Good afternoon, everybody, and warmly welcome to Epiroc's presentation of the Q4 and full year results 2018. I am Ingrid Östhols, investor relations at Epiroc. Our CEO, Per Lindberg, will give you a general overview of the quarter, then after that, Anders Lindén, CFO, will talk about the figures more in detail. After the presentation, we will have a Q&A session. Please, to give everybody a fair chance to ask questions, please stick to one question at a time. That would be very good. Okay, Per, please go ahead.
All right. Thank you, Ingrid. I'm very pleased to be here to present the results from Epiroc. A very strong 2018, first year of the existence of the company, and also, as we perceive it, a solid finish of 2018 as well. Let's focus on 2018 as a year, first of all. I think we had a very strong year. We had double-digit growth of the revenues, of orders, profitability, and also across all geographic regions. I think certainly 2018 was a good starting point for Epiroc. We have managed to ramp up capacity, not the least as you've seen in quarter IV with good revenues. I'm also very pleased to see that the service has increased with 18%, which is quite a feat, since it entails a fair amount of recruiting and training of personnel as well.
We have ramped up our R&D capacity, which means, on the one hand, increased spend, but on the other hand, also increased pace of introducing new products. I'm very pleased to see what we have achieved when it comes to new product introduction, not the least when it comes to sustainable mining in innovations and initiatives, battery, digitalization. We've made 6 acquisitions during the year. I think also that's a pace where we probably need to be in order to be able to reach our target of 8% growth per annum. We did that in 2018, and we'll certainly continue to look for acquisitions going forward as well. I also think that we did have a very successful introduction of the company. We are a 145-year-old startup, and we're alive and kicking. I think this is well done.
We have established the capabilities needed for an independent company, and we have very much established a brand vis-à-vis our customers. We'll continue to work on that, of course. We also need to make the more general public aware of the existence of our company. Looking at quarter IV more specifically, also, as I said, a solid finish of a good year. Double-digit organic growth in quarter IV versus last year. Quarter IV was actually the fourth best quarter ever.
If you look at the four quarters of 2018, we had four out of the five best quarters ever. Of course, 2018 was a good year, and not the least quarter IV. It was actually slightly better than quarter III, and pretty much in line with our own guidance. I'm quite pleased with that as well. We had record revenue in the quarter.
Ramp-up has proceeded really well. Not the least, we had very strong cash flow. I know that we've been standing here in quarter II and quarter III saying, "Yeah, we'll fix the cash flow." We have fixed the cash flow. Certainly very pleasing. Looking more specifically into the numbers, and of course, Anders will talk more in depth about the numbers, but a few highlights. Revenue growth of 19%, orders up 11% versus last year. Cash flow above SEK 2 billion, which again, is very pleasing.
We also have now a dividend proposal from the board to the AGM of SEK 2.10 per share. You may question how did we reason. Well, we reasoned as follows. The underlying dividend including Atlas Copco would be for Epiroc roughly SEK 1.80, and SEK 2.10 is an increase of 16%. We think that's substantial and also a good level for the proposal.
Orders received. If you look at the map here, we've seen a very good development in the Americas, both North America and South America. Worth highlighting is the fact that we received a very good order from Anglo American and Quellaveco in Peru. This is a greenfield project for copper. The order value which we received in December is SEK 385 million, which is quite good. We're very pleased to see not only the order, but also the fact that we have investments going on in greenfield as well. I think that's a good sign going forward.
Also very good is Asia and Australia of 16%. Actually, Asia, Australia was the best or biggest revenue generator for quarter IV, whereas Europe and Africa more on the flat side. Also mentioning, of course, as you may know, that mining is roughly 70% and infrastructure roughly 30%. In quarter IV it was 73/27. Quickly into segments. Now, equipment and service is roughly 75% of orders, as you can see. The growth in equipment and service 16%, 17%, quite pleasing. We'll come back to the segments. Whereas the Tools & Attachments are lower at 1% growth. Aftermarket, the pie chart to the right. Aftermarket is now 59%. Aftermarket in quarter III was actually 62%. We see the consequence of that is, of course, that equipment is increasing in the mix, which I'll return to, but it does have some consequences on the margin.
