Ladies and gentlemen, welcome to the Atlas Copco Conference Call. I will now hand the call over to CFO, Hans Olarmeyer. Please begin your meeting.
Thank you very much, and a warm welcome to everybody participating on this conference call, which is related to published information today from Atlas Copco. It's general information about the notice to the Annual General Meeting, but more specifically also, it includes an information about the proposed spin off of Epiroc. And that's the purpose for this conference call. The information brochure that has been distributed together with the notice is available on our website. So you can follow.
We will not use any other presentation material for this call. So everything that you see is from that information brochure on the web. Apart from myself, Hansel van Heer, the CFO of Atlas Copco, as you heard, we have in 3 different locations participation. I'm sure shareholders on the call will be happy to hear that we are working intensively with many things at the same time. So personally, I'm in London.
The CEO, Mats Johanstrom, who will speak to you in a few seconds, is in Canada. And the management team headed by the CEO, Per Lindbergh, the CEO of Epirot, is in Stockholm. We'll try to figure it out. If you hear something strange or people talking at the same time, we'll try to correct that as soon as possible. The purpose of this call, I mentioned already, but I'd like just to stress that there is not any intention whatsoever to discuss the current business climate or recent results on this call.
It is purely related to the information published today. On that note, however, I might just as well say that when it comes to the view of the world and the customer demand, we repeat what we said in the end of January following the Q4 results that we see a continuation on a high level of customer demand in the near term future, that it remains on a high level. The other thing that I'd like just to mention before we kick off with Mats is that the financial figures in the information brochure is done with the methodology called combined financial statements, which is not a pure pro form a. It is not a pure or a clear consolidation like the normal results from Atlas Copco Group would be. And I mentioned that because sometimes the addition if you sum up Atlas Copco and Epiroc numbers, you will not get the group.
And the reason for it is that, as I said, there has not been a full consolidation, but it's just merely putting numbers of Epiroc entities together and putting the numbers of Atlas Copco entities together. So there might be discrepancies. And I can already say that in the balance sheet, when it comes to certain lines, this is noticeable because there are financial relations between Atlas Copco and Eprox still, and that reflects in that the gross numbers look different than the Atlas Copco Group numbers. And it's the same when you look through the combined cash flow statements. You will notice, but I just caution you that don't take all the numbers on those parts as a true reflection of what you will read in Epidoc numbers going forward when it's totally on its own, so to speak.
With that, I hand over for some opening remarks from our CEO, Mats Randstad. Mats, please go ahead.
Okay. Thank you, Heine, Ulaan. I think it might have to give a little bit of background and reasoning around the suggestion to split the company. It's a little bit more than GEO on January 16 that we announced and that we will start to prepare for the split and come to this proposal to the annual meeting in 2018. And I think the suggestion is pretty straightforward then to have 2 listed companies anywhere or Atlas Copco will focus totally on the industrial customers.
And what we now call Epiropna, which is the mining and rock excavation and the hydraulic attachment out of the construction technique. Epirokland will focus on the mining and civil engineering to get the right focus on. And the intention is to distribute the Ebrok business to our shareholders and list it on NASDAQ down in the name of course of our capital plan. I think the year that has passed, we were quite early to dedicate a team that worked with the split, and that was led by Hans Ulla and myself and Liana and the team on the mines. We have focused on the business, and I think that way of working have been very successful for us and developed the business and progress on the split in a good way.
Today, with Per and the management team in place, I would say that Eperok is a fully operational unit and a subsidiary of Akerfokoden. So why split the company? I think Akerfokoden over the years has grown quite a lot. And internally saying, we need to say, if we focus, we succeed. So it's really been part of our DNA over many years to make sure that we really focus on something to be successful.
You can also see that the different industries have different demand drivers and even operating different geographical areas. So the intention of this business is to give the organization more focus and more speed to meet customer demand and even that's the way then. And by doing that, we want to increase shareholder value. I think at Perok now then, if you talk about the speed, as I talked about, and the focus, it's a new management team in trades now, a very experienced team. We have the Board with a full dedication to the company and to the industry.
