Epiroc AB

STO:EPI A

Earnings Call Transcript 2018-Q4

[Ingrid Östhols, Vice President Investor Relations]

Good afternoon, everybody, and warmly welcome to Epiroc's presentation of the Q4 and full year results 2018. I am Ingrid Östhols, Investor Relations at Epiroc. And Our CEO, Per Lindberg, will give you a general overview of the quarter. And then after that, Anders Lindén, CFO, will talk about the figures more in detail. And after the presentation, we will have a Q&A session. And please, to give everybody a fair question -- a fair chance to ask questions, please stick to one question at a time, that will be very good. Okay. Per, please go ahead.

[Per Lindberg, CEO, President & Director]

All right. Thank you, Ingrid. I am very pleased to be here to present the results from Epiroc. A very strong 2018, first year of the existence of the company and also as we perceive it, solid finish of 2018 as well.And let's focus on 2018 as a year, first of all. I think we had a very strong year. We had double-digit growth of the revenues, of orders, profitability and also across all geographic regions. So I think certainly 2018 was a good starting point for Epiroc. We have managed to ramp up capacity, not the least as you've seen in quarter 4 with good revenues. And I'm also very pleased to see that service has increased with 18%, which is quite a feat, which since it entails a fair amount of recruiting and training of personnel as well. We have ramped up our R&D capacity, which means, on the one hand, increased spend, but on the other hand also increased pace of introducing new products. So I'm very pleased to see what we have achieved when it comes to new product introduction, not the least when it comes to sustainable mining, innovations and initiatives, battery, digitalization. We made 6 acquisitions during the year, and I think also that's the pace where we probably need to be in order to be able to reach our target of 8% growth per annum, and we did that in 2018 and we'll certainly continue to look for acquisitions going forward as well.And I also think that we did have a very successful introduction of the company. We are a 145-year-old start-up and we're alive and kicking. So I think this is well done. And we have established capabilities needed for an independent company, and we have very much established a brand vis-à-vis our customers, but we'll continue to work on that. Of course, we also need to make the more general public aware of the existence of our company.Looking at quarter 4, more specifically. Also as I said, a solid finish of a good year, double-digit organic growth in quarter 4 versus last year. And quarter 4 was actually the fourth best quarter ever. And if you look at the four quarters of 2018, we had four out of the five best quarters ever. So of course, 2018 was a good year, and not the least, quarter 4, and it was actually slightly better than quarter 3 and pretty much in line with our own guidance. So I'm quite pleased with that as well.We had record revenue in the quarter. Ramp up has proceeded really well. And not the least, we had very strong cash flow. And I know that we've been standing here in quarter 2 and quarter 3, saying, yes, yes, yes, we'll fix the cash flow. We have fixed the cash flow. So certainly very pleasing.Looking more specifically into the numbers and, of course, Anders will talk more in depth about the numbers, but a few highlights. Revenue growth of 19%; orders up 11% versus last year; cash flow above SEK 2 billion, which, again, is very pleasing; and we also have now a dividend proposal of -- from the Board to the AGM of SEK 2.10 per share. And you may question, how did we reason? Well, we reasoned as follows: the underlying dividend, including the Atlas Copco, would be for Epiroc roughly SEK 1.80. And SEK 2.10 is an increase of 16%. We think that's substantial and also a good level for the proposal.Orders received. We've seen -- if you look at the map here, we've seen a very good development in the Americas, both North America and South America. Worth highlighting is the fact that we received a very good order from Anglo American in Quellaveco and Peru. This is a greenfield project for copper, and the order value which we received in December is SEK 385 million, so which is quite good. And we are very pleased to see not only order but also the fact that we have investments going on in greenfield as well. And I think that's a good sign going forward.Also very good is Asia and Australia of 16%. And actually Asia, Australia was the best or biggest revenue generator for quarter 4, whereas Europe and Africa more on the flat side. And also mentioning, of course, as you may know that mining is roughly 70% and infrastructure roughly 30% in quarter 4, it was 73%, 27%.And quickly into segments. Now Equipment & Service is roughly 75% of orders, as you can see, and the growth in Equipment & Service, 16% and 17% (sic) [ 17% and 16% ] quite pleasing, we'll come back to the segments; whereas the Tools & Attachments lower at 1% growth. Aftermarket, the pie chart to the right, aftermarket is now 59%. And aftermarket in quarter 3 was actually 62%. So we see -- the consequence of that is, of course, that equipment is increasing in the mix, which I'll return to, but it does have some consequences on the margin.And looking at Equipment & Service. I think we do have good sentiment in the market. We -- of course, there's fair amount of questions on orders and where is this going? And I'll come back to our outlook, but we see still good production levels at our customer base, still a good potential for orders going forward, but uncertainty has increased. I think if you look at quarter 4 specifically, I think we had -- we saw good activity. And as I mentioned already, service up 16%, something that is very pleasing. And again, back to the mix, the mix between service and equipment has increased towards equipment, which means that you will have a slight negative effect on the margin, as you can see, by the margin graph to the right.We also acquired in the quarter, ASI Mining, which is a U.S.-based provider of automation for different vehicles, in our specific case, of course, mining vehicles. And it's a good complement to what we do in digitalization and solutions for more productive mining and also, of course, for more automated mining. And I think -- so we welcome these guys into the family, the 34% into the family of Epiroc.Tools & Attachments, good business environment. Even though order intake was only 1% and part of the reason behind the relatively small increase in order intake versus last year, just 1%, is the fact that we are focusing on profitability, and the consequence of that is that we are not accepting orders below certain profitability, so which means that we back off from some orders, which has a consequence when it comes to order intake. Revenues up 10%. So what we already have in orders, we certainly continue to produce, of course. Margin is up to 13.3%. It's driven by growth in currency. It's more or less on the same level as quarter 3. And we will continue to work with efficiency measures in Tools & Attachments, especially when it comes to consumables or drilling tools, where we feel that there's still things to do. And we're still fighting with raw material price increases in that segment.We also have a couple of big acquisitions made. New Concept Mining, which has not yet been closed, and Fordia, which was closed in the beginning of January. So Fordia will fully be in quarter 1 and New Concept Mining once that is closed now in quarter 1. So I think these just to remind you unless you -- if you have forgotten what this is. Fordia is a provider of exploration tools. Very complementary to the business that we already have, leading in their segments. And we feel that this will be a very good opportunity for us to develop the business within exploration. New Concept Mining in rock reinforcement, also very complementary to our existing business when it comes to underground mines.Business development. We continue to relentlessly pursue, of course, both innovation and various initiatives when it comes to business development. In the quarter worth mentioning is the launch of second-generation battery equipment. We did have a big event in Örebro, the 14th of November. And we see first orders now coming in for second generation. And we feel that there is a very big interest for these types of machines underground use because of the economy of battery-driven machines and especially the impact of ventilation cost, but also the impact on safety and also on the air quality for operators underground. So I think that's, I think, is very promising and very -- something that we look forward to following, of course. We have an agreement with Ericsson on connectivity. This is 5G. And we feel that, again, if you want to go some mine, want to go for a connected mine, digital solutions, you need connectivity. The prevalent solution now is Wi-Fi, which has lower bandwidth and also typically lower availability than 5G, the promise of 5G that is. So we feel that on the back of a development together with Ericsson, we can also provide connectivity and also on the back of that of, course, provide our types of services and solutions. We've also, on a minor scale, but nevertheless, we have developed new drum cutter. So if you want to dig a ditch in your backyard, a big one, you can call us. We have the best tools available for these types of applications, and this is a new offering that we have in the portfolio.So all in all, I think, again, a strong 2018, a solid finish of the year, and good activity among our customers. So Anders, why don't you tell us about the numbers.

