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Atlas Copco AB
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Good afternoon, good morning, good evening, depending on where you are participating in this press and analyst conference call on our interim report for the fourth quarter and the full year of 2017 for Atlas Copco. We are here in Nacka, and that allows us to have some Q&A sessions physically here in the room after the first presentation. But I also, of course, as normal, invite the people attending on the telephone conference to participate in the Q&A session. However, I want to stress right away that we'd like everyone to restrain themselves to one question at a time because we'd like to allow everybody to have a chance to put a question. We will do this in the normal format, means that myself, Hans Ola Meyer, I'm the CFO of Atlas Copco Group; and Mats Rahmström, our CEO of the group, will start and give some comments on the quarterly report, and then we will open up for questions. And we estimate that we will be about 1 hour for the 2 sessions. So without anything more to say right now, Mats, I hand over to you.
Thank you, Hans Ola. And once again, welcome. I really appreciate you taking the time to come and see us and listen to us if you're here or connect through the phone. This cool truck here is the new 54-ton truck from Atlas Copco Mining, or Epiroc, just to say as well, though. But I wanted to show you something as a little bit of a starter. Everyone talks a little bit about digital and Internet of Things, Industry 4.0. And I wanted to show you a little bit how we bring that to our customers in a real and tangible way.[Presentation]
That stopped. What we like to show is intrinsically what we can do today. So everything that you see in the video is actually something that we can provide to the customers through products that we actually have, competence that we have. And this truck has now been on the road for 18 weeks. They have done 70 events. And it's -- yes, I know it's a lot of interest. I think they told me the other day that they have ordered the 600 different leads from customers. So it's really a successful way for us to come to the customer and show what we can do. If you look at a little bit on Q4 then, we have summarized it. You can see that we have had record revenues. I'm really pleased to see that we came back a little bit of revenues at the end of the year, catching up a little bit on the orders received. We say that there are high profit levels, but you also notice maybe through other report that there is a few onetime costs option -- evaluation. You have some of the split costs and the smaller restructuring. Otherwise, that will also be a record profit level for us. Also, very pleased to see that we continue with the very broad growth. We have all the business doing really well, even though back-end technique and mining stands out above the rest. But I would think of it as worth mentioning as really good results.If you look at the different regions around the world, we continue then to have double-digit growth, with the exception of Africa, Middle East, where we had 8, and I think also that's the real strength of the group to be present in all these areas. Cash flow, SEK 5.5 billion, which is really, really strong for us. If you compare it to last year, you can see that there are some difference in the tax we paid, especially then for the split. The Power Technique business area. I've been working with the Road Construction divestment, and I think they have done a fantastic job. But I am also glad at the same time decide now they can really start focusing on the products that they have in the product portfolio. The split project, Hans Ola is actually very much leading this together with Håkan Osvald. It's on plan. We have done the legal splits globally. Now we are preparing for the carve-out. Hired a new COO for Epiroc, who will be on board next week. Of course, that actually completes the management team as well, so they will be present here and be part of Atlas Copco until the split. This confirms the same thing that I have said, but the number is then 14% organic growth. And we were actually up against quite a strong quarter last year as well, so we are really pleased with that number. We can also see on the revenue, as I mentioned then, that we had strong revenues, catching up a little bit, which is also good. The operating margin, you can see that we have the adjusted here on 21.5%, and you can see what I mentioned earlier then on the minus SEK 407 from comparability. That's really strong as well. And of course, that moves down also the net profit and the earnings per share. We don't add that back. And then if you take a look at the year, I think if you take the profit and loss intrinsically, you have records on all levels. I think that's a fantastic achievement for the group. Record order, record revenues, record profit, I think that's really, really good. Internally, we have also worked over the last few years a lot with the net working capital. I think there's a lot of good work that's being done as well. So you can see that coming down as well, and it's actually good for all the different business areas.I mentioned the growth rate on the double-digit, which is down for the year as well. Vacuum stands out, mining stands out, but they also have a little bit of tailwind. And I think the other business, is worth the recognition as well. I think they've done a tremendous job. We have done a number of acquisitions. Like Atlas Copco, we do a number of them. A little bit smaller from time to time. We integrate them. We make sure that we create value out of the things that we bring. Then I think the question that I've been asked most during the year, what are you going to do with the cash. And then do you have the -- the board then proposed the distribution of SEK 18.2 billion, consistent of the SEK 7 as the normal dividend. And then we have the special mandatory redemption, which is then SEK 8. I know, probably, there's a lot of interest around that. And at the end of the presentation, Hans Ola will talk a little bit more and give you a little bit more on the redemption and dividend.I think this just summarizes a fantastic year for us. You always get spoiled with all these good numbers that come in, but I can promise you there's been a lot of hard work in the teams to accomplish this, handling deliveries or, at the same time, we have done the split, we have done the divestments, so I really recognize my team out there. Almost 50,000 employees that have made this happen. I think they've done a fantastic job. And you can see basic earnings per share is up approximately 22%. You see the split in terms of the way we sell our equipment. And I