Looking at equipment and service, I think we do have good sentiment in the market. Of course, there's a fair amount of questions on orders and where this is going. I'll come back to our outlook. We see still good production levels at our customer base, still good potentials for orders going forward, but the uncertainty has increased. I think if you look at quarter IV specifically, I think we saw good activity. As I mentioned already, service up 16%, something that is very pleasing. Again, back to the mix. The mix between service and equipment has increased towards equipment, which means that you will have a slight negative effect on the margin, as you can see by the margin graph to the right. We also acquired, in the quarter, ASI Mining, which is a U.S.-based provider of automation for different vehicles.
In our specific case, of course, mining vehicles. It's a good complement to what we do in digitalization and solutions for more productive mining and also, of course, for more automated mining. We welcome these guys into the family, the 34% into the family of Epiroc. Tools and Attachments. Good business environment, even though order intake was only 1%, and part of the reason behind the relatively small increase in order intake versus last year, just 1%, is the fact that we are focusing on profitability. The consequence of that is that we are not accepting orders below a certain profitability, which means that we back off from some orders, which has a consequence when it comes to order intake. Revenues up 10%, so what we already have in orders will certainly continue to produce, of course. Margin is up to 13.3%.
It's driven by growth in currency. It's more or less on the same level as quarter III. We will continue to work with efficiency measures in Tools and Attachments, especially when it comes to consumables or drilling tools, where we feel that there's still things to do. We're still fighting with raw material price increases in that segment. We also have a couple of big acquisitions made. New Concept Mining, which has not yet been closed, and Fordia, which was closed in the beginning of January. Fordia will fully be in quarter I, and New Concept Mining, once that is closed now in quarter I. I think this, just to remind you, if you have forgotten what this is, Fordia is a provider of exploration tools, very complementary to the business that we already have, leading in their segments.
We feel that this will be a very good opportunity for us to develop the business within exploration. New Concept Mining in rock reinforcement, also very complementary to our existing business when it comes to underground mines. Business development. We continue to relentlessly pursue, of course, both innovation and various initiatives when it comes to business development. In the quarter, worth mentioning is the launch of second generation battery equipment. We did have a big event in Örebro at the 14th of November. We see first orders now coming in for second generation. We feel that there's very big interest for these types of machines, underground use, because of the economy of battery-driven machines, and especially in the impact of ventilation cost, but also the impact on safety and also on the air quality for operators underground.
I think it's very promising and something that we look forward to following, of course. We have an agreement with Ericsson on connectivity. This is 5G. We feel that, again, if you want to go as a mine, want to go for a connected mine, digital solutions, you need connectivity. The prevailing solutions now is Wi-Fi, which has lower bandwidth and also typically a lower availability than 5G. The promise of 5G, that is. We feel that on the back of a development together with Ericsson, we can also provide connectivity and also on the back of that, of course, provide our types of services and solutions. We've also, on a minor scale, but nevertheless, we have developed a new drum cutter. If you want to dig a ditch in your backyard, a big one, you can call us.
We have the best tools available for these types of applications, and this is a new offering that we have in the portfolio. All in all, I think, again, a strong 2018, a solid finish of the year, and good activity among our customers. Anders, why don't you tell us about the numbers?
I will. Thank you, Per. Some details on the numbers, as always. Orders received, 11% organically up. As you can see, and as Per said, the Q4 was a very strong revenue quarter. It's a record in revenue with good output and 19% organically. Of course, also we had an impact of currency, as you have seen, about 3%, which for the full year came to 1%. Also worth mentioning here is that, as you likely have noted, the currencies towards the end of the year actually came down a little bit with the strengthening of the SEK. I will come back to that a little bit about going forward. With the structure we have in there, we have a contract manufacturing, which has more or less been divested at the end of the year. The vast majority will disappear going into 2019.
The acquisition part and this contract manufacturing makes up for about 50/50 of the structure piece. Going forward, as Per said, we expect the demand to remain on the level where we are. The impact from the acquisitions of Fordia. Fordia will be fully in during Q1, but that will more or less be balanced out by the disappearance of the contract manufacturing. Between the two, it will basically be a wash. On the currency, now when we start basically from zero again, when we compare the levels where we are compared to the average of last year, we see that it's a little bit lower. However, if we compare year-over-year, the first part of the year, especially during Q1, will be stronger than the second part of the year. We can expect the positive currency effect in the beginning of 2019.