And of course, after this split, they will have an independent access to capital, and it will also provide present shareholders and new shareholders to invest directly in Ekeroquium in the mining industry. The preparation on a strategic level have been under the name of Mine of the Future. So we have focused a lot to see and understand what businesses we like to be in and what we don't tend to be in. So I think the team has put a lot of efforts to really understand the value chain and the processes of our customers to clearly identify areas where we can add very tangible improvements in productivity and safety for our customers and also be very clear with areas where we say that this is probably not for us. So the mind of the future projects is to say, of course, we talked about more and you have seen that on the capital markets, the digital mine, I think, being safe with our customer, but also sort of improved productivity.
You can see more and more of the products with automation, and it also leads to productivity. You can see the battery initiatives, proof of the drill rigs and the loaders to give our customer the necessary emission mine, and that will improve sustainability and also drive down costs for them. We also see service as a big opportunity, and working on some of the new products as well. So to summarize the Epiroc part, I would say that the strategy is in place to drive either customer safety, productivity and sustainability. We have a very dedicated and experienced management team in place and the work.
And the purpose of this fleet is to give really increased speed and the focus on these activities in the strategy. The remaining part is, of course, the the to industrial customers. We get 4 business areas. It's compressor technique. We have industrial technique.
We have power technique and vacuum technique. And while you have 25 divisions with dedication to certain segments in the market. Last year, revenue is around SEK 85,000,000,000 and our presence is 3,180 countries, approximately 34,000 employees and 30% of our sales is coming out of service. We looked at our financial goals as well. We think they are quite ambitious with the 8% group annual business cycle.
I think that's maybe 2x or 3x GDP. So the 2 step gap will continuously work with innovation for market expansion. We also look at market shares, of course, but also add on some strategic acquisitions. With the last year, the group has enabled them to deliver approximately 7% growth. So our financial goals will remain.
They present during the annual business cycle, sustain high return on capital employed and to distribute 50% of the earnings in dividends. It's now the focus for us will be very much on our customers to really drive tangible productivity improvements and clear return on investments and driven by product strategy that we've been so successful with over many years. We also put a lot of focus on developing talented people and bringing a little bit new talent to this digital world. And we will put a little bit of expertise to see what we can do in the organic crude sides, mainly through innovation and new products. And of course, we have a presence in most geographical regions around the world.
So if you now look forward a little bit and focus on the future, We truly believe that splitting the company into 2 liquid companies is the right thing to do. It should benefit both companies, Petrok and Atlas Cop Group, our customers and shareholders. I also picked up the line that I think was a good summary that someone said that the take on change has not been this fast, yet it will never be this slow again. And of course, with that in mind, I think if 2 companies can pick up speed and throughputs, I think that's the best thing. Thank you.
Thank you, Mats. Very good. Then I'd like to hand over from Canada via London to Stockholm and to Per, who will start just since you are new to many on the call, perhaps some of you know Persians before, I'm sure. But please go ahead and take the effort of Partha.
Thank you, Hansa Wallach. It's a pleasure to be here and to present EPIROC. Yes, my name is Karl Lindber. I joined the company 1st February this year. So yes, I'm relatively new.
Previously, I was the CEO of delivering the new KOSSNESS since 2,005, which is a listed company in Stockholm. And tied to that again, also CEO of Korsnas and Vice President of Kinetic. And from a training perspective, I have a mechanical engineering background and added PDP from Chalmers in Stockholm or in Rotterberg, I'm sorry. I have to say I'm very excited to be here and I'm very proud to be here. I think we had a great opportunity to make a little difference when it comes to increasing the focus, speed and agility of Epirot.
So enough of me. Looking at Epirot, of course, the Epirot is mainly consists of Atlas Copco business here, mining and rock excavation, plus hydraulic attachment tools from Power Techniques. So old MR is roughly 19%, 95% of the business. We have customers in mining and infrastructure, roughly 2 thirds were customers in mining and 1 third in infrastructure. Revenues in 2017 was 31,400,000,000.
We had 13,000 entry units and we had sales in 115 countries. And who are the UL? Well, we are a leading provider of solutions for rock drilling and rock excavation, demolition and recycling. And we focus on specific selected niches. We're not all over the place.