know I tend to repeat myself, but I'm very proud of the development in Asia. We can first see it's 30% almost of our business, which is really, really good because it's the biggest compressor market. It's the biggest vacuum market. It's the biggest auto market in the world. So you need to have a strong presence there. Now a little bit with a tailwind from semi, of course, helps also get good numbers, but that is a really strong number for us. We are pleased about that. But you can also see the others, the light blue one is the 3 months. So you can see it's a strong growth intrinsically everywhere.What we have seen internally when we discussed this is that in the beginning of the sales, you have a little bit more activity in South America. But I can now confirm we can see it for the year, but also for the ending of the year that Brazil has been very solid for us over a number of months now, and that looks fairly positive. There is also Chile, part of that being a strong contributor that's mainly mining, of course. So that looks kind of promising. Middle East, you might say that with oil prices coming back up again, that it was -- see a lot of activity, you see a little bit more activity, but it's not yet significant.This is the organic growth with volume and price. You can see another -- it has 6 quarters with strong growth. And I mentioned it earlier, the last 2 quarters down intrinsically, but go up against 2 good quarters last year. So we thought that was really good in Q3, Q4. But of course, we are proud then to have this finish of 2017. But you can also say that the Q1 last year, that was really, really strong. And it was an outstanding orders received, especially from the Vacuum Technique business side. This is the sales bridge. We break it down for you, how this looks like. If you look at the structural change, we have had Leybold in the main part of the year. But Leybold is now out, so that's now organic growth. You can see currency. We have actually quite a lot of headwind with currency, mainly dependent on the U.S. dollar. And it's been negative for 4 of our business areas in the last quarter. But this quarter, we actually also have negative for Vacuum Technique. So intrinsically, all our business area has that and also the strength a little bit of the pound for vacuum number. Price, 1%, so the -- it comes back then to the 14% organic growth.This gives you little bit of the development of the group, and what stands out here is the share of Vacuum. It was not quite recent. Actually, Vacuum, Industrial Technique and Power Technique also almost similar in size. And now you can see that the Vacuum really stepped up in being a significant part of our group. Look at that little product in the corner there. A new design for us. It might not look so clean to you. It might look complicated. But it's actually a lot of standard designs that we know how to do that we build into a bigger machine. Made it for our customer, now easy to service. A big [indiscernible] machine. And I think it has a great potential a little bit for the future.Orders received wise, you can see the 7%, but you can see the quarters for -- can I use this one? Yes. You can see Q1, Q2, Q3, really strong and also strong finish of the year. What was really pleasing is, of course, to see that the revenue came back up. And we know that we have some bottlenecks in manufacturing. It's getting better, but we are still struggling with some components on some suppliers. I will say that we have the stock, our competence and our capacity ourselves, and we continue to work on that in Q1. And we believe that in the main part, we will be back on normal lead times during this quarter. Record revenues and record profit. Operating margin at 23.3%. I think it's an outstanding result from the Compressor Technique business area.While looking at this, you might say, "How long can this go on?" I mean, it's fantastic development now over many quarters. And once again, the record 38% growth for this quarter. And I think that really impacts the operating margin, 25.8% versus then 24.4% last year. It was good last year, even better this year. And now there is also a little bit to have been in currency, as I said.And then looking at this industry, the semi industry then. We can see that our customers' revenue is growing quite rapidly. I think they launched a capital quarter report the other day. You can see it's doing fairly well. You can see that prices for chips, logic and memory, is also keeping us on a good level, which is good for the industry. Of course, we look a little bit at the utilization in the factories. It's a little bit seasonality in this, but we can also see it's the high utilization of the factories that they have. CapEx investments, it goes a little bit up and down. In September, they said on a 12-month basis, we grew up 4.4%. And now we see that the indication is closer to 20%. And that is highlighted, not my numbers, it's just the statistics. So it can come and go a little bit. So as a whole, it looks promising. It's really performing. And I must say, look at the revenue development, what a fantastic job they're doing in manufacturing to keep up with customer demand. It's a challenge, don't take me wrong, but I think they do a fantastic job. Does this mean that every quarter is going to be this great? No, it's still a business with big orders, with key accounts. We can still come and go a little bit, but I think the basics for the industry over a longer time is very solid.Service is developing in a positive way as well. I talked a lot about semi, but also the Industrial Vacuum is doing fantastically well and the High Vacuum as well. It's easier for us to penetrate on the semi side, where we have better penetration, but also on the industrial. We start step-by-step in making sure that we have the coverage, to make sure that we can add value to our customers. Industrial Technique, 7% up. I think it's good. The car industry, a soft little bit of industry defined on -- I mean, it's been 7 years, I think, with approximately 4% growth annually. If you look a little bit at the external projection for the industry, we talked about that it might come down to 2%, but it's still growth. Of course, the need to a little bit balance where they would put in the CapEx for the future. And I think you can see from a lot of the media and what's going on in this industry. It's about the electrification. It's a lot about the hybrids and gas. And our product portfolio is pretty well lined up for change you see in material. We have the SCA, which is the adhesive, which can work with mixed material. You have the handler, which do the riveting. And of course, if you do a lot of this change, you will also need tools for the final assembly parts. So I think you have a good position for the investments to come over the number of years. 