When it comes to operating profit, the flow-through Per mentioned was about 25%. We should remember that we have still an impact of the fact that last year we were not a fully built independent company. That has obviously a negative impact on the flow-through. Also the fact that we have, in relative terms, more of capital than of the market with a strong revenue growth. The operating margin, as reported, increased by 2.4 percentage points. If we then exclude the impact from split costs and long-term incentive programs provisions, the improvement is 1.8 percentage points. I believe some of you have already made that math and divide it into currency contributing with one percentage point and organically about one percentage point and a little bit more than one percentage point. Then the structure had a negative impact with a little bit of a dilution.
When it comes to the split costs and the long-term incentive program provisions, worth mentioning, which could have been a little bit of a surprise, that it's actually a positive amount net of the fact that we have had the split costs, but the impact from the lower share price in the end of September compared to end of December had a positive release of provisions.
So that's why it's plus SEK 8 for the quarter net of the two. If we go then into the P&L, I've said it before and likely the last time, last quarter, I will mention that when we compare to the previous year, it's comparable down to the operating profit. The tax and the financial net is a result of the combined financials that we used when we created the financial history. If we look at the R&D expenses, they are up.
We are putting initiatives in R&D, so that's clear. We also see an increase in marketing and admin, also from a stronger presence. But in the admin, we see a volume impact from logistics, increased growth, but also here is where you see the impact from the, let's say, inefficiencies or lost economies of scales in some of the building of the Epiroc as an independent company, and also the long-term incentive programs, which year to date was an amount not a positive, but it was an amount of SEK 66 million.
When we go lower or further down in the P&L, the interest net of SEK 37 is around the level that you can expect. We have obviously, other than the interest, we also see fluctuations in exchange rates, so it will not be straightforward, but that's quite normal.
I would also say here that the refinancing of Epiroc during the second half, and particularly in Q4, doesn't have a material impact of the financial net. We have obviously, other than the interest, we also see fluctuations in exchange rates, so it will not be straightforward, but that's quite normal. We have replaced, I will come back to that, the bridge loan, more or less, during Q4. Tax rate worth mentioning, you see that year to date, we are at 24.5%. We've previously said that we will be low 26%.
We have seen a positive impact also retroactively that we now can include from the tax reform in the U.S. The U.S. is a country where we pay significant taxes, second to Sweden. So that's why we are at such a low number for the quarter. But going forward, we should expect the tax rate with this sustainable tax reform to be below 25%. If we then go into the balance sheet, we have, as I said, almost completed the refinancing.
Other points to make is obviously we also completed or announced the rating from S&P with a stable outlook and a BBB+. Good for us, and I think we're pleased with it. Other points to make, the working capital, especially inventory, which you have seen in the cash flow, improves or reduced during Q4. If we then compare with last year, then of course, when we capitalized the company in the beginning of 2018, we also had the cash at a level where it should be sustainable, and during this year, we have generated cash. So we closed the year with SEK 5.9 billion in cash. Also the equity is obviously then the difference between last year and this year from the capitalization.
When it comes to IFRS 16, we have a preliminary number of about SEK 2 billion that we will, let's say, increase the balance sheet with, and also then the net debt. I will come back to that a little bit. If we then look at net working capital, we did take it down with about half a billion SEK during the quarter. The net working capital as a percentage obviously was lower. The average 31.8% is stable, but the period end number, if you calculate, is lower. We see improvements coming now with the supply chain program according to plan, not so much yet in the balance sheet, but we see positive signals. On the net debt, it was reduced by SEK 1.9 billion during the quarter. Is now SEK 1.2 billion, was SEK 3.1 billion.
The IFRS number will inflate the net debt with about SEK 2 billion as a consequence of the accounting treatment increasing the balance sheet asset side and the interest-bearing debt. Most of that will be long-term. Part of it will be short-term according to the classification and the method that we have applied. The net debt was not impacted by the refinancing. We replaced the bridge loan with the long-term financing according to plan. No real changes. There is SEK 1 million left to be replaced, and that is scheduled for this month to be taken out and replaced with a long-term part. Last but not least, cash flow. As Per mentioned, pleased to see the strong cash flow that we finally had in Q4. Obviously contributed by a good result, but also by the reduction in working capital.
