people will really try to explain you why vacuum is such a good asset to have. If you want to hear it, okay.
Sign up.
Sign up. November the 15th is the place to be. We try to be very efficient there from morning until, what was it, 4:00 P.M. or something?
Yeah.
You will be able to fly out back to London or back to Frankfurt or even back to Stockholm.
Don't wait too long to sign up because we can't host too many people.
You should say the first 100 get a special price.
Yeah. Okay.
Okay, enough on that. Before we go to the questions, here the outlook, why I stay, or we stay on this level. You see, we have this first, this outlook is the marginal outlook is sequential, don't read it wrongly. That's important to know. We see also that vacuum and Industrial Technique today is running at a very solid level, and even went up. Where CT, where I see some possibilities, but on the other hand, you heard me also saying about the Gas and Process on the oil and gas business, where okay, where on one hand I see possibilities but also see some headwind. Of course we have CR and MR of Construction and Mining and Rock, where one hand there is certain positive expectations, but on the other hand, you also heard me saying there is also a bit of headwind.
That made me concluding on this level. Most likely I will get more questions on.
I see
side, Hans Ola.
Yeah.
Let's go to.
Yeah, exactly. I suggest we do like this, that we start with the one or two questions here, and then we move over to the telephone conference after that. Yes. Go ahead, Guillaume.
Thank you very much, Hans. Thank you very much, Ronnie. It's Guillaume Op den Kamp from UBS. I was actually going to ask you about the outlook precisely and maybe some granularity on the Compressor Technique division. Now that you're going to have a fifth leg, so when you talk about vacuum, can you provide us with what kind of growth, the intake you got in the vacuum part of the business versus the traditional compressors? And maybe a follow-up later for Hans Ola.
Yeah. I think when it comes to the vacuum, and of course we will learn together, also to lead and especially now with Leybold and CSK together on that part. It becomes not so easy for you all to read and also for us, it's a new area. What we can say on the vacuum, the same it come that they get high vacuum has gone very well, strong, high level. We also all expect certain cyclicality on that. You know my thinking about it, we'll see. I still don't see dark clouds in that area, so still a reasonable continuation. The other part of the vacuum, the industrial vacuum, if I can call it, is more a lookalike.
If I talk about industrial compressors, small to medium-size industrial, it's more or less I see the same pattern. I'm also learning as you are learning on this. That is what we see where I believe there is some market to take, mainly also market share. That is the mission, what we do. Where I see on the big size, I don't see any light coming. Of course, we get orders, but we don't get happy when we are not growing. There I expect still tough times. Then you have a bit the whole area around oil-free, the medical, which has some point, but we get some positive points and then you get a couple negative points. A slight positive, I summarize my own long explanation.
In the quarter, is it fair to assume that vacuum deliver most of the growth or all of the growth at the end of the week?
Yeah.
The rest was negative?
Yeah. For sure.
Most of the growth.
Mostly the growth, yeah.
The rest was negative, or?
No.
No.
Okay. Thank you. The second question is basically of the SEK 100 million-SEK 200 million assumption on the currency, I wanted just basically to maybe try to narrow it down into how much of it will be actually the British pound. What's the pound impact, so to say? Thank you.
It's nowhere near the dominant factor in our bridges. Even if it collapses yet another level, it will not have that big an impact that the dollar and the euro development has. Let's say the dollar, Swedish krona and the euro. If you get that answered, you explain always the big part of the movement. As I said, our pound exposure is relatively neutral nowadays because we had a positive exposure when we didn't have so much of cost.
Headwinds, yeah.
That we have now, so it's definitely not a big negative nor a big positive for it. EUR, SEK, and the USD is determining the big things for us, and that's why I say SEK 200 million to SEK 300 million for Q4.
Next year you will see it a bit better when we report Vacuum separately.
Yeah.
You will see it in the bridge.
We can comment.
You see it in this flow through bridge.
Thank you so much.
Yes, one other question here.
Anders Sjölund, Swedbank. I'm coming back to your outlook again. Given the very strong order intake that surprised on that side, is that the reason why you are not more bullish on your outlook? You compare with the relatively strong order intake, or how should we interpret it?