23.1% is profit. A solid, good number. They had a negative currency on 0.7 there, but still very strong. I wanted also to talk about the little socket tray that we have there. It looks like a very simple little product, but it's actually something that releases a lot of potential for our customers. And if you look at that tool, it's a full traceable tool, so you get all the data. It's fully connected. You hook it up, you get all the data. You can service. You can do everything. You have traceability for all the tightening. But then you want operators to be error proofed. Meaning, that you can only do the right thing at the right time. Then we have the socket tray. And of course, you can only pick up the right socket for the right application. And normally, this is fixed via station. But by making sure now that you actually have the battery socket. So imagine if you're a plant manager around the plant, and you say you don't like to do line balancing, meaning, increase a bit -- bump up or take down capacity. Then you can take your tool and the socket tray there, and you can move it from one station to another station very quickly. In the old times, actually, you need to take everything down. It will incur a lot of costs. And this is a true virtual station. So it's really -- I mean, you talk about digital on this. Something as -- looks as simple as this relays a lot of potential on the customers. You can also see that they have good invoicing at the end of the year there. Mining, strong order growth, 16%. It's normally -- we talk a little bit about the bits and replacement in the mine or if it's adjacent or if it's greenfield. You still see very little greenfield investments. It's mainly -- it's built on both replacement and also adjacent in the mine, but explore a little bit new then. So that's very promising. We think there's still replacement out there for us to come. The industry as such, I mean, pricing for some are the key for us gold, copper, stay factor, which is very promising. You can see the operating margin at 20.3%. So the main part, of course, this time is, of course, the equipment part. And you also have a little bit of negative currency there about 20.3 is a good number there as well. I wanted to talk a little bit about the product because I think it's such a cool product. We have the 65-ton truckload, 65-ton. This is a 45-ton truck. And when we launch it now, it has the circuits and digital on it, which means that you can take out data. You can sit with your customer to look at how much you utilize this, can I do this in a better way, how many run hours do I have on the engine. You can do a lot of cool stuff to make sure that you increase your productivity. But it's also the software in this that's also prepared for enormous drive. We don't offer it a product, but we could refit it if the customer would like it over time. Really compact and unloads 54 tons. And already now it's a big seller for us. Power Technique. This is the business that is a little bit seasonal for us. Orders, 5%, 14.1%. This is why we have the SEK 30 million restructuring. So if you would add that back, you're close to 15% versus down the 13.9% last year. This will -- lightweight compressor, that is actually something else. This is making sure that we understand the market. This is actually perfectly defined to fit on Asian trucks. This is kind of the -- it's compact, easy to service. You can put it on your truck, which is the way they do it over there. So it's another little innovation we bring to the market. So that's group in total. I think sales being fantastic for us over the years. If you look at the currency, it's getting a little bit more heavily over time. And I will finish, before I hand over to Hans Ola there, to say that you can see we have a real strong Q1 last year, and that would be a little bit of a challenge for us. We will take that challenge. Hans Ola?
Thank you, Mats. Swapped places a little bit. Yes, you see the numbers. You have seen them already. You have read them most of you, I'm sure. So I will not comment more on the operating profit and revenue level than what has already been said. Between operating profit and profit before tax, there's obviously financial net, and that financial net is slightly more negative this quarter than last year. It's primarily related to FX changes on the financial aspects, not the FX that hurts the operational profit. And that explains why the profit before tax increased 6% as operating profit increased 8%. In a similar way, if you move down, you come to the income tax. And there, you can see that when we have deducted income tax, we suddenly have a flat profit development on the net basis compared to last year. And the reason for that is partly this financial net and partly in tax. So what is included in tax? Well, we have an efficient -- effective tax rate of 28.7% in Q4. And last year, we had just above 24%. Both of them, a little bit out of the norm. We have said that we have had about 26%, 27% for quite some time the last 2 years as a run rate. So it was positive deviations, to a certain extent, last year, and we have some negative in this year. We have commented in the report that in this 28.7% effective tax rate in Q4 is year is included the taxes that we have paid for the restructuring of splitting the company in 2 because that has been done already in 2007 as an internal restructuring. So that is negative. On the other hand, we had some one-off positive adjustments in Belgium, which compensated, to a certain extent. That if why exclude those 2, we would, again, have about 26% tax rate. And looking forward into 2018, we now know that there are changes in the U.S. As you have heard about, there is a new tax reform in the U.S. There are certain other changes that we know about, Belgium is one, and in a couple of other places. So the best judgment we can have right now is that for the full year 2018, we're talking somewhere in the region of 25% to 26% effective tax rate, okay. We can only also talk about the impact of the currencies. Mats already mentioned that you saw that there is a SEK 500 million negative, or in the report, you so that there is a SEK 500 million negative impact compared to Q4 last year of about SEK 500 million. If knowing, today, that we have one of the worst currency basket situations that we have had in many years in Atlas Copco, it means that if we weight everything together, we are at almost equivalent basket levels than we were in 2009. And then you remember what happened in 2009 when there was havoc in the financial markets. What I'm trying to say is that we are not really producing the record results with the help of currency. On