Atlas Copco AB

STO:ATCO A

Earnings Call Transcript 2018-Q1

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Thank you very much and very warm welcome to this First Quarter 2018 Conference Call for Atlas Copco. My name is Hans Ola Meyer, as you heard. I'm the CFO of the company and this time, it's a little bit of a special call because yesterday, at the Annual General Meeting, a decision by our shareholders to split the company in two, Atlas Copco and Epiroc, was taken and you have seen from another press release.As an effect of that, we are now -- and I'm sure you have noticed already -- we are reporting the continuing operations for Atlas Copco and Epiroc is then reported as a discontinued operation.This has some implications on some historic numbers where the exact quarterly data between Atlas and Epiroc is not exactly 100% reconciled and somewhere in the material, you will see that there may be some gaps in some numbers or numbers left out and so on. And this is for the reason that the Epiroc prospectus with all the details is not ready, as you know, and will be ready at the end of May.Also as a consequence of the decision, we thought it would be a good idea to not only have Mats Rahmstrom, our CEO, as usual on the call but also Per Lindberg, the CEO of Epiroc, and Anders Linden, the CFO of Epiroc participating in this call. And we will come back to that later of course.Today, we have an hour as usual and I would already now ask for the Q&A session that we stick to one question each because it allows more people to have their possibility to ask questions. But I'll come back to that. First, I'll hand it over to Mats.

[Mats Rahmström, President, CEO & Director]