Yeah. You read me very well, Anders, that is for sure. Also, although you see a lot of people being optimistic about mining, we should also look in our figures with all the respect, we do good work. We also should see when we make the comparison, we had a cancellation. Yes, sequential it goes a bit up. I will not talk it fully down, but I'm not going to say that we suddenly will get every quarter double-digit growth. I hope I'm wrong. I hate to be wrong, but now I hope to be wrong, but I don't believe it.
That's the reason why. And Vacuum also, like I explained to Guillaume, it's a high value. It's already high. The last quarter, okay, because sometimes people wait a little bit for ordering.
Also in the Industrial Technique area, you saw the general industry was coming up, not only the automotive sector.
You should also know that I think over the last three, four years, we invested, we did a couple spot on acquisitions in aerospace and in the semiconductor, in the phone business or the
Low torque.
Yeah, the low torque. Also in the high torque, that is where we get some traction. We get some share.
In the general business
in the general business. That is what I want to get at the end in the tools business, in Industrial Technique business, of course, broader exposure than only what is 50% on motor vehicles. That is the mission, and yeah, it gets something. Yeah.
Finally, the big compressors versus small and medium size. It used to be the vice versa, that small and medium size starts to grow first, and then the bigger items later.
Yeah. I think what we see, of course, if I split them now in three instead of in two, the big oil and gas and the ones that is bigger, this whole is a tough business.
The Gas and Process .
The Gas and Process . You see that in order of our colleagues, these are even going bigger.
There is not much investment going on in fuel gas boosters because sometimes we get there is not much in expanders. There is not much, it's rather low, that made me also really mention that specifically. I think when you come to, say, the small, medium size and the big ones in the middle, there I see some reasonable development coming in. You see them in the U.S., you see that also in Asia, even in China. When it comes to the small to medium, my guess is a bit mixed, where we wrote it also, a softer Europe where the U.S. was okay, where you saw Asia, then China, India. India, very strong. China, okay. Just to give a quick run. Of course, Brazil, I don't need to say that. I mean, you know this.
It's a question mark for me on Europe, what is this? I always have difficulties in the third quarter to read the yellow canaries in Europe because with the holiday and part of that, I'll wait.
Good. Should we turn to two questions from the telephone conference, please?
Yeah. The first question comes from the line of Klas Bergelind from Citi. Please go ahead. Your line is now open.
Yes. Hi, Ronnie. Hi, Hans Ola. It's Klas from Citi. A couple of questions, please. Firstly, on North America, did I understand you correctly? You saw weakness in general industry in IT, but better momentum in industrial compressors. Early cycle is getting worse, which I expected, but the larger compressors are also improving. My question is really, are you taking market share or is actually demand improving on the larger side in North America?
I think if competition was not listening, then maybe I say we take market share. I think we do well. If you read our track record in launching new versions and new models, I think it gets attraction also, the whole area around energy is stronger than ever. That is where people see, and also see that energy is costing even. People say oil and gas is lower, but we talk about electricity here. That is for sure. When you talk about general industry on the tool side, of course, there is also a transformation taking place in U.S., that also gives certain effect on that. I would not read too much in that because that market, for us, is not the biggest market.
Sometimes you conclude wrongly by only reading that sector, because it's also not fully geographically spread, even not in the U.S.
No, it's a lot of focus on North America currently, and if short cycle is coming down, but CapEx related investment is coming back, I thought that was interesting.
Yes
maybe we
To elaborate on that, yes, I can go a bit to go further. I think we see more talks with rental companies when you go. We have a bit of exposure to that sector. You see certain activity talks. I've not seen big orders, otherwise you would see them. They're talking. Also the people on the oil and gas, if you talk to Texas, if you do that, you see a little bit more positive talk on that one. Okay, fine, we will see. On the other hand, when you look to Industrial Technique and the automotive, it's on a high level and we should not underestimate that. Don't forget, we are model driven and new models, I think we also get more activity.
Okay. My second question is on the margin in Vacuum Technique. The 200 basis points increase seems to be largely driven by volumes, or are there any other effects driving the margin here, increased share of services, et cetera? Then on Leybold, CSK and Schneider Druckluft and the margin, some 7% in the quarter, how much is PPA and where can the margins go to and by when? Are we still talking 15% margin in two to three years?