the other hand, it's been weighing quite negatively. If I look at the dollar today, it's even worse than it was in Q4. So we expect that when we come in April and talk about the first quarter, we will probably have somewhere of about SEK 600 million in negative comparison with Q1 2017. So it's not getting better before it gets worse, so to speak. So that's a little bit on that. Here you can see what I talked about, we tried to separate what is volume price, mix and other types of efficiency improvements, what contribute -- what has that contributed, what has contributed from currency changes on revenue and profit and so on and so forth. And then we have a couple of negative onetime items that Mats talked about. So here, you can see the bridge. If we look a little bit by business area and you focus on the second column from the left, this is what we'd like to focus on and say, "What is the real operational improvement, or worsening, that has happened in the quarter if we separate out currency and onetime, et cetera, et cetera?" You see very important positive contribution in CT and in Vacuum Technique -- Compressor Technique and Vacuum Technique. Short comment on Compressor Technique that, actually, last year, was not the strongest comparison. So there, the improvement in profit in relation to revenue is very strong, but it most -- more relates to how Q4 last year was. In Vacuum Technique, you can see that it's a very hefty profit improvement from revenue growth as well. Here, it is really related to this fantastic achievement to produce so much higher output with relatively less investments during the year. You can also appreciate that currency has been extremely negative on profit compared to revenue for Vacuum Technique. Industrial Technique, more or less normal, I would say, and the same goes for Mining and Rock Excavation and Power Technique. You can see there how the different components come together. I move over to the balance sheet, and I don't want to spend too much time. I'll just highlight that from last year, same time, you can see that the cash holdings have increased by SEK 13 billion in spite of the growth of the business that we have seen which, of course, then is reflected in a very strong cash flow. For the year, we reached a record operating cash flow, which is at the second line from the bottom, where we eliminate everything that we don't consider true operational cash flow. So acquisitions is obvious, dividends is obvious, that we don't consider operational. But there are also certain other things that we adjust for. For the quarter, we did not reach the record high level last year, but it is basically to be find -- found in the timing of taxes paid, et cetera. So these are the numbers. SEK 5.5 billion in the quarter is the strongest one of the quarters in 2007 -- '17, sorry. Now end of it all, what is the bottom, bottom line? Well, this is what the earnings per share looked like from 2007 to 2017. You can see that the last column includes a SEK 7 per share proposal by the Board of Directors to the AGM. You can also appreciate the boards' and the owners' intention to keep a very steady, perhaps, someone would call it slow compared to other numbers, but steady improvement and increase of the annual dividend. And occasionally, as you can see from the history, there has been a need to do an extra capital distribution, and that's exactly what the board has proposed, but this time, SEK 8 per share. Behind these proposals lies, of course, a couple of things that we have explained before. There is a strong belief that Atlas Copco should have strong financial numbers in order to be able to carry out all the growth investments, whether it's organic or acquisitions, that fits our strategy. And if indeed cash generation continues to be as strong, which we don't hesitate it would be, the board don't have any problems with adjusting like we do with the mandatory redemption, and that's why the proposal is like that.Before I hand it back to final words from Mats, on the split, where Epiroc shares will be dividended out according to the proposal to the AGM, you can see where we are today. If we go a little bit further on, you also see that we will enter the period where we are audited by the NASDAQ Stock Exchange, and they will look at Epiroc and see whether they are really fit to be a separate listed company. And that process has actually just started or is starting in a few days. In the middle or around the 20th of March, there will be a notice to the Atlas Copco AGM, where information about the new company, balance sheet, dividend policy, capital structure, et cetera, will be explained and informed about. Then we have the AGM. And finally, we are targeting -- it's a bit of a span in this graph, but we are targeting somewhere in the middle to the late June to be the first listing of Epiroc, following, of course, a positive AGM decision and the positive decision by the Listing Committee of NASDAQ. We hope for that, of course. I could also, here, already say that as this is now the plan, it also means that when you receive the first quarter report in April for Atlas Copco, you will have Atlas Copco continuing operations, and then you will have Epiroc as discontinued operations. So just so that you are prepared, that the numbers will not be comparable to Q4 if you don't look very closely. So with that, I think I hand it back to you, Mats, for the final slide.
Yes. This is the near-term outlook for the group, including Mining, Epiroc as well. And how we do this is, intrinsically, that when we meet in the mine management meeting, we check a little bit activity level of customers, we check a little bit the external data, what is to come. And we have no real reason to increase and say we have operated on a very high level in 2017. We believe that there is still a high activity level among our customers. So we have maintained this stand down overall demand for the group that we expect to remain at current high level, which we think is a very good level for the group. The unpredictability in quarter 1, I would say that it's a little bit on the Chinese New Year. That seems to be extended a little bit year-from-year. And of course, being so strong in Asia, it has an impact on our number. But on the other side, it happens every year. So...
Great. Thank you, Mats. So that brings us to the Q&A session. [Operator Instructions]
So with that, we will alternate between Nacka and the telephone conference. So I suggest we start with the telephone conference. And we -- I'll look for someone to help us out here. Yes, you do? Okay. Perfect. That's already prepared. Thank you. So -- but we still start. If I can then ask the telephone operator to repeat the instructions for the Q&A session, please.