Thank you, Hans Ola and I will start on Slide 2. We call this Slide Strategy in Action and we wanted to share a little bit a story with you and this is really what drives our organic growth. This vacuum dry pump [indiscernible] might not look much to you but it's a very important of the making semiconductors.And this is a success working together with the corporation, with one of our big clients. And they developed this product over 18 months and onsite. And it's a pump now that is recognized being more quiet, has a smaller footprint, and higher energy efficiency and it's also easier to service.So when they had the AGM last night, we recognized this for the John Munck Award, which is the award for best innovation in Atlas Copco. This is a very important product and a big success for us. Then on Slide 3, [indiscernible] stock to comment. Also, wanted to comment on the Epiroc-Atlas Copco decision. So I'll start with record order intake and SEK 25 billion for us almost. It's a fantastic result, recognizing 9% organic growth versus last year Q1, which was the record for us. So we're very pleased with that.You can also see that there's still a big drive for equipment, but also service is tagging along in a very good way. You can also see that we're growing all our main markets. I would especially like to highlight the penetration over the last 1.5 years in Asia. In this quarterly report, you see it's 37% [ OSA ]. So it is very important to be number one in the world. It's the number one semi market. It's the number one auto market. It's the number one contested market and of course, of the construction market. So they really drive our presence and competencies in these regions.Profit margins and adjusted one was 21.8% and the reported one was 22.1%. And on the positive side, you had the divestment on light and concrete for SEK 109. You had a split cost on Atlas Copco sign being negative on 39, but then you need also to look if you want a complete split cost on Epiroc. I think it's minus 95 and you also have the evaluation of options for minus 16 and that is then the gap between the adjusted and the reported numbers. Hans Ola guided you a little bit on last quarter, on the currency and it came at minus SEK 450 million and Hans Ola will share a little bit looking forward later on in the presentation. On Epiroc, fantastic orders received. Very proud of the organization and Per will uncover Epiroc's presentation later on. Slide 4, this repeats a little bit what I just mentioned. But if I go to the revenues, we can see it's almost SEK 22 billion there and organic growth of 9%. It's quite a good achievement and we are proud of the team that's been pushing on deliveries. But you can see there's still a gap of course between the orders received and the revenues.But if we go to the graph, I think I mentioned in the previous quarter, we are trying down to be on the level on the run rate now that could match up with Q2 and Q3 in terms of deliveries. And you can see that principally, we are almost there now. So I think they have done a great job of course with fantastic orders received now. There are new challenges in the supply chain for us and we'll cover that a little bit later.Operating cash flow, the bottom line there, we are building up inventories, orders [indiscernible] to be able to deliver for the future orders [indiscernible]. Hans Ola will cover that a little bit further as well later on.Slide 5 shows you the split of our sales. We can read the very strong Europe, 13% up. Very solid numbers in Brazil, mainly down for the Atlas Copco part, very solid 17%. And you can also then continue group in Asia and as I said, earlier down the complete split, 37% being in Asia, which is very good for our future opportunities.The negative part [indiscernible] Africa. The biggest [ BA ] there is the CT and they were principally flat, but we all seem to [indiscernible] here and there was one order in [indiscernible] that did not repeat. So it's principally for comparison there. Slide 6, first highlight that we have decided to exclude mining and rock excavation in this slide. You can see now 7 strong quarters and we continue to invest and I encourage them to look at new opportunities both in coverage, but specifically in R&D. So we continue to invest money into that. I think this is a very interesting company today to work for a young engineer that would like to have a big challenge, that could be hardware, software, or into the new digital area. I think that this variance may be a [indiscernible]. Slide 7, there I would highlight on the currency, SEK 450 million and then you can see that now, we have combined the volume and price into one what we call organic. It might look to someone like we are trying to hide away from a problem. That is not our intention but we have realized that our guidance, when we cannot include new products or projects, don't give you good guidance price for comparable products was approximately half the percent.Slide 8, there you can see the new structure, compressor being a big part. But you can also see vacuum being principally number 2 size, and then industrial technique and power technique. Slide 9 getting into the compressor performance and considering the number of industries that they are in today, I think the organic growth number on 13% I would say very, very strong. You can also see that in the graph that it really sticks out that's an amazing performance. It's a big demand for the larger compressors. That's