Yeah. PPA, you take. I will take the other part. Yeah. The vacuum margin, if you do this type of volume in the semicon and in the high vacuum and where we go, then coupled even on the service, which is also then growing, you have a very good flow through.
That's for sure. It is volume driven, I can say that. When it comes to Leybold and CSK, of course you will see also next year a little bit more on that as we get separate reporting. The Leybold's margin is mid-single digit, that will take a bit of time. I don't see it much moving up and down next year. Why not? Because we have to do a couple of synergy projects. That will take a bit of time to do that, and that we knew. When we bought it, we knew perfectly what we need to do, but it takes some time. That is an area what we need to do, and maybe you can talk a bit there.
No, on the ambition, you mentioned it yourself that, obviously we have that ambition still there about mid double digit margins. It's definitely what we are aiming for, but after integration and whatever you have to do to get there. On the dilution, of course, it's on the specific acquisition, which you have to remember is still a relatively very small part in the third quarter of-
Absolutely
vacuum business. If you look at it, roughly on three to four percentage points is what we would classify as being the PPA dilution, if you like.
Okay, perfect.
Yeah.
You will get-
Not on the full vacuum business then. I am talking on the acquisition.
Absolutely.
Klas, if you come to the capital markets day, you will get a full dissection.
I will be there.
Not on the details, no, sorry. At the bottom strategy.
One thing is, I think what we do, and that is also if you go back when we announced the whole vacuum journey, which we go through. Our aim is to be the market leader and to make it a strong profitable business, which we believe we can do when we develop further.
Yeah.
We are investing heavily, and not on the balance sheet, but on the real over the P&L in the industrial scenery in the vacuum. On R&D, in [feed and straight], in integration, this is going on, and this will take us some time.
Yeah.
I would like to do it in two months, but it will take us maybe two, three years. That we will elaborate a bit more also in the Capital Markets Day.
Good. My final question is on the growth on orders in compressors. It seems like it's roughly flat ex Vacuum, but if we also try and back out Gas and Process, Ronnie, which was weak in the quarter, what was the growth then for CT, given that industrial compressors are now showing an improvement?
I have to
As we said to the previous question here, Vacuum is not representing all the growth in Compressor Technique. Even including Gas and Process, there is a slight growth.
Okay
Compressor Technique.
It's not double digits.
No.
We would like that.
Yeah.
Yes. Thanks.
Thank you.
The other question from the telephone conference, yes?
The next question comes from the line of Peter Frölund from Handelsbanken. Please go ahead. Your line is now open.
Thank you. Good afternoon, Ronnie and Hans Ola. My first question is on the cash flow and maybe the inventory side. You released the net working capital. At the same time, we saw sort of a flat inventory to sales quarter-on-quarter while you normally see sort of a decline. Maybe you could share some light here and perhaps even more importantly, in combination with the outlook, you're not reduced inventory as much as you usually do in the quarter. You do have a very strong order situation in vacuum and a sort of a flat outlook. Maybe you could share some light on how that equation actually looks like. My second question would again then be on the compressor side. If we look at your numbers, we can see that CT is flat in orders while vacuum is plus almost 40%.
In the CT flat order situation, you're right that service is doing all right, industrial compressor is doing all right, then basically it's mostly Gas and Process left. My question is really how weak is Gas and Process? If you compare that to a historic level, what are we running at now? I was expecting that that couldn't go much further down. Those are my two questions. Thank you.
On the cash flow. I'm not sure I fully agree with you about a poor inventory reduction in Q3. Of course, it has a little bit of a challenge because you have the acquisitions coming in, you also have a little bit of quarter-to-quarter currency moves, which tends to drive up the reported numbers. In fact, we think that the working capital part of the cash flow is a good indicator because a lot of that comes from inventory reduction, actually. I don't see that you should expect that it's something that is really an indicator for Q4 or something like that. I can't read that yet into the numbers.
Okay. Maybe the volume component of inventories is actually down, quarter-on-quarter then. Okay, that's great. Thanks Hans Ola.
Absolutely down. CT does a lot to that and also MR.
MR
The other two are
Less money also, yeah.
Yeah. Less money. Yeah.