Much more than that is not to be said about the operating cash flow we had. As expected, investments were about on the same level. What I should mention regarding the cash flow, other than the SEK 2.2 billion in operating cash flow, we also divested a couple of portfolios with the customer finance, which we also did in Q3 that had SEK 200 million positive on the net cash flow. It's not included in the operating cash flow, nor is the repurchasing of shares, which we also did in the Q4 about the same amount, about SEK 200 million. All of those two items is part of the net cash flow, which was SEK 1.9 billion for the quarter. With that, I have completed the financial part and leave it to Per for the summary.
All right. Thank you. I've already said all of this, and I said that I'm happy with 2018. I'm happy with the solid quarter IV with good growth. Of course, you're all waiting for what's the outlook. If we look at 2018, we had very strong demand in quarter I and quarter II. Came down somewhat in quarter III and quarter four. There are also increasing uncertainty in terms of what's going to happen on the global trade politics and also where is the global economy, where's the cycle, where's that going to go? Increased uncertainty, but we still see a high level of activity among our customers. Our outlook is that we will stay more or less on the same level that we saw second half of 2018 rather than the first half of 2018. That's really the outlook for the demand.
When it comes to revenues, we had a very strong quarter IV, as you saw. We expect quarter I to be somewhat lower than quarter IV, but certainly a significant growth versus quarter I of 2018. That's more or less the outlook going forward. If we look at the focus of the company, I already mentioned that 2018 was a year where we have focused on establishing the company, making sure that the brand is well-known, that we have the capabilities and the capacity internally. 2019 will be a year where we focus on efficiency, on customer offerings, on agility, and on resilience. Those have been the trademarks of old MRET and now Epiroc, and we'll certainly continue to nurture those into 2019. That's going to be the focus going forward. That's it. That's the conclusion.
Thank you, Per and Anders. I think we should continue with the Q&A session. I think we start with the floor, and I already see one question.
Thank you, Ingrid. Olof Larshammar from DNB Markets. One question from my side. You have had a very good progress in the service business throughout this year, I think 16% growth year-over-year in the fourth quarter. Could you please elaborate on the main driver for this development? Also, are your expectations going into mountain and especially considering that you have been ramping up number of personnel within the service areas, I understand. Thank you.
The drivers behind that development is really a very systematic mapping of the fleet and the service needs of the fleet and trying to understand exactly who's the owner, how many operating hours does it have, is it due for rebuild, et cetera. That systematic work is really the baseline for driving the sales of service. Of course, the size of the fleet as such. Of course, which means that the proportion of the volumes of equipment sold during 2018 is good news going forward. The focus of service into 2019 is to continue the growth, but also to focus on efficiency. I think the growth during 2018 has been very satisfactory, but I think we can do better when it comes to efficiency, growing more efficient when it comes to service, that's going to be the focus.
One should also keep in mind that the service is both spare parts and service man-hours. The majority of the volume within service, the growth of volume within service as such, has been man-hours rather than spare parts. That is to be taken into account as well when you look at the service numbers in total. Back to your question, that's going to be the focus on efficiency and growth rather than growth.
Anders Roslund, Pareto. I have one question regarding the order intake outlook for 2019. You mentioned that you now expect or hope to stay at the level achieved during the second half of the year. You received a very big order in the fourth quarter.
Yeah.
Do you expect that type of orders to come also in 2019?
Well, I certainly hope so. There is, of course, we end up in this discussion in terms of what is a large order and what is some of the baseline order, we've been elaborating internally because we had that question in quarter II and quarter III to understand, is there some systematic way of understanding the base load and on top of that, the big orders? There's not. I wouldn't call it random, but it's not easy to understand. Is there a pattern? No, there isn't a pattern. Basically, with that in mind, we say that the levels should be more or less on par with what we saw in quarter III and quarter IV. On top of that, possibly a big order. Who knows?
Okay. You don't include big orders in that forecast?
We saw big orders in quarter IV. We didn't see that magnitude big orders in quarter III. If it's going to happen, it could top it up. It's not easy to exactly forecast, because we're not making the decisions, and of course, this is based on the decisions made by a customer. If you look at the general activity and if you look at the sentiment in the market, it's still at a very good level, but the uncertainty has increased.