We work selectively, and we're looking for to work with missions where we can have applications where there's a need for performance critical equipment and services with significant aftermarket requirements and where there's a good focus on productivity and total cost of ownership. And this is an area which is very important for us going forward as well, but we will not deviate from these types of initiatives. I think it's also a great opportunity for us to exploit digitalization going forward and increasing productivity for our customers in both mining as well as infrastructure. We will report the Epiroc business in 2 segments. First of all, the bigger segment would be equipment and service.
And here's the typical equipment that you may be familiar with, which is rugs, grills and loaders and haulers, a variety of equipment you can see that in the brochure. And these are relatively large investments for our customers and they typically go to the same customers, same geographies, very often bundled with service contracts. So we will report equipment and service as one segment. And in 2017, it was roughly 72% of revenue. The other segment will be tools and attachments, typically smaller investments or even operational expenditures, typically sold through more sales channels and the variety of tools used for a variety of machines.
So and that consists of roughly 28% of the business in 2017. So that would be the 2 reporting segments. And looking forward, we have stipulated financial goals and prior not to going through the financial goals. I would like to say that our key target or our key goal is to provide superior value creation and to focus on delivering results rather than promises. And the key basis here is to continue to leverage the strong operating model that we have and to continue a very efficient use of capital and also to have stable and rising dividends.
And we will do this through agility and adapt into cyclicality and capital equipment because capital equipment tends to be cyclical, whereas the aftermarket business is definitely more resilient. So here again, agility in the capital equipment part of the business is important and also resilient in aftermarket. So focus will be on maintaining and growing aftermarket business. Some comments on the financial targets. The first one is growth.
We say that we our goal is to grow 8% over the cycle, which should be compared to 4.7% over the last 3 years. And we would like to grow better than the market throughout the cycle. And this is quite an ambitious target given that we see that over the last again, over the last 2 years, we've seen 4.7%. But we believe that this is possible through innovation and through focus and again through speed. 2nd, though, is margins.
We have, as mentioned, a relatively cyclical capital equipment business, but a more resilient asset market. And we have been historically a top performer throughout the cycle and this is where we intend to remain even though it's not easy to exactly specify where the margins will be over time. So we will compare ourselves to our best to compare going forward and we would like to have industry best margins. Over the last 2 years between 2015 2017, we've seen an operating margin of 17.9%. Capital efficiency, we will remain agile and continue to strengthen the operating model, and this is, of course, very important and, of course, be prudent in value creation in our investments.
Return on capital employed over the last year is 24.3%. Capital structure, we intend to be investment grade. With the prudence that that entails. And finally, dividend, we intend to distribute 50% of net profit over the cycle. And looking at the financials as presented in the brochure, a couple of comments there as well.
There is a difference in operating margin between the old MR and Eberoq in 2017. MR reported 20% operating margin and EBITROC 18.9%. So there's a difference of 1.1 percentage points. And the difference there consists of corporate costs for the split and for starting to build up a corporate office and also positions for long term incentive programs. Balance sheet, we had an upper in the upper balance sheet, also the former Atlas Tech Group Financial Services.
And it should also be noted that in this endeavor is to have a net debt end of March of roughly TRY 3,000,000,000 corresponding to a net debt in relation to EBITDA of roughly 0.4 times. And more information about our Q1 results. I'm sure you're interested in how things are going at the moment. We cannot comment that, but more information about the Q1 will be available in Atlas Copco Q1 report. Epiroc's first report will be presented on July 19.
And the prospectus, of course, will contain more information and will be available end of May. And finally, I should say as a reminder of our Capital Markets Day which will be in May 30th. So if you have a pen and a piece of paper, please note that down. We intend to go to Oragu and visit the operations there. A formal invite with ROCE and we of course at the Capital Markets Day will present more details in terms of who we are and where we are going.
So with that brief presentation, I turn it back to Angelo.
Thank you, Fred. Very good. We are approaching the Q and A session. But just before we do that, a very, very quick summary. You heard a few dates or indications of timing compared.
Just to repeat then that we are, of course, the next point, so to speak, is that the AGM for Atlas Cofco, where the final decision of the proposal to split, will be dealt with and hopefully decided upon in a positive way. In the meantime, the audit by the stock exchange is going on full speed right now. That will carry on until the beginning middle of May when that will be then handed over, the audit that is, to the listing committee of the Nasdaq Stock Exchange end of May and then follows what Per alluded to the Capital Markets Day for Epiroc, etcetera, etcetera. And we are targeting a listing in the latter part of June. That's what we're aiming for right now.