both oil-free and gas compressors with a strong drive in Asia, as we highlighted as well.The operating margin, we reported 23.1% and I think they have a negative currency just about 1.2%, something like that. So it's a very strong profit margins on compressor technique.On the innovation side, you can see in the left corner it's in medical gasses, providing them compressor equipment for hospitals mainly. We have very strong performance in U.S. but we are leading also in the U.K. But we have more work to do in some other regions and we continue now to introduce new products. And the Walker Filtration acquisition is something that we wanted to do for a number of years. It's a key component for performance in compressors but also in vacuum technique. So you can now say that we are in the [indiscernible] business for compressors and vacuum techniques. Vacuum technique, Slide 10. We didn't highlight it, but it was also record revenues. They consolidate in dollars so if you would have looked at this graph in dollars, you would see that they also have the record for the [indiscernible]. And it seems to be semi was a little bit more flat, but we continue down that was [indiscernible] is a fantastic quarter last year and they continue to grow at this [indiscernible] industrial and high vacuum, and the numbers I see cannot believe anything else in that we are gaining market share in this area.Operating margin was highly impacted by the currency, mainly that the U.S. dollar negative 3.4% currency. If you look at the market now, we still see cheap pricing there and they said it was increasing. Now, think it's been more flat and sales is still high. Although I think some of you might have followed some of the reports last week that you can see some foundry companies reported that they had less demand for the high-end phone chips for example. But it is a smaller piece of the market and so we still believe that the main drivers of this industry are still there, more memory is in use, more data computing. We see more IoT in the auto industry, more AI and ER as well. That doesn’t mean that every quarter is strong. It's still a lot of key accounts in this business, but the demand for this type of product is increasing over time.On the new product side, the variable speed, we recognize that from compressor technique, this is how we help our customer to drive down costs in terms of efficient use of the energy. It's also good for the environment. So now, we have these type of [indiscernible] compressor technique. We have it in power technique but also now in vacuum technique. It's a very interesting product on the [indiscernible].Industrial technique, solid organic growth of 9%. Continue to develop very interesting products to the market, shifting more and more into battery, connected tools as well, as you can see in the left corner. And the trend shift we have seen a little bit, each month [indiscernible] quarter will be that the general industry starts to take off with better and better market from what we call off-road. I can see a clear shift as well. In the strong core market in Asia, as well as generally developing there as well. Overall, I think I talked a little bit about the general demand for the auto manufacturers. They say that in the past few years we had a 4% growth for a number of years and the projection going forward is that there's still growth but on a lower level, around 2% that was also confirmed in Q1. Then we should note that our business is not directly correlated to the manufacturing output, more to the number of products in the market. We did see even in the core industry a big demand for different projects and we locked in material in body shops, but also in transmission and powertrain. And driven of course by some of the electrification as well.Completed a very interesting small one, but an interesting acquisition for Klingel. It completes in principally one more [indiscernible] technologies. So if the customer [indiscernible], we can handle the nuts, and the bolts, and the screws of course. Also then for mixed materials on the adhesive solutions. Also the sales [indiscernible] and this [indiscernible] is a one-side operation and you can use it for steel, as well as aluminum. It's a very good and complementary technology to the ASPRs. And if you look at the graphic on some outstanding orders received on industrial technique as well.Power technique, I think you have to look at the graph. I think you have a proud team there with strong orders received, up 16%. This is portable compressors, but also rental is growing okay. The adjusted margins of 15.1%, and they also have a negative currency impact of minus 1.3%. Then you can see on the capital gain and that is from the divestment of light and concrete, so they reported 18.9%. If you look at the corner diagram, the container, it's actually quite an interesting product where we have then combined 2 engines into 1 big generator, which makes it significantly more efficient and they can utilize the [indiscernible]. I really believe this will be a winning product moving forward. Also another interesting for the rental business that we've done have the [indiscernible] and in the same beat was now [indiscernible] in steam and steam is one of the best ways of course to transport heat in different processes in the industry. So one more step that in the specialty rental business.And by that, I will hand over to Per and give you an update on the Epiroc quarter.