No, on that, Peter, I think we are really getting traction internal in the organization. That was a bit frustration in all of us, it's moving in the right direction. When you come to your question around compressors and Gas and Process is very low. That's also the reason why I'm really talking about that, and you would see also we need to do some more on adapting the suit on that. It's low, and it drags down the full CT part of that. I think the other, if we take away that part, and you know on the service, we don't grow double digits. That you also know. It has some growth, and you can see more or less the equipment in the same context or in the same level of that.
That's my point. The Gas and Process needs to be down 20+% because it's still like 50% of compressors. Am I wrong here?
No, you are very close. It does.
Perhaps one extra comment on that. We have said it many times, Gas and Process is not the biggest part of CT by a long shot.
No.
It is very lumpy. Sometimes you actually have a good quarter even in a bad trend. I think that is a little bit the explanation also why it looked so negative.
Year on year.
year on year comparison.
Thanks a lot. I get back in line.
Okay, thanks. Do we have any more follow-up? Yes, a question or a repeat, I think here in Stockholm? Okay. Yeah. We give it to a new question instead.
Thank you. Andreas Brock from Coeli Asset Management. A question on pricing. Pricing is zero, I think, in all the divisions this quarter. When and where will we start begin seeing positive pricing?
You see pricing there are two drivers in the whole pricing. You can say three, because you can say one with a very negative one is competition, which is a negative. The other one that positives is innovation, coming up with new products and all that. The third one is inflation. It's the inflation that helps you. You should also know the way we report, you have a big part service. That I think you can say, yes, you need to do innovation in service and all, but that is not so easy to get done. Then really make it in the category pricing to really get a positive if you don't have a strong inflation. We get some, but it's very low. That is what you should read out of our things.
Of course, there is price pressure in the different areas, but of course we also get with a positive flow through, otherwise you don't make this profitability. You don't make. Today, if you see industrial prices, because I see it on one hand to sell to you, but also I buy from him. It's both. That is where we need to see efficiency, innovation to keep the margin on the right level. When would you see some? I think you will see next year some coming.
When the central bankers succeed.
Yeah, that will definitely help. Even also from a couple innovation areas, I see some markets which are where it's turning.
Eventually they will succeed one way or the other.
Yeah. Let's hope.
Thank you so much.
Yep. Okay. That was it. Good. I think actually we have a number of questions on the telephone conference, we go back to that.
Yep. The next question comes from the line of Markus Almerud from Kepler Cheuvreux. Please go ahead, your line's now open.
Hi. Markus Almerud here. I'd like to start with the U.S. where you mentioned here that the yellow canaries are a bit positive in the U.S. now. I know it's a difficult quarter to say anything about, but could you maybe say something about progression throughout the quarter, and how was September in particular regarding the industrial landscape in the U.S.? Then on the MR orders, you had equipment orders being up sequentially. Could you talk a little bit about if there was any particular large orders which are positive, or if there's just a positive sense in general that the base orders are basically progressing positively, if you are in a positive trend there? Thank you.
Yeah. On MR, of course, when you are living in MR in the mining, you are born as an optimist. Otherwise you don't survive in that area. I am not in the camp of seeing, okay, overall a positive area on the mining. Of course, if you are in copper, if you are in zinc or even in nickel, yeah, you will get traction. There's good prices, there is demand. You need most likely to do replacement. That is also what we see. The orders, what we get, some are a little bit bigger than others. You get that. That you see if you look geographically, you see where the copper and the nickel coming from, and the zinc. You see South America, Chile, Peru. You see Russia. You see a couple countries in Africa. That you see.
When you are in the camp of iron ore, then I think we will maybe get some orders, but that will be more automation orders, will be mid-life upgrades, that part. That you see. You have seen the announcement we made from the BHP order that was this type of upgrade automation, because that has to go with efficiency, because you know all what the price is doing. For us, I think it's the majority are replacement orders, what we get. On the equipment. I call it still, sorry that I'm on the other side, sporadic demand, so they can use a statistical term, but I say not really tailwind that we don't have.
It's also true to perhaps just to clarify that there was no huge order that made it in Q3. There was a couple of good orders, but otherwise we don't sell if we don't have any good orders. That's at least not the reason. No.