So I think we will do like this, but when you pose a question, please limit it to 1 at a time. And we don't have so much time available to allow just one question per participant. And please, if you have a specific intent that you want to address the question to someone specifically of us, then please say so when you address the question and obviously who you are. With that, I hand over the word to our operator for the call. Please go ahead.
Thank you. And the first question is from the line of Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Matt, Hans Ulijn, Paris Kvaas at Citi. First on the growth target, if you could remind us of how you define a business cycle. Do you include the bad years and then the good years and then you do an average? Because 8% is broadly in line with expectations in the market after 2020 if we use 2015 as the base, which is the 1st growth year this cycle.
But if you include the negative years, obviously, the ambition is for accelerating growth. And if that's the case, I assume that you're betting on the aftermarket to pick up further on more automation, Mining 4.0, given the relatively limited M and A opportunities within your current niche. So if you could elaborate on the growth target, please.
I suggest that, sorry. No, you go ahead, Thad.
Okay. Thank you. Yes, it's you're right. I mean, in the definition, we do include both in the bad years as well as the good years. And given that, we think the ambition of growing 8% is relatively ambitious.
It's not only targeting SMRT but also targeting equipment sales because we believe there's opportunities there, not the least to exploiting innovation and digitalization and automation.
Okay. But just to follow-up. If we think about Mining 4.0 and automation, increased positioning, etcetera, Would that extend the life cycle of the equipment, I. E, it will be able to be run longer, but it will be better for the aftermarket because, obviously, it will increase the utilization. So how should we think about automation driving higher unit sales?
Or are you betting on pricemix to go higher if it's not M and A, if it's more organic?
Well, there's it's clear. I mean, it's a little bit so my limited experience is that the automation that we've seen so far, the relatively advanced automation, that it gives us higher utilization of the equipment, which drives, of course, aftermarket sales increasing such. But also, of course, it tends to shorten the lifespan of the equipment as such. So it could be a combination there, but I think also there's opportunities to be if you do have speed and agility, I think you can capture the market for automation versus if you really don't have speed and agility. So we hope we can do that.
Okay. And then my final follow-up is on M and A. You're well protected in your Upstream segment, particularly in underground hard rock. Doing M and A mid and downstream would dilute your margins and returns, particularly as the miners rarely ask for a supplier to be active in all parts of the value chain. And M and A around Mining 4.0 will come at quite punchy multiples.
So should we see M and A more about partnerships such as sub Combitech? Or will you do any more large scale M and A? Because obviously, you're quite protected on where you are in your niche currently.
That's great. Most likely, it's going to be a combination of those 2. I think, of course, it's difficult to find acquisitions, which will not be dilutive to our margins. But certainly, we will definitely not do acquisitions, which will not be value creating for our shareholders. That's practically.
Thank you, Karel. And to be then take, I was a bit lean there on letting the second question, but let's be more strict going forward then. So next question, please.
Next question is from the line of Graham Phillips from Jefferies. Please go ahead. Your line is open.
Yes. Thank you. I'll speak to one question. Graham Phillips from Jefferies. On disclosure, Hamzolomeo has been very good with mining and rock.
We've seen 3 parts disclosed on this: equipment, consumables and service. I see you're referring to just equipment and service together and then attachments separately. If you do have this aim to grow the aftermarket and service, we can see that historically going back 12 years in mining and rock. Please inform me, what is your intention to go forward to reduce the disclosure now and lump equipment with service, which would seem a retrograde step? But if you're still going to provide something in terms of your aim to grow aftermarket and service, how can we measure that if it's lumped together with equipment?
We will actually report sales for equipment and the service separately going forward, I would say. Yes, within the segment of equipment and service.
Okay. Well, that's good to hear. And maybe that my question that's I'll go get back in line. Thank you.
Next question is from the line of Guillermo Pena from UBS. Please go ahead. Your line is open.
Thank you. Guillermo Pinha from UBS. Hi, Mats. Hans Ola, Pierre. One question or two questions into one question, actually.