[Per Lindberg]

Thank you, Mats and you have another proud team in Epiroc. We had a very strong quarter I think, organic growth of 21% landing above SEK 10 billion, which clearly is a benchmark for the group. Double-digit growth in all regions where the Americas and Africa-Middle East came the strongest. Equipment and service growing 22% with equipment being the stronger of the 2 and we still see the majority of orders coming from the down field expansion projects, just quite interesting to see. So it's an attachment at 13% also, very healthy.Revenue is up 14%, which just in comparison, a very good number. But of course, given the orders received, we're still under pressure when it comes to supply chain. But we're managing and I expect a ramp up to continue or to accelerate in quarter 2. Margin is at 18.4%, but of course, we do have one time listing cost of SEK 95 million, which corresponds to 1.2%. And we also have corporate costs now building up, the Epiroc Group corporate functions, of roughly SEK 45 million. And that as an indication is roughly 3 quarters of the run rate that we expect during 2019. And also, at the end of this slide, as you can see, there's a reminder of a capital market day on May 30 and there's obviously a link to a website where you can register. And I encourage you to do that. Thank you.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Thank you, Per. So it's Hans Ola Meyer here again. I think we will move over to the income statement on Slide 14. But Per have taken you well in this case back to continuing operations, I should say. So Mats have taken you through some of the numbers in the income statement.If we look down, you recognize the 22.1% on operating profit and adjusted 21.8% as Mats said, you remember as well. We've got the profit before taxes then means that we have about SEK 320 million in negative financial net. It's above what we feel is the run rate and the reason, the main reason I would say is because we decided to prepay one of the Euro loans that matures next year. We will have a pay back of that one time cost before this loan matures next year so that was a good idea. But it's a onetime cost included in that. That's why it's big.Going forward, I would say you should expect perhaps a little bit more than SEK 200 million or in that range. Of course, depending what the Krona does to the Euro and the Dollar and translation differences, but somewhere in that region I would expect for the next quarter or two. Further down, you have the income tax expense and you can see with your own immediately that we have about the same tax expense as last year, but higher profit. So the rate, tax rate, was 26% and it was quite much higher, 28.6% in 2017. Now, of course, as I said in the beginning, now we have a combination of new numbers for Epiroc and new numbers for continuing Atlas Copco. So we should perhaps be a little bit careful in overanalyzing the ratio and the numbers for last year. It will take a couple of quarters and reports and then you will be quite comfortable with understanding what is a run rate for Epiroc and what is a run rate for Atlas Copco. But in this particular moment, when we are still splitting. It's a little bit difficult to be exact but 26% for continuing operations is also a pretty good indication of what one could expect for the next couple of quarters.What we have seen that helps from last year is of course the reduction of corporate income tax in the U.S. and the first steps of reduction in Belgium, and so on and so forth. So that will continue to be some changes further down the road. But for the near term future, this is a pretty good indication of what you should expect. And the basic earnings per share you have there and then we can turn to the next page, on Page 15. This is where we turn the revenue bridge and the orders bridge into a profit bridge. You can see that the currency impact on profit is pretty big compared to the impact on revenues, and hence, of course, the negative margin effect that it gives for the group, about 1.3% negative. The other ones are, as we have commented, the onetime items and the share base. I won't go through them in detail. Instead, I'll go to Page 16 and we can look at the different parts of the group, with a flow through for the group of more than 40%. Of course, we have a couple of business areas that stand out. Compressor technique, as Mats alluded to, just like the group, negative impact from currency on the profit margin. And hence, if you allow for that, so to speak, the 23.1% is a very good number. The flow through is of course a combination of what was -- costs that have disappeared from last year and a very good leverage on the increased revenues and volume increases. So it's, as I've said many times before, it's not so easy to say now, we are exactly what we believe you will see going forward. Just conclude that in over a period of time, I think for Atlas Copco with the profile we have, that 30% to 35% drop through to [ EBIT ] on the revenue increase is probably more long-term achievable than these numbers.You can see another example of a very high leverage effect on profit in vacuum technique and you can also, if you make the numbers, Mats already did it for you, about 3.5% negative from currency, which is of course a burden and then repeating last year's good profit margin with that burden, so to speak, from currency is quite amazing achievement.Industrial technique is more Swedish related than Euro-Dollar perhaps than the other two. So the impact on currency was mildly positive actually from a margin perspective. And Power technique, again, negative from a currency impact. So the 28.6% on the flow through in volume price mix and other is more or less a normal indication I would say.I'll move onto the balance sheet here. Of course, it's a very messy picture. If you look at December 31, to the right, and compare it with March 31, you can immediately see that in all lines, there has been an exclusion of the Epiroc business and that has basically been moved from each of the lines to the right to assets classified as held for sale in March.The increase in total is of course both an increase in Epiroc and in Atlas Copco from working capital needs and also, of course, the profit generation in the assets it's accumulating in cash. So there is the short summary, I would say, on the liability side. The equity is increasing for Atlas Copco, of course, and whereas the interest bearing liability, again, is a combination of Epiroc -- well, of Atlas Copco continuing and then in liabilities classified as held for sale, you will find the similar effects as on assets. It's grouped in one line for Epiroc.I'll move over to cash flow here and start by saying, as we've done now, this is including discontinued operations. So we make no mistake in that. The next comment I would like to say is that you have followed us -- those of you that have followed us a long time, you know that we talk about operating cash flow. The reason we do that is because we want to guide to what we think is an underlying operational cash generation capability and that's why the numbers on certain things like currency hedges of loans we eliminate for that in one of the lines.You can immediately see that the big shift from last year is the working capital that is now accumulating because of the orders on hand development that you saw from order service. So if you would then try to see through this number from what is Epiroc and what is Atlas Copco, you can roughly say that about SEK 600 million positive would be a round number for Epiroc and the rest would then be for Atlas Copco. And in a similar way, you would find about SEK 1 billion in cash flow for Epiroc last year and about SEK 2.5 billion of Atlas Copco continuing operations. Just to get a feel for that both of us are accumulating working capital right now, of course.If we move on then to next slide, just a repeat summary of what was decided yesterday. An ordinary dividend of SEK 7, a mandatory share redemption of SEK 8 per share. So in total, we're talking about SEK 18 plus billion to be distributed in cash for shareholders in the next couple of weeks. And then of course, the big decision, the dividend out of the shares in Epiroc.Here is then the update on the split. There is no exact date on the listing. We still talk about mid-June that part is roughly indicating. But we have to, of course, wait for the final NASDAQ listing committee meeting at the end of May. And the decision yesterday was of course from the shareholders that they decide to go there. But we still have to wait to know exactly the timing of the listing per se. So with that, I think I'll just leave it 2 short words for Mats.