Okay. Thank you.
Yeah.
I don't think we have any more questions from the floor, so I think we hand over to the telephone conference operator. Do we have any questions?
Thank you. Our first question comes from the line of Klas Bergelind of Citi. Please go ahead. Your line is open.
Yes. Hi, Per and Anders. It's Klas from Citi. Coming back to order intake and guidance, you are now saying that you're guiding for flat demand on a rolling six-month basis. I think last time it was against the last quarter. That would mean that if it's X large orders, I get that to be SEK 3.3 billion that you're looking at or a run rate of SEK 13 billion on an annual level. It's a little bit lower than I thought, considering that at least according to my history when I look at MRET, when you were part of Atlas and how orders are trending at some of your competitors historically, orders are typically on a seasonal basis higher by some 7%, 8% in the first versus the end of the year.
Could you comment a little bit, Per, when you're using your data from 1990 that you referred to during the last conference call, whether that is the typical seasonal pattern and why we shouldn't see it again? Thank you.
Well you're right. The clearest development over the year when it comes to quarter- on- quarter sequentially is that quarter III is typically lower than quarter II. We also can see a slight uptick in quarter I versus quarter IV. Now, as I mentioned already, the arrival of large orders is we don't exactly know when they will arrive, so it's difficult to take that into some sort of a forecast. We also, as I said, we continue to see high activity and pretty good optimism when it comes to our customers. Again, higher uncertainty. All of this combined, we feel that looking at orders received more or less on par with second half is what we expect. It's not necessarily more scientific than that.
All right. A follow-up question to this relates to, hopefully, the conversation can turn to the medium-term outlook, not only the next quarter. We know that the latest peak in 2012 was mostly underground, where the replacement cycle is very short, some five, six years, particularly on loaders, a bit longer on the drill rigs. When we now listen to Caterpillar, they're saying that their customers, the miners, are telling them that they should be ready for replacement cycles starting in 2020. Your trade cycle is shorter than Caterpillar surface tracks, which are typically replaced at 12-13 years intervals. What have the miners told you from a medium-term perspective when you think about replacement, Per? You're guiding here for near- term, but can 2019 be the replacement year of the second wave, or do we have to wait longer for that?
Well, we expect, as you may remember, is that so far, according to our definition and the way we talk to customer, understand their investments, is that the majority has been expansion rather than replacement. In 2019, we expect a replacement to become a larger proportion of orders received. I guess the answer is yes. I think we'll see more replacements in 2019 than we saw in 2018.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Graham Phillips of Jefferies. Please go ahead. Your line is open.
Yes, good afternoon, Anders and Per. I'd like to ask a question on this new order you've got from Anglo. It is open cut. Typically, it's not been where you've had a huge focus, obviously, with the underground mining machinery, typically more where you've been focused. What is it that you've offered there in terms of either new products? Is this a new area that you can perhaps develop more? Of course, where the current copper price is, it's quite way below greenfield incentive price. Is this something you've done in order reducing costs for this customer that enables them to consider a project of this size as a greenfield?
Well, obviously, these are surface drilling machines. It's both from our ADS division and to a minor extent from SCD. It's big machines and some smaller machines. That's what we do. It's really the highest level of automation on all machines. This is essentially what we will provide. The incentive and the reason for them to go for a greenfield project, I guess you have to basically hear them. I've seen part of the numbers that they provide, and the cash costs that they will achieve, this mine will be fantastic. I think that's really the reason why they go for development.
Okay, thank you.
Thank you. Our next question comes from the line of Matthew Spurr at BNP Paribas. Please go ahead. Your line is open.
Yes, Matt Spurr, ex-AM BNP. The first question, let's go back to the Quellaveco, if I pronounced that correctly, on the greenfield. When you get an order like that for that project, is that all you're gonna get or are there multiple opportunities to win throughout the life of this project?
Yeah, we have an agreement with them not only on machines but also for service is not currently recognized in our orders received. It's a substantial service amount that will be done for these machines over the period of time, but that is not disclosed, the magnitude of that, but it's a significant number.