Referring to what you just commented on innovation. Could you give us an indication of your content of innovation in the last year, for example, new product contribution to sales during 2017. And you can define new products as basically product launches that you announced over the last 2 years? Or help us understand the innovation content of Edvardok during 2017? And secondly, how much of your current production is assembly that is outsourced outside of Epiroc?
Well, thank you. It's a very good question. I'm afraid I don't have specific answer to it. I think we have been launching automation products. We have launched battery driven products in 2017, but I don't have a specific number in terms of what portion of the mix that contributes.
And regarding how much of the assembly of the overall Atlas Copco at the moment is outsourced?
Okay. This is Anders Lindgren, the CFO of Epiroc. The assembly part is obviously referring to the equipment. So I mean, equipment sales, it's about 30% the most part of that is assembly. I mean, the vast majority of that is assembly,
in house.
In house assembly. All right. Understood. Thank you.
And next question is from the line of Peter Paulien from Handelsbanken.
This is Peter from Handelsbanken. Okay. You want to outgrow the market and you want to have a higher profitability.
Could you help us how
you define the market appears? I mean is it in total? Do you look at the aftermarket guys that are the best, the service guys that are the best, even niche players. It's pretty hard to find a strong enough peer, to be honest. So how should we think about your definition of the market?
Well, there's actually quite a few research studies pointing to the growth of the mining infrastructure markets, and we will refer to those when we compare our growth. And that growth is actually lower than the 8% as far as least we have seen. And that will be the definition of market growth, which we will compare ourselves to. When it comes to profitability, we compare ourselves to industry and we will again compare ourselves to basket of peers when it comes to that.
Okay.
Kindly follow-up. Will you also provide service part of the tools and attachment
in sales? Because there will
also be some type of aftermarket there as well.
There's a very limited aftermarket as well, and we will not disclose that or break that out in terms of the tools and attachments because it really is a very small portion.
Okay. Thanks
a lot for your answers.
The next question is a follow-up from the line of Graham Phillips from Jefferies.
So obviously, there are not a lot of people on the line, but I wanted to ask about CapEx. Can you give us indication of what CapEx has been in the last couple of years on the information disclosed and what you think going forward
will be the
specific CapEx to Epirod?
Well, we are sending an answer here, and I think Anders needs to help you there. So if could just leave us a few seconds and perhaps let another question prior to give you this more specific answer.
Okay. And maybe, Hans, while you're looking at that, Hans, Olimayo, if I could say, will the disclosure for Epiroc equipment, consumables and service be comparable to the equipment service and ticket unit units on a commodity basis.
The intention with the whole split is not to reduce the transparency that you are used to from MR.
Okay. So although they're calling it attachments, that will be equivalent to the consumables then perhaps, Oleg?
It's really difficult to define where what is an attachment and what is a consumable and what is an integral part of the equipment. So I think that for the time being, I think you will have to rely on the information that is in the brochure. And then of course, when Equinor comes back and report on its first official results, etcetera, I'm sure that you will find that the level of disclosure on sales, etcetera, at least mirrors what you have been used to in when it was in business area in Atlas Copeland.
Okay. Do we have the CapEx answer yet?
Yes. This is Andres. Yes. It's the total CapEx is around Yes. This is Andres.
Yes. It's the total cash is around SEK1.5 billion.
Sorry, that was last year or that's the forecast for this year?
No, that was last year.
Okay. And going forward, with 8% revenue target growth, would we assume that in absolute terms it rises, as a percentage of sales stays the same? What would be the thinking around that?
It's about you could assume the same ratio.
Okay. Thank you.
Next question is a follow-up from the line of Guillermo Peigne from UBS. Please go ahead. Your line is open.
Thank you. Looking at your fleet as well from operations, I basically saw that the decrease actually 2017 versus 'sixteen, 'fifteen. And I was wondering to a great extent, obviously, this is driven by working capital expansion. But I was wondering whether there is rooms to optimize this to accommodate growth? Or is this driven by the supply chain issues that the industry faced through the sharp ramp up of order intake?
Can that be optimized?
I think, clearly, there's plenty to as an overall observation, I would just say that I think there's plenty to do when it comes to our capital employed and not the least working capital. And the expansion that you're seeing is driven by inventories basically handling the orders that we have received the first international order book. But that's who I see.