I think when it comes to U.S. and was it the latter part of the quarter order, I think I didn't see much difference. Of course, you always have to clean it from certain events. We do ourselves because we had a fantastic launch of new products for the Quincy brand, which was a great success. Of course, that always pulls a little bit, and that happened in August. It comes into September. When you really look the underlying market development, I cannot see a big difference. There is for me, and that I mentioned already in the explanation, when you talk to the people in Texas, a little bit more positive. We see also the oil price. We see some rigs coming up, and that has a bit of an effect. It's like the MINExpo has a positive effect on mining and rock excavation guys.
A bit the same look and feel.
Okay. Can I just also follow up on that, Ronnie? You mentioned the base metals and then iron ore. What about gold? What are you seeing there?
Yeah, I see also there some replacement, but on the lower level, I think. We see some activity. There is some hope, but not that I will mention it as one of the key indicators.
Okay. Thank you very much.
Thank you. I look around, I think we continue on the telephone conference.
The next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
Yes, good afternoon. Graham Phillips from Jefferies. My questions were going to be around Compressor Technique and also Industrial Technique. Just first of all, on the Compressor Technique, Ronnie, you referred a couple of times to Gas and Process need to do some work there. Can you give us an indication of perhaps how many people employed in that particular subgroup of the roughly, whatever it is, 19,000 in the division? Also related to the acquisitions, Hans, you talk about the PPA amortization having an effect, obviously starting to have an effect in the quarter. I was just trying to work out how much at the group level PPA is. I think from the annual report last year, I get a number around SEK 920 million.
I'm not sure if that's right, potentially that could sort of almost double, I guess, if you take into account the acquisitions that you've made this year. Could you perhaps give us a bit of a steer on that? Thank you.
Can I just jump in, because I will forget the other one.
I agree with you.
I'm not sure. I don't have the numbers, Graham, on what you refer to the annual report in my head. If you refer to that was the depreciation and that the effect of this would be that it doubles, I doubt it very much. Was that correctly understood?
Well, yeah. Again, there would have already been some PPA because of Edwards.
Yeah.
Now we're going to have more PPA from the couple of acquisitions. Of course, I'm trying to hone in on.
Significantly smaller, on the other hand, than Edwards acquisition also.
Yeah.
We can come back and see if we can look at what is written in the annual report and make further comments after that, perhaps.
Okay. Right. I guess there will need to perhaps be, particularly when you hone in on Compressor Technique and Vacuum Technique separated.
Yeah.
Some sort of understanding between what the EBIT is and then perhaps what the EBITDA level is.
Absolutely. Yeah. That's why we urge you to come to Antwerp in November.
Right.
You spotted good that I think because a new acquisition and you want to know what it will become.
Absolutely. The quarter is not fully reflecting [uses].
No, not yet. Yeah.
No.
No. It will come. On the gas input, I will not elaborate too much in detail on that part because, okay, I also have to respect certain areas here. I think it is an area everywhere in the world. It's areas where we say, okay, at least for the next coming years, there is no project. We have to do it different. We have to move activities and operations and even there we need to do. That is what we do. I promise you when it's significant, so significant it will affect your expectations or whatever, we will let you know. You know how Atlas Copco works when it comes to certain adaptation to the new suit, if I can call it like that.
No, exactly.
Not to use the restructuring. Of course, on the micro, it is a type of adaptation, but it's not so significant. It's significant when you want to understand the result of CT.
Just finally then on Industrial Technique and the low incremental margin, their 4%. If we look at, I think the business is still dominated by automotive, either OEMs or sub-suppliers. Is there a mix issue? You talked about the growth in general industry. We think about the mix in the business maybe moving more from motive to more general industry, aerospace and defense, the incremental margin or the margin on that sort of work is lower, or is there not perhaps that much detail that you can go into on that?
I think, of course, there is always some. I'm not going to say that everything is carrying the same margin, there is always some mix in that. When you look to that, the majority is that we are heavily investing. That is what we do. What I, and we agree with the whole business area, what we want to do is really invest in getting organic growth and be strong in this joining technology and these new areas. We put a lot of feet in the street. We're building new operations. We have new innovation centers. We invest in that, cooking costs a little money, we do that.