[Operator Instructions]
Is there an operator on the telephone conference listening?
And our first question comes from the line of Klas Bergelind from Citi.
Then I think I have to quickly address the situation and take the first question here at Nacka.
Yes.
Is there anyone already lined up for a question here? We have 7 in line, so we'll just -- perhaps, they don't need any introduction or -- so then we can just let the first person on the call.
Mats and Hans Ola, it's Klas from Citi. Can you hear me?[Technical Difficulty]
We have a problem. Yes, yes, no. I imagine that, but we need to hear them as well.
We have Klas Bergelind from Citi on the line. [Technical Difficulty]
Yes, Mats and Hans Ola.
We think it, too, that we expect to come.
Okay. Hans Ola, it's Klas from Citi. Can you hear me?
[Technical Difficulty]
And I repeat again, if there someone in the audience here that really would like, we have one question here while you try to connect technically. So it's good if you can present name and then...
Mats and Hans Ola, it's Klas from Citi. Can you hear me?[Technical Difficulty]
No. I can't hear anything.
[Audio Gap] specific or take a number also as you actually have a 2% improvement over the year. So there is improvement in price even if you don't see it in the bridge.
So the effect of what Mats said, which is quite right, the new product, why would you find it in the bridge in the volume? So you can debate that, but there it is very difficult with such a massive exercise, betrays all the different individual deals. So this is what we have come to do, but it can give an impression that no one spends time on price. But we do spend a lot of time on price when it comes to introducing new products at the right price.
Another question is, now that the mining businesses is divested or taken apart...
Peeled off.
Yes. You dividend a lot of the profit. What are the chances that you can find something adjacent to the remaining business? I mean I don't expect you to find a vacuum business tomorrow. But how do you see it on the opportunities to find -- adding businesses?
For the Atlas Copco part and the Epiroc part?
For the Atlas Copco.
What we do is a little bit, what we believe, is a strong DNA and what we can be successful at. One of those things is that we really take a look at is there a possibility to have a technology lead and be positioned #1 and #2 in the world. As we said, this is important for us. We also look a little bit, is it important to the customer? Is it important part on his process to make sure that we bring some real tangible value to the customers? So that's now the criteria we think is really important. We also like to come back to the customer and help them with service to make sure that they have got a lot of uptime on our product. Being an important product to service content is also important. So we look first for the core of what we do. Can we do something somewhere else? Just another compressor company in the geographical area? But then we'll also look at service opportunities, but we also look at different and new technologies. One example is in Industrial Technique, where we assemble principally grinding and tightening at the time. But today, we also do adhesive, and we do riveting as well. So there are other assembly technologies that we could evaluate as well. So that is the way to go -- the way to look at this. We have done 27 divisions, including Epiroc today, and they present a strategy of what they like to do. We say that it fits the way we can add value. Is it a good stand-alone attractiveness in this segment? And then we start looking at candidates then, and that always goes back to the board. And we look at them one by one, and we make sure that, there's something that it we can create real value for our shareholders.
And I understand your question. You asked specifically about Atlas Copco, but I certainly hope as there are many shareholders that also will have 2 shares going forward rather than just the Atlas Copco share. But -- so we don't see it as a selling, as you say. It's really splitting, and then both of them should be able to carry out this type of strategies that Mats...
And I think in Mining and Epiroc, that gives you a little bit of direction, at the same time it's extra potential in service, be having 3, 4 smaller acquisitions. Now that adds a little bit of coverage and also the product portfolio of the service.
I think now that the telephone line seems to be working, so perhaps we go to that now.
Once again, Klas Bergelind from Citi.
Mats and Hans Ola, it's Klas from Citi. Can you hear me now?
Yes.
Very good. So the first one is on demand on the industrial side. Last quarter, it was broad-based strength versus expectations in the market. Compressor orders meet expectations, so did mining and vacuum. This time, it's vacuum that stands out, industrial and mining, less so. I'm trying to gauge what happened, particularly on the industrial side as we went through the quarter if we leave MBI out for a moment. Am I right to assume that North America accelerated through the quarter? But the picture was a bit more mixed in Europe and in China. The reason for asking is that you write in the report that ordering intake increased in most regions in industrial compressors versus all regions last quarter. So where did you see the strength versus weakness?
Yes. Well, first of all, I think that it's -- I see where the question comes from because, of course, you find words. Sometimes, I can assure you after many years, you struggle to find exactly the right words. And sometimes, they get interpreted more than what you would expect probably. But I think one reflection, when you look at the -- all the business areas, growth numbers in Q4, and you see what you point out that it was more than -- it was double-digit organic growth in all business areas in Q3, and that is not exactly what you see in Q4. But it's also important to look a little bit longer than that. And if you then bring up the Q2 report, you see that it was not as strong in the industrial space growth at the time either in spite of having easier comps in Q2. So I don't think that -- our discussions internally have not led to any change of pace as the main theme. That at least is our take on the numbers, so to speak.