And yes, Ngo, this is Hans Zola here. Again, since I assume that part of your question came from looking at the numbers presented under combined cash flow statement, actually also that line on working capital is affected by these things that I said are not really the equivalent to a fully consolidated view. So you have to be very careful when you look at those numbers because in all due respect, they don't provide the best guidance actually at this level. It will be much clearer once you get into a full disclosure, so to speak, of Eperok as a listed company.
Thank you very much. And can I refer to whether you do have any net debt to EBITDA target Just to understand how can you just balance it in the future?
The only comment for the time being, as you know, we have not had that type of target historically, and we will not going forward either. But if you do the rough math from what Epiroc target net debt and gearing will be when in the beginning, you will find that considering dividend and redemption, etcetera, that the Atlas Copco ratios will be somewhat higher in terms of financial leverage, not by a big, big difference, but still. But otherwise, no, we cannot comment more on that. We don't have a target for that going forward.
Thank you so much.
Okay. Thank you. And ladies and gentlemen, as a reminder, if you do have
Unless, be appropriate. So let's have those 2 questions. Thank you.
Great. So the next question is a follow-up from the line of Claus Bergman from Citi. Please go ahead. Your line is open.
Yes. Thanks for taking the follow-up. So a question on margins. It seems like the Construction Tools business from Powrtech is a low double digit margin, but I would assume that the Tools and Attachment business in Mining is higher margin, taking total Tools and Attachment to a higher level, maybe 15%. And if you could help us with the margin of Tools and Attachments relative to Construction Tools then.
And if we could get a feel for the pure service service equipment margin, obviously, we've talked about this before, it depends on the cycle, but is it currently 2 times equipment or maybe 3 times currently? That would be really helpful.
Well, we can say that the Tools and Attachments margin is obviously lower than equipment and service, and service margins are higher than equipment. That's pretty much all we can say.
Okay. Okay. All right. Yes, I'll leave it there. And just one quick one as well is, could you help us anything with average growth in services versus tools and attachments?
I would assume that tools and attachments, that's a more cyclical part. But if we get some feel for the average growth currently between the 2.
Well, the most cyclical part of the becomes which would be a certain definition would be the combination of service and tools and attachments, it's definitely more stable. And when you look at tools and attachments, it's actually consumables to a very large extent. So that's more stable actually, that's stable.
No, I understand that the
equipment business is the more cyclical. I was more interested in the growth rate between tools and attachment versus services, currently pure services, excluding equipment.
Well, I think we don't have information to disclose that right now, to be honest with you. I think if we have appropriate information on that, I will let you know perhaps to get some more to statements.
Thank you, mate.
And next follow-up is from the line of Graham Phillips from Jefferies, which is our final question for today.
Yes. Thanks for taking my final one. Okay. So of the net debt of $3,000,000,000 in March, how much is pensions? And just confirm, Arne de la Meijer, there's no more payments in the second quarter that will contribute to the special or ordinary dividend that Atlas Copco will be paying.
That won't be paid out of the Epiroc balance sheet. It will only be paid out of the Atlas Copco balance sheet.
Correct. It will be paid out of the Atlas Copco part. When it comes to the amount of pension and cost retirement benefits, etcetera, but I don't have it off the top of my head here. It's not the significant part compared to the pure debt part of the loans. Of course, the net debt also includes an assumed cash position of a couple of 1,000,000,000.
So that's how we've modeled it. You mentioned that the target is for March, but But in reality, it's also a target which you think will be pretty accurate when it comes to the actual starts cost spin off for because there will be generation of cash in the meantime, but there will also be a specific consideration change for Epidot to put the hedge in place for historic long term incentive plans like the option plans that Atlas Copco has carried. And of course, Epiroc will carry part of that going forward. So those are the main things, but there will be a couple of pluses and minuses in the Q2 and in the beginning of the Q3, which will leave us pretty close to this target net debt at the end of the day anyway.
Great. That's very helpful. Thanks very much for taking my call.
With that, I thank all participants for participating and of course also Mats in Ottaba and Per and his team in Stockholm. Thanks a lot, and I hope we touch base again when it's time to announce the Atlas Copco Q1 numbers on the 25th April. Thank you very much. Goodbye. Thank you.
Thank you. And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.