This is not the main explanation, every time you are at record levels of revenue, it means that there's been some good project invoicing as well, or I mean bigger orders.
Yes.
Those tend not to be the highest profit. Same time. There are a couple of these explanations, then again, we don't want to make a big story out of that specific quarter flow through.
I don't think that's the reason I'm answering also like that, because we looked ourselves, of course, on this. I think it's not a real strategic move or something which you would see within one or two years as the margin dropping significantly. That I cannot say, on the contrary.
You talked about good service increase in this, I remember when you'd given a service proportion in the past, this was one of the lowest contributions to service, you were aiming to grow it. Again, you would imagine that service is a higher margin business.
Service is growing in Industrial Technique, the other businesses in Industrial Technique is also growing.
To your point, it's also a significantly smaller portion than CT service growth is impacting and how that is impacting.
Okay, thank you.
Thanks. Yet another question, please, from the conference.
The next question is coming from the line of Ben Maslen from Morgan Stanley. Please go ahead. Your line is now open.
Thank you. Afternoon, Ronnie. Hi, Hans Ola. Two, please, for me. First, just on M&A, you are adding 3% to 4% to the top line from acquisitions. Can you keep that pace up? How does the M&A prospect pipeline look? Ronnie, just more broadly on China. We can see lead indicators picking up. How did China perform within Asia and within your businesses, what is growing, what is still under pressure? More color around that would be helpful. Thank you.
Okay. Yeah. The M&A, you know, Ben, how we work, there is small acquisitions. They come almost every month. You have seen what our track record was already this year. There is definitely more appetite, and it will not be different from the past. It's in that area where the same region if I look at geographically, maybe yeah, the same. Also the different sectors which we have done will be more or less the same. Would you come up if you will say, "Ronnie, does it mean you will buy another big Vacuum company?" Maybe not. Let us first absorb that part, and let's first create a good, strong, integrated, stable business. The others are Industrial Technique, when it comes to compressor, that is the main one. Of course, when we find the right assets in the mining side, for sure.
You know a couple of areas which we have been talked before. They're still on the agenda. One day, like on the Vacuum, one day they fall, then we go on on that. When it comes to China, I make it myself a bit easy. We can say, take it from our business areas, our industrial part is doing better than our construction mining part. Industrial Technique, Vacuum, Compressors have a positive development where we see construction, mining having a tougher development, a tougher ride. That is happening. What businesses are doing well, motor vehicle, because that's Industrial Technique, flat screens, food and beverage, medical. These are businesses which are doing great, which is getting tough and still tough.
The steel production here and there are more difficult, although I must say when you are involved in very special steel, you see some investments. Also what we see lately is that more and more attention is giving on energy. I mentioned already in my start when I was talking, we see more and more attention, especially if we take the area, a big area around Shanghai. It is the talks when you go out is as qualified on energy as you have in Europe or you have in the U.S. There are spots in China where it's not yet there. That is a good news for us, because they see what it means, the carbon dioxide, what it means, the cost of energy. That is a good part to hear.
When someone was asking me about market share, that I had in mind when I was answering that question.
Got it. Thanks, Ronnie.
Thank you. We continue. We make a break on the telephone conference. We take questions for Ronnie.
Thank you. Looking at Mining and Rock Excavation, I was wondering, in the past you, in the way of investing a little bit in R&D, then you scale back, now you're capturing growth, up to some extent. I'm wondering about whether you're gaining, to a certain degree, you're gaining market share in the mining equipment area or consumables driven by past investments. There's got to be late effect on that.
I think when it comes to the Mining and Rock Excavation and the R&D, what we have been building more is R&D on automation. We had a journey, if you take four or five years ago, we acquired a couple companies which we integrated, which also boost a bit the R&D investment. Okay, that we have slowed down a bit in these areas. But on the other hand, we have more investment in automation. Yes, when you have been in MINExpo, you see a couple of new products. You don't make them in a month. That R&D we have been doing over time. That is what has happened in this. If you take the big fleet orders, there's not many orders. I think it's not a surprise, I think it's a tough business today, but the cycles are a little bit different.
We are really down, we have kept a very strong core and kept R&D. The factory is not full. That is to have eyes in the stomach, per se.