[Mats Rahmström, President, CEO & Director]

On the near-term outlook and the [indiscernible] overall demand for the group is expect to remain on a current high level. And the reasoning we have had in the management team is that we see record orders and it's a global picture in both 4 business areas and in all regions, specifically happy as you know with Asian development. If there are any clouds on the sky, the automotive has had production base going to come down a little bit, but we still see a lot of very active customers in the marketplace, and that is also valid for North America.In semi, there's a couple organizations looking at the CapEx going forward. I think both these organizations, as I looked at, they took investment back a little bit from CapEx for the year but still positive, like 9% and 11%, something like that. So the overall demand from the industry is still there, even though you might have seen some smaller correction.We continue to launch more and more new products and I think that will help us with the demand as we see it will not change much for the coming quarter.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Excellent. Thank you, Mats. Thank you, Per. We then continue with the Q&A. So operator, please can you give some instructions?

[Operator]

[Operator Instructions] Our first question comes from the line of Peder Frolen from Handelsbanken Capital Markets.

[Peder Frölén, Head of Equity and Credit Research]

You mentioned, Mats, the delivery capacity, you almost reached a Q3 level. Given the book-to-bill now, if you also include Epiroc of 1.16, how should we look upon this delivery capacity? And what will that effect the actual -- the leverage in the short term? So you will be able to increase deliveries from this Q1 level significantly? If so, in what area and what would that implicate in terms of the leverage? I know it's a big question and I think hopefully you could answer in sort of both Epiroc and Atlas Copco manners.

[Mats Rahmström, President, CEO & Director]

I think it's an excellent question and it's of course one of the questions that we debate a lot in our own management team. And I think we talked in the beginning of this cycle that it was foundry good that was one of the bottlenecks. I think that has been addressed from those supplies in a very good way, which is healthy because it's very difficult to change that type of suppliers. We go more and more to use [indiscernible] suppliers to handle the demand as we see it. We have ramped up in a fairly good way, I would say, and I think that industrial technique, I don't have a concern. Vacuum technique, we continue that to invest actually on a quarterly basis just to upgrade the capacity in machining. Today, handle it in a good way and I can see they're doing a fantastic job as well. I think the bigger challenge is still in compressor technique and in Epiroc. And now, it's still so that in principally, our own capacity and competencies in place to assemble more machines and deliver. So that's not really the issue. And I think each of the 27 divisions and they have a short list of suppliers that they're working with on a daily basis. So it's a little bit difficult to predict exactly what will pop up in the coming week. And now, we've put of course a little bit extra demand on this value chain [indiscernible]. But yes, it will be step by step better. There are very detailed plans from each business area with this is what we need to do. So I'm quite confident that it will be better and better, but it is a challenge on a daily basis. What I would like to say is that if you look at the lead times, look at competition, you can see that [indiscernible] will see that I think that we are very competitive even with the situation as we have it today.

[Peder Frölén, Head of Equity and Credit Research]

That's very clear and that doesn’t sound like you need to increase your staffing or cost that much. So at least in the short term, we could expect maybe abnormally high leverage. Or is that correctly interpreted?

[Mats Rahmström, President, CEO & Director]

I think it's going a little bit of head of oneself to draw that conclusion. We believe that we will be able to eat into the orders on hand situation. That's basically what this conclusion, the exact leverage we talked about that before, is very difficult. There are so many factors that affect the year, the similar year last year, and this one. So I would not sort of confirm anything of unusually high leverage. That's not what I would expect to see, to be honest, Peder.

[Operator]

Our next question comes from the line of Graham Phillips from Jefferies.

[Graham Phillips]

My question is around the operational gearing, the drop through margin, which obviously you’ve been very good in the past, have been a lot of focus on that. And you say it could normalize to 30% to 35%. Could you just contrast vacuum, compressor, and the industrial because obviously, industrial is below that at the moment and where there may be an impact on PPA creeping into here from previous periods, and also the impact of service and OE, of that mixed changes within the businesses.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

If I start and then see if Mats would like to add something. But I think one the reasons if you compare industrial technique to vacuum technique, for example, is that there has been a good steady increase of business volume in industrial technique whereas, sorry, if someone is open perhaps muting temporarily could be good. There is some noise in the background. Anyway, so I think it's more that effect that is visible in vacuum technique that it's been an extraordinary ramp up in short period of time. And then it's almost like the costs are not having time to catch up. We're investing, and we're investing, and we're investing but the needs through the big order book is just increasing all the time. But I don't think that the quarter, and certainly not predicting Q2, is the right way to look at that normalized 30%, 35%. I just don't know where it will come next quarter, to be honest. It's too many factors that play in. When I say normalized, I'm talking perhaps over a 12 to 18 month time and seeing that that can be a sustainable level perhaps. But it's very difficult to be more precise about that. When it comes to the purchase price amortization effects, of course if you buy companies and then you get the purchase price amortization on the intangible, and then suddenly, 2 years later, the business is double the size, of course, the impact is not so big anymore from a percentage point of view. But I don't think that is exactly giving you any good guidance for the flow through per se.