And I mean, for Compressor Technique, we believe, especially in North America, and that we can really see how it looks in Atlas Copco but also in the Quincy brand from new products and a little bit of tailwind from the market that's really get good traction during the quarter, and hopefully that tailwind continues a little bit. But the drive here is not about new products.
The reason for asking is that in China, we're hearing a little bit of a sort of mixed picture towards the quarter-end on the industrial side. And obviously, the 21% growth that you report in Asia, I mean, that could be largely linked to the T, I would assume. So is it right that China in industrial comparison slowed as we went through the quarter in China?
That's not what we see. But again, when you see reports, there is always 2 things. It's what happened in the comparison period, and it's what happening right now as we speak. And your interest is, of course, the latter. I understand that. Do you see a new trend? But the short answer, no, we can't see that in China.
China has been fairly strong for us in all business areas with good business. Looking forward a little bit now, we know this is the strongest auto market in the world and with strong growth numbers. But I think the expectation for the coming years is a little bit of more modest numbers around 2% growth. And we see, though, although a lot of activities around electric vehicles, battery production, it seems a lot of money goes into this. And hopefully, it is done to correct little bit environmental issues there in some cities.
Our next question comes from the line of Graham Phillips from Jefferies.
My question is around Vacuum Technique. Could you talk a little bit about the FX situation there? Because it appears that the FX outflow and operating profit was even greater than the revenue. What are the more important currencies here we should be thinking of? What would sort of a guidance be given where we are today? And also again, just on the incremental margin, the sort of 56% that's been around last quarter and for a very high number this year. We can all try and forecast what we think the revenue line's going to be for this business. But in thinking about needing to invest, you said that you've been reaping the rewards of not having to invest and just expanding out the capacity utilization of your plants. But at what point did that come back down?
You mean the cost implication of investing?
Yes, because that's obviously what's relating to that incremental 56% margin.
If I start, Mats, and then -- on that, we commented last quarter, I think as well, that every quarter, we have a -- follow a new set of investments for approval, which means that they understand that they need to increase capacity compared to how the world looks, and that we don't see any change in the strong demand that these mobile phones and all the devices and everything is pushing the semi industry primarily. So they are, on a continuous basis, putting new capacity in place. It's not that we expect that at a certain quarter next year, you will suddenly see the impact of the cost. It's coming as we speak because there were decisions taken a year ago as well on new investments, and they were taken in the first quarter, second quarter, third quarter and so on and so forth. So I don't think you should be looking for a drastic step change in -- because of that. The big impact you started with in the quarter, in spite of a fantastic margin, was that it was done in spite of a very negative currency situation. Vacuum Technique has a little bit of a different mix than the rest of Atlas Copco. It is very much affected by dollar. So the positive -- strong dollar is very positive. But in their numbers, it's pound Sterling and Korean won and Czech kroner are suddenly rather big cost currencies. So it's not so easy to see, but when you consider the swings over this year, you can understand that they were very much helped by the currency in the beginning of the year and last year. But now they get it in an extra negative when the dollar to the pound Sterling, the dollar to the euro and the dollar to the rest is developing negatively, or the dollar is weakening. So it's not that we mean that for every kroner they lose on revenue, the currency explains more than 100% on the profit, like it looked almost in this quarter. I should have said when I showed that slide that don't take this as an absolute science. We have a basket of 60, 70 currencies, and it's very difficult to come to a specific, exact answer on how much the effect has been on -- from one quarter to another. But this is our best estimate.
And I guess in the SEK 600 million you indicated for the group, is that including Epiroc? I mean because that would have made that -- it could be at least SEK 500 million or SEK 550 million just for Vacuum Technique of that SEK 600 million, no?
You're right. That rough guidance that I gave was for the complete business. That's true. That's true.
I think to add on the Vacuum as well, on the manufacturing footprint, of course, we have operations in Japan, Korea and also in China then. And I would say that the latest investments is mainly in China, where we expand our production. We have spoken earlier about that there is an interest to establish China as one of the leading suppliers in semi. And actually, over the last 2 quarters now, we have seen a couple of quite significant orders from Chinese manufacturers. So it seems that this come to a fruition and reality now.
The next question comes from the line of Peder Frölén from Handelsbanken.
Okay. It's only one question. I would like to focus on the Epiroc business. In order to get the sale for the mix affecting profitability here in the deliveries but also to see what happens ahead, so could you help us with any sort of guidance of the part of sales that is linked to equipment versus consumable, services, compared to civil? And if not, maybe you could help us to understand how much the actual mix effect is the profitability year-on-year basis points? And please also tied to that, on the large orders you mentioned that's slightly low in the fourth quarter versus the third, was sort of the fourth quarter the abnormal one? Or is the third quarter the abnormal one?
Yes. I might come and ask you for the last one again to repeat it. If I start with the first, we don't give the breakdown, let's say, exactly what is service and equipment. But in the comments, you can read that, take mining and rock excavation, for example, you certainly have an effect, the negative mix effect on the profitability because they have such a big share of service and consumables compared to equipment. So now that we have a return of the equipment sales, investments are coming along again, and we don't have the same high margins on the equipment side as we have on service and consumables. Then of course, we are suffering a bit on the mining and rock excavation side. When we look at the other one that has very strong growth numbers, Vacuum Technique, it's not really the same. They don't have the same big share of service compared to equipment like mining and rock. And also, importantly, they don't have the same difference in profitability between equipment and service either. So that impact is not the main explanation there. But again, I don't want to sound as if mix is one of the key explanations of the profit margin from last year to this, but it certainly is noticeable in MR.