Okay. Then my follow-up was, I know you said it's difficult to assess this, sort of what's base load and what's large orders. I sort of try to ask it a different way then. Based on the current level of activity, where do you think you are for large orders in this quarter, let's say versus Q1 and Q2 of 2018?
Well.
I know you didn't announce any in Q3.
Yeah, I know. The numbers in quarter IV, we basically have one big order, and that's the Quellaveco order. We saw more big orders in quarter I and quarter II, not to the size of the Quellaveco order, but the number was certainly higher.
Okay, thanks.
Yeah.
Thank you. Our next question comes from the line of Marcus Almerud of Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah, hi, good afternoon. Marcus Almerud here. Just continue on the orders and then to pick up on Klas's question. If I get it right, I think you've said before that Q1 and Q2 was basically on par with Q3 if you were excluding the large orders. That means that you saw a downtick in base orders or however you want to see it in Q4. Was there any reason for that? Also, if replacements are gonna be a larger part of 2019, that means that the expansion is gonna come down if you're gonna be at the same level. Are you basing this on customers' hesitation or anything else that is behind this? Thank you.
Well, to be honest, I'm not exactly sure I understood the first part of the question. Of course, if orders is maintained at what we saw in second half throughout 2019, and if replacement is a bigger proportion than expansion, of course, that's gonna be a lower amount of expansion. That will be a consequence. Right now, we're just talking about the very near future, which is quarter I , and we expect that to be Again, I'll just repeat, we expect that to be on the same level as quarter III and quarter IV, more or less. That's where we are.
Yeah. What was the first-
If you don't mind, can you repeat the first part of the question?
Yeah. What I asked was, I think that Q1 and Q2 were very high, right? I think you've said that if you were excluding the large orders-
Yeah
Q1 and Q2 and Q3 were basically at the same level, that was sort of coming down in Q4. I was just wondering if there was any reason for that or if it was just any temporary factors, et cetera. You also had the seasonality in Q3, which was one of the reasons why it was weaker, and you said you've seen that in the past if you looked at the data, et cetera. Now it's coming down-
Yeah
even further from Q3. Just explain the dynamics if you can or if you have any reasons for it.
As I said, I think, we're still looking at a positive sentiment, good activity. As you say also, there's a fewer amount of larger orders the second half as compared to the first half. Whether this is a function of decision making and our big customers or not, I'm not really sure. Whether it's just a random pattern, not really sure either. When it comes to the outlook going forward, what we're saying is really, it's again, very difficult to predict the arrival of large orders such as the one we had in Quellaveco, for example. It could happen that we receive one or more, which will have quite a significant impact on the individual quarters, but that again, is very difficult to forecast.
Okay. Thank you.
Thanks.
Also quickly, if I could just ask about exploration as well, if you're seeing those kind of trends continue, what you're seeing in exploration. Thanks.
Well, we see exploration still being on a high and healthy level, not to the level that we saw in 2012, for example, but still on a high level. Exploration continues. The forecast, if you look at the forecast for vital metals such as copper, such as nickel and associated metals when it comes to the electrification of the global fleet of vehicles, there will be a shortage come 2022, 2023 if we don't see major expansion, be it greenfield or brownfield. Of course, exploration will continue. The current uncertainty, of course, means that people are not entirely sure where to invest and how much to invest. Will this exploration continue? Yes, we believe so. Will there be positive momentum in mining going forward? Yes. Right now there is uncertainty.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Guillermo Peigneux of UBS. Please go ahead. Your line is open.
Good afternoon, Per and Anders as well. Just a question on the second generation of electric equipment. I just wanted to check the state of affairs now. I guess, there's two competitors on the ground, mainly with the same technology, but electrification used in different ways, so to say. You use modular batteries, whereas your competitor inside the mine uses a different technology there. Is it too early to assess which technology is, in a way, capturing the most attention by mining clients? Would you say that they're indifferent to the technology in terms of battery technology? That's my first question. Thank you.
Yeah. That's a good question, actually. I think our feeling and our understanding and our belief, obviously, is that having interchangeable batteries and a standardized cell factor is the way to go, and this is what we have in our second generation. Which means that we can upgrade the cells when new battery technology arrives, and also make a changeover quicker for the customer. We believe that's the way to go. Now, whether that's going to translate into the customer's belief as well remains to be seen.