[Graham Phillips]

And was price and volume significant in any of those stop through margins in any of the divisions?

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Not very different across the boards. Mats indicated half a percent positive for the group and there is no big deviations in that between the business areas, no.

[Operator]

Our next question comes from the line of Alexander Virgo from Bank of America Merrill Lynch.

[Alexander Stuart Virgo, Director]

I wondered if you could talk a little bit about compressor order growth and the demand trends that you're seeing there, 13% clearly very strong. I just wondered if you can break down some of the regions for us, maybe quantify Asia and China in particular, and just give us a view on the different end market developments within that 13%.

[Mats Rahmström, President, CEO & Director]

If I start, in general, on the demand curve, yes, it's a big event at [indiscernible] beginning last week and [ massive increase ] in the order [indiscernible] around the world. And I think you can see in the industrial compressors, I think it was called yellow canaries before. You can see a big demand for the industrial compressors. And it's a global picture. On the bigger compressors, which you have them in oil-free and in gas and process, they can see it's a big drive in Asia, specifically in China. And as you know, we actually manufacture these [indiscernible]. So they are very good at meeting actually the demand there. On the absolutely smallest compressors, simple technology, I think it's a little bit more flat. That's also global. But I'm not sure that means the market is a little bit our competitiveness as well. So in general, I think it looks good for many of the divisions. And I think the biggest change you see in gas and process compressors, even though that it's not really oil and gas that drives everything. It's a bigger [indiscernible] more process. It's not that many orders in the gas side. So it's a general demand for compressors, for industrial and the bigger ones. You want to add?

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

If I just follow what exactly you touched upon, that for quite some time we've had a decent development on the small to medium-sized industrial compressors actually. But we have lacked what we had 3 or 4 years ago, good, strong demand for the bigger compressors. And that is what I see is the main explanation for the last quarter or 2 ramp up of the order growth, the organic growth.

[Mats Rahmström, President, CEO & Director]

And I would complement that information by saying that in power technique, the portable compressors that we submit more and more requests for the 4 we had mentioned, which are the bigger machines. So in that 16% orders you see more and more bigger machines that [indiscernible]. So it's a clear demand from [indiscernible].

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

In power technique in the latter example.

[Operator]

Our next question comes from the line of Andrew Wilson with JPMorgan.

[Andrew J. Wilson, Analyst]

Just a quick one for me I guess following on from the previous question actually. Can you talk a little bit about how the demand developed through the quarter, thinking particularly in compressor but also I guess a general comment on the group as a whole please.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

I'm not really sure what you're after, but you want me to comment on the other [ BAs ].

[Andrew J. Wilson, Analyst]

Please just in terms of did you see demand accelerate through the quarter? I.e. was March stronger than January, February? I'm just trying to understand the run rate there.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

No, I understand the question but I think we will refrain from those comments for many, many years because we do sell investment machines to a large extent. It's not a very straight-line type of growth or decline that we see month by month. So it would be just as misleading as a good leading indicator to look at monthly numbers, to be honest. So I think that even a quarter sometimes can be difficult to judge whether we see a good or a new trend, or a remaining trend from before. So no, we don't like to comment on specific months. It becomes just not very informative, to be honest, and you have to just trust me on that one.

[Operator]

Our next question comes from the line of Lars Brorson from Barclays.

[Lars Wauvert Brorson, Director]

Maybe I could turn to Per first. Obviously, a fantastic first quarter for you, Per. Can you talk a little bit about the outlook into Q2 relative to the 10 billion order level you saw in Q1? That's obviously a very strong number. You mentioned expansion project, maybe more so than replacement. Can you help us maybe with a bit of color around what commodities, if there are any pronounced trends that's driving that. I'm particularly keen to learn what some of your copper miners might be doing.