Well, I realize that you don't want to give the sales split number on top of that, but it's not that far away from you will release a prospectus on the Epiroc business. And I sincerely hope that we will get some more insight to the different revenue streams at that point, at least. On the order side then, you mentioned that large order was slightly less in Q4 versus Q3. Would you see that new equipment orders were unusually large in Q3? Or were they are unusually low in Q4?
No, we -- yes, again, it's trying to dissect the wording, et cetera, but it was purely less. I don't want to make a judgment whether there could have been large orders that has come early in Q3 or indeed comes later in Q1. But there was a clear difference between Q3 and Q4. That's the only thing I think.
And now our next question comes from the line of Lars Brorson from Barclays.
Mats, Hans Ola, I would be interested to understand, Mats, what's embedded divisionally in your demand outlook into Q1. Would you say in broad terms that all divisions are flat? Or is there an expectation from your side that, perhaps, your industrial divisions might accelerate and offset further deceleration or decline in Mining?
No, I think what we have seen in Q4 well represents that activity level going forward as well. We don't see a big deviation in terms of activity between Q4 and Q1. So I think that what you have seen in Q4 will continue in terms of activity levels. We don't see it shifting dramatically one way or the other. Of course, the comparison, the comps will be different going into Q1. And what was outstanding last year was, of course, the vacuum orders received in Q1 that we could not repeat in Q2. But otherwise, I don't see a big shift.
And just on the mining side, because for me, there was -- I mean the sequential drop you see about 5% versus Q3. I know we are still running at relatively high levels from the year prior. But do you think we continue in mining to decline through -- sequentially through 2018? Should we say the replacement cycle starts to fade, particularly on the rig side? I presume there's more to go on the load and haul, which I think you alluded to, until we start to see a more material pickup in greenfield and then in brownfield, which, I think, looks more like a 2019, 2020 driver.
I think for mining, we see still replacement. We still think there is potential for replacement going forward. We also see significant part being where they actually explore a little bit other opportunity in the same mine. But I keep repeating myself in saying that the greenfields, no, there is not much business at this point in those areas. Also, I think it's fair then to look at mining maybe over the cycle of Q4 and Q1, and then you can draw some conclusion about trends as well.
And sorry, just a final follow-up. Would you mind just repeating what you said earlier? I think the first question in the room on pricing because the telephone conference cut out. I was interested to understand your pricing trends, particularly in CT and in mining. I had expected a little bit stronger pricing. I think you mentioned pricing partly reflecting some product introductions. Could you repeat what you said there, please?
I'm not sure, but I will try. What I've said, in the bridge, you could see 1% improvement. We don't break it down. But what you see in that bridge is actually, yes, the same products 1 year to the next year. So in that bridge, you actually don't get any of the new products that we have introduced. And you don't either get -- if you have sold it as a project, which is quite normal in the car industry, in the mining industry. So that is kind of a missing link in that bridge. What I've said was that the operating gross profit, we can see improvements, which is price built on that we add more value in innovation and new products. That's a little bit the way I answered.
I'm looking here in Nacka, but no hand in the air, so we continue with the telephone conference call questions.
The next question comes from the line of Sébastien Gruter from Redburn.
Just one question on the MR pricing. If we look at your U.S. competitor, I mean, they have put a mid-single-digit price increase or reported mid-single-digit price increase in the last 2 quarters. If we look at precrisis, predownturn, there was not such a gap between MR and the U.S. competitor. So how do you explain the 0% price, more or less around 0% you reported over the last few quarters? Is it driven by competitive dynamics? Is it self-inflicted? Can you give us some color on the price environment for MR?
Yes. I think I would repeat what Mats talked about, generally, also for them, of course, that the impact of the strong pipeline of new products is not reflected in the pricing number that we see. I think, last time we had this conference in October, we talked about that, perhaps, we're doing you this favor by separating it out. We should rather talk about organic contribution and so on because it's certainly difficult also for us to know exactly what is the mix impact and what is the true price. But again, we can only repeat that on like-for-like offering, we have not achieved more than very marginal, i.e., rounded to 0% effects on it. And of course, there is a competitor. What comes back from the market is that the competitive situation on consumables, et cetera, is very strong. And that is, of course, impacting since that different from equipment would be, theoretically, one area where you could say that there should be some kind of a normal type of price increase coming from. But there, certainly, we get evidence from the business that there is a very strong, competitive situation out there in -- specifically in Asia. But in order to go further and then start to compare with a certain competitor and so on, I think we refrain from that. And we don't have intelligent information enough to say that, yes, we understand that some, they're just doing a better job or whatever, that, I'm sorry, we can't comment it -- on that.