Maybe I wanted to ask that whether what you saw is broad for everyone or actually you see that yourself, you're going more as an organization within mining equipment.
I think if I look back six, seven years and look now, I think we are, to use a nice word, more sustainable in our offer. I think so. I think that R&D effort has yielded some strength. Market share, especially if you take an underground, because then we're another Swedish company, I think it doesn't move so quick. A mine is not changing from one day to another. I think what is important that the players in that business, that they really come up with new. Right now the theme is automation, how to integrate that, how to make less people in the mine and getting more ore out. That is the theme, what we go. To use that also in the OpEx, to get a lower OpEx because the mines start to look to OpEx, which is again, a good thing.
Yes. We have another question here in Stockholm.
Yes, regarding the mining. Anders Roslund, Swedbank again. The improvement in the sequential mining development has been rather good. Is it the first step of recovering to about 20%, or what's your next Is it a new normal where you are now?
Anders, I tried to explain it already before. I am in the camp, like I said, careful wait. Not wait, but see and then say, "yes." On that one, I would like to put myself to underpromise and overdeliver. I hope I'm wrong on that. I really hope. Of course, if I take the facts, yes, we are most exposed to underground. It is since 2012, we see constantly a drop. Machines cannot go on forever, need some either a mid-life upgrade or a replacement. We are also coming up with new automation features, which gives possibilities. Yes. I think there is definitely qualified discussions going on as I'm speaking, more than maybe before. There was always talks going on, but more of to see what the market will do. That I see. I see consumables up as a sign.
You also see the prices have stabilized. The price of copper is not bad. Of course, historically much higher, but it's not bad. Price of zinc, nickel, it's not, and the demand is good. People will do. When you talk the same, and which is also a big exposure for us, if you talk about coal, and it's not a big exposure, but we have some, or you talk iron ore, you talk another part. We have some area where we see some traction, and that's also where we got orders for the copper, the zinc, and the other part.
I'm a bit say yes, I'm very happy for the whole organization and for myself, I see that, but I'm not to say, "no, we got strong double-digit and we are really done." That's again, when you look to our outlook, that's again, is also built in that part.
We're running slightly out of time, but we have one final question from the telephone conference, please.
Yep. The next question is from James Moore from Redburn. Please go ahead. Your line's now open.
Still on the line?
I believe he has disappeared from the queue. The next question is from Max Yates from Credit Suisse. Your line is now open.
Hi. Thank you. Just two questions I had. Firstly, just obviously you are benefiting from currency and we should see that come through on the margin next year. How do you think about that? Do you think of retaining all of that at profit level, or will you use that occasionally where you can to gain a competitive advantage versus your peers and try and stimulate growth?
I would say I would never do that because I am not a believer that price is that you use that for getting market share in our business. You get innovation, productivity, the driver for market share, which then comes to a normal margin. To really play with the price all the time and then say, going out as a CEO, "Come on, let's be aggressive. Do that." That will not work. That will lead to a disaster, because the salesman, he loves to sell. He will definitely use all the margin I've given him to do, he will use it fully. That is not the way you steer a sales organization. That will never work. Never.
Okay. Just as a follow-up on Industrial Technique. You talked about automotive being at quite a high level. When you look at the model schedules of your customers as we go into next year, how do you think about the growth of the automotive part of Industrial Technique?
Yeah. There is still some good, say input on that side. If you take on China, where maybe 10 years ago we would not say that, but now there are many new models where we also have compacted or even are part of the cycle. That is where we definitely see good development. That's also the reason why we have in Asia, mainly China, because that is also a bit of India, the reason why we have good success. Also in Japan and in Korea, because we should not forget these players. That is a very strong help in our growth. It's a little bit less in Europe. There we see, but okay, there is still some activity, and you can say it's in the U.S. between Europe and China when it comes to the level.
Also there are still some good quotations, good projects going on, and not only for our tools business, but also for our riveting business, and also for our adhesive business. I still see some potential growth in our motor vehicle business in next year.
Great. Thank you.
I'm not talking it down as this was the conclusion, sir.
Great. Thank you very much all of you on the telephone line and here in Nacka, Stockholm. We repeat again, we hope to see many of you in Antwerp on the 15th of November. With that, thanks for today. Goodbye.
This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.