[Per Lindberg]

Well, in general, we can't see a slowdown in the mining, nor in construction. So the basic outlook, we expect demand to be more or less in the same level going forward, at least in the short term. When it comes to specific, you know, the types of orders that we get tends to vary, as Hans Ola said, by month, and there's also a variety of projects. So what turns up in our order books is not exactly indicative of what happens in the industry as such. We did receive a fair amount of good orders across our commodities in copper and gold as well. So the activity seems to be high there. But we also saw a high portion of orders coming in on surface equipment, surface drilling primarily, quite a lot stronger than underground during the quarter. But I wouldn’t say that that's necessarily a trend, but that's what we saw in quarter 1.

[Lars Wauvert Brorson, Director]

Just one follow-up on the outlook for vacuum technique, Mats, and just try to understand what you see in the semi side versus the industrial vacuum side. Industrial vacuum has been very strong for you over the past year. You’ve outgrown the underlying market considerably. Can you help me a little bit with what you see, particularly on the industrial vacuum side, both into Q2 but also maybe some thought further in 2018.

[Mats Rahmström, President, CEO & Director]

I think I'll speak more in general, but what we are doing with the Edwards and the Leybold brand, and also with the Atlas Copco brand, industrial is increasingly broadening the product portfolio and doing that in a rapid way by using synergies within our own company. So we're launching quite a number of interesting products to the market, which strengthen each sales rep's portfolio when they go to market so they have a more complementary product range. And then we also add coverage globally and competence. So the success is based on very traditional strategies, closing gaps in the product portfolio, making sure that we actually go out and make the customer with the right competence. And I conclude that that is what we are doing. That is exactly what we're doing and we're going to continue to do that. And I agree with you, I think that we are gaining market share here and actually, if you start adding these brands up now, I think we're getting close to the #1 or #2 position in the industrial market. We can also see the expansion of the product portfolios in high vacuum also taking market share and being very successful, also driven by product development, I would say, and launching [indiscernible]. That's what I see in these 2 markets. In semi, I mean it's been such a rapid development for a couple of years now and it's easy to get used to this level. But maybe we see that and you can see that from some of the reports in the U.S. last week. There was a little bit of a correction. We tried to follow these 2 organizations that followed CapEx and doesn't give much guidance for us actually and tend to change a little bit from quarter to quarter. It's quarter day both adjusted it down a little bit and at the same you can see some of the foundry manufacturers saying that they have a little bit weaker demand for the high-end chips for the iPhones and cellphones. At the same time, they also announced that they will increase the CapEx. So I think everyone is ready. One of the shifts that we have seen in our order book is this quarter you see more and more of the Chinese establish themselves in this market. So a number of the accounts on our top list for the quarter is Chinese. It's very clear that they are moving very quick into the memory business [indiscernible].

[Lars Wauvert Brorson, Director]

And how big -- sorry, just one final one -- how big is EUV for you today?

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Lars, I'm sorry, we can definitely take the questions afterwards but we need to move on. There are still a few questions. Sorry for that.

[Operator]

Our next question comes from the line of Ben Uglow from Morgan Stanley.

[Benedict Ernest Uglow]

It was really following on, Mats, from your remarks about the semi foundries CapEx commentary. Can you just give us a sense is there any change in terms of your own conversations with your customers? So in terms of the dialogue that you're having and the kind of sentiment on spending, which frankly changes pretty rapidly in this industry. Can you detect any changes in your own conversations? That's the first question. The second sort of follow-up is just price conditions in vacuum. Is there any change in what you're seeing on pricing?

[Mats Rahmström, President, CEO & Director]

On the first one, not even ourselves can read a clear path when it comes to the investments. Quarter-by-quarter, you can see some of the big American accounts be leading and you can some of the South Korean leading. This quarter, as I just commented on, you see a lot of big orders coming in from China. So it's investment cycles and lucky enough, we have had a couple of big ones every quarter so far. There could still be quarters where they don't place these major orders for us. So it is a key account business. On pricing, if you're in the semi market, the customer expect you to reduce your pricing ever year on your pumps. And the way we work with that is try to come with innovations all the time to bring more and that is the story I brought for the iXM pump in the beginning of the presentation where we're seeing more efficiency, easier to service and [indiscernible]. And we work very close with these customers to develop the next generation of pumps. And that is the opportunity for us also to -- that they can value our product in a better way. But there is in general a new price increases on [indiscernible] pump to that industry.