I was just thinking, I mean, with 0%, given the wage inflation you face in your service and the cost inflation we see for more material -- I mean the net pricing must be negative in -- for MR today and whereas on the margin.
Again, I mean, that is that conclusion. What we look at the -- you can draw that conclusion, but what we look at is how is the cost development input values, as you say. But we also look at what type of efficiencies can we achieve. And hence, that, combined with whatever price is there, it gives us the unadjusted gross profit margin, as Mats alluded to. And there, we don't see these negative trends. So that's the way we look at it.
And the next question comes from the line of Andrew Wilson from JPMorgan.
Just a quick, actually, follow-up on pricing, specifically in Vacuum. For the positive pricing, there was a good development given that it's just kind of been up and down over the last couple of years. Can you just talk about whether this is a function of just the very good volumes in the market or whether you think this is something sustainable that the customers are, I guess, prepared to pay for that kind of a higher-value product, please?
It was a little bit difficult to -- I didn't catch exactly the edge of your question, to be honest. Can you...
Was it operating margin? What was the question?
Yes, maybe if I try again. Just on the vacuum pricing being positive, just trying to understand whether that was just a function of the volumes being as strong as they are or whether you think it's sustainable in terms of customers being prepared to pay the higher prices for the quality of products. I think, previously, you've talked about pricing -- some pricing pressure in some of the markets in vacuum.
Yes. Again, I mean, of course, we are referring to whether it's a rounded 0% or whether it's a rounded 1%, we shouldn't overestimate that there is a big difference in how vacuum has coped on pricing compared to others. But of course, it can differ from one quarter to another and between business areas in this respect. But the -- and that might be not answering your questions at all. But what we know when it comes to vacuum is, of course, that there is a very strong expectation from big customers that we should be able to reduce prices because that's what happens when we buy their equipment, mobile phones, et cetera, over time. The same products have a decrease in price, and they expect that from us. So there, we are even more anxious to deliver new, better products, really value-selling products; high-end, value-selling products. So it goes against your question, perhaps, but that is -- if anywhere, it's true. It's also in vacuum.
I think the only way really to work on pricing there, they would not accept the price increase. Understand that product, that it's a couple of generations old, not even inflation. So you constantly need to challenge and improve the processes. And what our teams are excellent, that it's actually not only to understand our product but the customer process. And in many times, they're kind of a confidential process. But we need to work very close to customers to bring new technologies all the time. And this also comes back to the service schedules we do depending on the process that they have. So they have actually done a fantastic job to increase the value for our customers, which you also see in the bottom line.
Our next question comes from the line of Andrea Koski from Nordea.
Can you hear me, yes?
Yes.
Yes, yes, yes.
Perfect. I have a question on mining and rock excavation and mining equipment in particular. So I think we can split the equipment exposure into 3 categories. It's replacement demand, it's demand for mine extension, and then we have a greenfield demand. And as you said earlier, we don't see any greenfield activity really. So the equipment demand is currently split between replacement and extension. So firstly, if you can give us a sense of the split between the 2. And then also, in 2017, we have seen a very strong increase in demand for replacement equipment. And now when the replacement cycle is probably coming to an end soon, do you think there is -- the replacement demand could come down year-over-year in 2018? And should we expect that to be offset by stronger demand for expansion and potentially or so greenfield?
I think on the replacement versus the adjacent, if you call it that, I think they're both contributing in still a very good way. I don't think we have exactly disclosed the split. We don't follow it 100% either, but they both contribute. What we made a statement was that we do not think that the replacement cycle, it's come to an end. At this point, we still see a lot of activities around that as well.
Maybe to clarify, so replacement versus expansion. Do -- would you guess it's 50-50? Or -- not in terms of contribution but in terms of equipment delivery.
Yes, but not only don't we disclose it. It's not -- it's also that we don't follow it in a statistical manner, if you see what I mean. There is an activity you could say that, "Don't you know your business?" Well, we think we do. But to consolidate everything and grade what is a true replacement and what is a mix of a replacement order and an adjacent extension, and in certain cases, even a greenfield, it's not something that we spend a lot of time on digging into. We follow the business from a growth, from a profitability point of view, and we try to understand. And each of the salesmen, each of the business line managers, I'm sure, have a good understanding of his territory in this respect. But it's not something that we do a lot of exercise of consolidating into a number because we don't think it's the most important thing to drive the profitability and growth going forward. That's why we are vague. That's why we can't give you a straight answer on this. That's the reason.
Yes, I understand. But -- and maybe if I just ask, do you think replacement demand will be as high in 2018 as in 2017?
I don't believe that we comment on that.
We just come back. We don't see -- we don't hear that the replacement cycle is over. That's not what we suggest.
Our last question comes from the line of Adam Sandberg from Carnegie. And Adam has just dropped out of the queue, so our next question comes from Anders Roslund from Pareto Securities.
My question has been answered.
Great. Thank you, Anders.So with that, then I thank everybody. There might be some further questions popping up, but then we have our excellent Investor Relations team here in Nacka, of course, ready to answer any questions after this call. But for now, thank you very much, and have a nice weekend. I'm going to look forward to talk to you and see you in April for the first quarter report. Thank you.
Thank you.