We've made our analysis, and we're going down our route. It's early to say exactly what the customers are going to say. We also know that we believe that we are in the lead when it comes to battery technology and the applications in mining vehicles. We intend to remain in the lead.
Thank you. Then a second question maybe on the dividend. The proposal is SEK 2.1, which is a little bit short of the 50%, or around 50%, that you basically highlight in the IPO prospectus. Is there any reason why, given the state of the cycle, what you see in front of you, that you should be a little bit below your ambition or aim?
No, I don't think one should read anything more than, as I mentioned already, the underlying level, if you include Atlas Copco, would be SEK 180, and we are now at SEK 210. Again, it's a 16% increase, and we think that's substantial and a good starting point for Epiroc.
Thank you. My last question regards Tools & Attachments. I guess, good operating profit development there, good operating leverage. Can you determine how much of this is internal versus just basically mix and organic growth?
Sorry, can you repeat the question?
Yeah. In Tools & Attachments, you did have a better-than-expected performance, I guess. I wanted to check whether you could share with us how much of that is just internal cost savings or internal efforts versus organic developments.
Go as well. Okay. I think if you look at tools and attachments, we have tools, we have attachments, and attachments has done fine essentially throughout 2018. The issue that we had during 2018 is really around tools, consumables. We have faced headwind when it comes to raw material price. We have basically been able to fend off the raw material price through price increases and internal efficiency. We're treading water when it comes to the profitability as a percentage. I don't know if that probably doesn't answer your question, that's where we are right now. The leverage that you're seeing is volume driven. That would be my assessment, primarily.
Okay.
Yeah.
Thank you so much.
All right.
Thank you. Our next question comes from the line of Alexander Virgo of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Thanks very much. Good afternoon, gents. Just following up on that T&A question, I wondered if you could explore a little bit more around the dynamics you mentioned, and have mentioned before, around the bottom end of your portfolio and your initiatives to move away from unprofitable business. Obviously, it's hampering the top-line development. I just wonder if you could talk about how much longer you feel that is something we need to be aware of over the coming quarters and year, and whether or not you can see the end of that, if you like? Is that something we're just going to have to be wary of for a slightly more longer term? I suppose just to ask the previous question in a slightly different way, how much of the 300 basis points year-on-year margin improvement would you attribute to that initiative, i.e., avoiding unprofitable business?
Thank you.
All right. If I answer the first half, you'll look at the flow through. As we mentioned previously, we do our portfolio primarily in tools, we do have some core products where we have profitability levels that we're quite satisfied with. Part of the portfolio is not satisfactory. We're dealing with that, we expect to be able to resolve part of that at least within the coming couple of quarters.
When it comes to the, let's say, the profitability improvement. Yes, I don't really want to quantify it, there will be an improvement on the relative margin, obviously, from divesting less profitable business, we can see a better flow-through, without being too specific at this point.
All right. Thank you very much.
Thank you. Our next question comes from the line of Graham Phillips of Jefferies. Please go ahead. Your line is open.
Thanks. Yes, I had a follow-up question on the cashflow for Anders. It's a really good fourth quarter cashflow. Can you talk a little bit about the impact from working capital? I think that's the main reason it's come in stronger. Also separately related, is IFRS 16 going to have an impact on the P&L as well? You've indicated that the operating leases will have an impact on the net debt. Does it change any of the accounting for the P&L, in the P&L for IFRS 16?
Yeah. If we start with the cashflow, I like to talk about the cashflow. The main reason for the, let's say, the reduction in working capital is inventory. As we had a very strong finish, obviously not all of the sales have been paid and turned into cash. If we look at the different components of the working capital, obviously the reduction has been in inventory more than in the receivables. I don't know if that answers your question, but we're pretty pleased with the development for sure.
Which business-- Because that will have impacted the margin, which business of the three business areas would have had the benefit? Service to equipment or Tools and Attachments?
It's a little bit everywhere, to be honest, obviously with a strong revenue and deliveries from the Equipment side, that obviously made a difference. We've worked hard in all areas, I don't really want to be too specific here either. Certainly, the Equipment deliveries have made a difference.
Okay. Thank you.