[Operator]

Our next question comes from the line of Erik Karlsson with Industrial Equity Partners.

[Erik Karlsson]

Would love to hear what you're doing on pricing across your different BAs this year.

[Mats Rahmström, President, CEO & Director]

I think that we are doing a lot of activities, of course. Some of the customers that we work with, as I mentioned, in semi, it's more on the innovation side by [indiscernible] can bring higher gross margins and bring interesting products to the market. It's up to each and every of the 27 division really to work with pricing on each market and say that we are competitive. We can see that we have the price for this quarter down. It was [ half the ] percent positive on price development. And this is for like production 2017 versus 2018. And you do not get the projects in there. And of course, in Epiroc, there is many of these big projects that they deliver. So it's -- and then we cannot mesh it. You see the same in the car industry, those big projects and you see the same in gas compressors, big projects. It's been getting more and more difficult for you to give good guidance, but for like for like products, it was up [ half a ] percent for the quarter.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

I think we mentioned also that it was no big differences between the business areas in that pattern actually. There were small differences.

[Operator]

Our next question comes from the line of Markus Almerud from Kepler Cheuvreux.

[Markus A. Almerud, Senior Research Analyst]

First, a question for Per. I think you said that equipment was growing faster than services. Is that the case for orders as well, or just the sales? And also, if there are any big orders in those numbers. And then finally, Hans Ola, if you could help us with the FX expectations for Q2 would be helpful.

[Per Lindberg]

Equipment is clearly growing faster right now than service. That's true both in terms of revenue as well as in terms of orders [indiscernible]. When it comes to FX...

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

I think that was directed to me. I think it was, Markus.

[Markus A. Almerud, Senior Research Analyst]

Yes, it was. So the FX impact on [indiscernible].

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Thanks for reminding me. I actually forgot to mention it when I was on the income statement there on the profit bridge. So thanks for that. No, we see, as we have said many times, when you look at this impact on operating profit, it's a bridge impact. So it is of course a reflection of what happened in the second quarter last year and what happens sequentially this quarter obviously. And if we look at the picture today on FX, we would expect that it's mildly negative, much less than it was in Q1 for comparison, and I'm talking for Atlas Copco continuing operations. But I would be surprised if there would be a big difference also in Epiroc. I mean the trend would work in the same way. And that’s primarily because there was a further weakening of the U.S. dollar gradually during Q1 last year that had that impact. Now, we see it's the Swedish Krona also that is very weak right now. So it's difficult. Mildly negative and if something happens at the end of the quarter, of course you know since before that, that will also affect this number. But if it's almost zero or if it's 100 negative, I really don't have a better prediction than that. But much less than in Q1.

[Markus A. Almerud, Senior Research Analyst]

And then large orders in Epiroc, any large orders that impact those numbers?

[Per Lindberg]

Yes, we had some large orders no doubt. I think we've actually sent out some press releases, but to be honest, on the top of my head, I cannot remember exactly. And we have some [indiscernible], right, some of the copper mines. But that's the one I can recall at the moment.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

But if I fill in what we have let's say historically commented as big orders, so to speak, I wouldn’t say that there was something like that in explaining 5% or 10% growth in itself. But it was a good variety of important orders. But it doesn't mean that it's something that you should sort of take away and show an adjusted growth without 1 or 2 big orders. No, that would not be correct I think.

[Per Lindberg]

That's absolutely correct.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Thank you. I think we are at the end of the hour and I think at least might be some of you that want to have another go at a question, but I think mindful of time here and other meetings. Thank you for participating. I know that the next event on the calendar is quite near in time, this time, and it's about a month from now when there will be a Capital Markets Day specifically for Epiroc. And you have seen that before and I'm looking at Per and Anders. I think it's the 30th of May.

[Per Lindberg]

Correct.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

Very good.

[Per Lindberg]

You're very welcome.

[Hans Ola Meyer, CFO & Senior VP of Controlling & Finance]

So with that, I thank you for participating again and for Atlas Copco continuing operations, the next opportunity will be the 20th of July for the second quarter report. Thank you very much and goodbye.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.