On the IFRS 16, as we have mentioned, there will be very marginal impact. We will have a very small, and I think, let's say, plus on the operating profit and a very even smaller negative impact on the profit before tax, after financial net. It's really immaterial considering the size of the company.
Okay. No particular division as again, of the business areas, equipment, service, or Tools and Attachments in terms of the P&L profit increase?
No. The numbers are so small, so it's not noticeable in the larger scale.
Okay. Perhaps just another follow-up is on the service. You talked about what's happening with orders. How much more headroom is there in discovering these bits of equipment that you've mapped, that you said that's not been fulfilled on service needs, who owns and what the size of the fleet is? Trying to understand what the normalized level of service order or organic sales growth is quite difficult to know when we've seen very strong numbers coming from you in recent quarters.
Yeah. I think there's still plenty of potential in mapping the fleet and making sure that we touch every piece of machine and also, the target is to have 100% of all the business on a machine. At the end of the day, that's going to be unrealistic, but we expect that 70% could be possible, and we're certainly not there yet. There's plenty of potentials going forward to continue to work with and increase the service proportion.
Right.
Yeah.
You mentioned that it's dilutive to margin to the service profits because it's more man-hours than spare parts.
Yeah.
At some point, do spare parts follow? Presumably these guys are working longer to service equipment, but they're going to be using your spare parts, aren't they? They might not have previously been using your spare parts.
That's correct.
Is the margin impact that significant that you've mentioned it? Should that then reverse at some point in, I don't know, in the coming year?
Pardon? Can you repeat the question?
The point you made about the biggest bookings in services being for man-hours-
Yes
rather than spare parts.
Yes.
That's lower margin. At what point do the spare parts actually start to actually come in, as your man-hours are actually using your spare parts rather than someone else's?
Well, that's a difficult question. I don't know exactly when that would be. As I mentioned, the focus going forward is to increase efficiency in service in general, but also making sure that the growth is more efficient than we saw in 2018. That's going to be the focus. Exactly when there's going to be more spare parts in the mix between spare parts and man-hours, I'm not exactly sure, to be honest.
Okay. Thank you.
Yeah.
Okay. We have time for one short question.
Thank you. Our next question comes from the line of Amit Agarwal. Barclays, please go ahead. Your line is open.
Yes, it's Lars from Barclays. I hope you can hear me.
Yeah.
Per, I had a slightly larger, bigger picture question on copper, your biggest metal exposure after gold, obviously, and arguably a big upside surprise to your growth in 2018. We've seen some 2 million tons of peak production capacity come through in approved projects over the last 2 years. You mentioned Quellaveco, obviously, that was in your numbers in Q4, approved in mid-2018. That was at the tail end of that. I think that means we are now at a 20-25-year low project pipeline beyond projects in construction. That's what we call probable or highly probable projects, and would suggest we might see a bit of an air pocket in CapEx growth among your copper miners in 2019, 2020 potentially. That's at least the picture I'm starting to hear out of some of the big EPC vendors. Is that a picture you could recognize?
In other words, do you look at your copper business in 2019 and 2020 as being a declining business?
No, not necessarily. I think we already mentioned the outlook going forward. Copper, if we talk to customers globally, especially in, I think I mentioned South Africa. No, southern Africa and South America, I think they're quite bullish going forward in terms of their expansion projects. As I already mentioned, is we think that if you look at the projections for copper balance production and demand, if we don't see major expansion beyond 2022, 2023, there's going to be a shortage. Exactly how that's going to play out over the next few years, difficult to say, but we're not seeing that copper should be necessarily weaker than the average, so to speak.
Obviously South Africa is tiny in the scheme of things. This is very much a Latin American market. I guess the point I'm trying to make is there aren't many board-ready projects out there that can be pushed through in the near- term, particularly given where copper price is today and some of the permitting and environmental issues we continue to see. So that's why I'm flagging what I suspect might be a bit of an air pocket among some of the copper miners in the short to medium term.
Okay. I was referring to countries such as Zambia rather than South Africa. We'll see whether you're right or not.
Thank you.
Yeah.
Okay. That was actually the last question. Time is running up. I think we have to end this session. Thank you very much for joining us, and hope to see you again next quarter. Thank you.
Thank you.
Thank you so much.