[Anders Lindén, Senior Vice President of Controlling & Finance]

I will. Thank you, Per. Some details on the numbers as always. Orders received 11% organically up, as you can see. And as Per said, the Q4 was a very strong revenue quarter as the record in revenue with good output and 19% organically. That is, of course, also we had an impact of currency. As you have seen, we -- about 3%, which, for the full year, came to 1%. And also worth mentioning here is that, as you likely have noted, the currencies towards the end of the year actually came down a little bit with the strengthening of the SEK. And then we can -- I will come back to that a little bit about going forward. With the structure we have in there, we have contract manufacturing, which has more or less been divested at the end of the year, the vast majority will disappear going into 2019. The acquisition pot and this contract manufacturing has -- makes up for about 50-50 of the structure piece.Going forward, as Per said, we expect the amount to remain on the level where we are. The impact from the acquisitions of Fordia, Fordia will be fully in during Q1, but that will more or less be balanced out by the disappearance of the contract manufacturing. So between the two, it will basically be a loss -- sorry, a wash.On the currency, now when we start basically from zero again, when we compare the levels where we are compared to the average of last year, we see that it's a little bit lower. However, if we compare year-over-year, the first part of the year, especially during Q1, will be stronger than the second part of the year. So we can expect a positive currency effect in the beginning of 2019.When it comes to operating profit, the flow through, Per mentioned, was about 25%. We should remember that we have still an impact of the fact that we -- last year was where we were not fully built independent company. So that has, obviously, a negative impact on the flow through. But also the fact that we have, in relative terms, more of capital than of the market with a strong revenue growth. The operating margin, we -- as reported, increased by 2.4 percentage points. If we then exclude the impact from split costs and long-term incentive programs provisions, the improvement is 1.8%. I believe some of you have already made that math and divided into currency contributing with 1 point and organically about 1 point and a little bit more than 1 point. And then the structure had a negative impact with a little bit of dilution.When it comes to the split costs and the long-term incentive program provisions, worth mentioning, which could have been a little bit of a surprise, that it's actually a positive amount net of the fact that we have had the split costs, but the impact from the lower share price in end of September compared to end of December had a positive release of provisions. So that's why it's plus SEK 8 million for the quarter, net of the two.If we go then into the P&L, I have said it before and likely the last time, last quarter, I will mention that when we compare to the previous year, it's comparable down to the operating profit. The tax and financial net is a result of the combined financials that we used when we created the history, the financial history. Nevertheless, if we look at the R&D expenses, they are up. We are putting initiatives in R&D, so that's clear. We also see an increase in marketing and admin, also from a stronger presence. But in the admin, we see a volume impact from logistics, increased growth, but also here is where you see the impact from the, let's say, inefficiencies, lost economies of scale in some of the building of the Epiroc as an independent company. And also the long-term incentive programs, which year-to-date, was an amount, not a positive, but it was an amount of SEK 66 million.When we go lower in the -- or further down in the P&L, the interest net of SEK 37 million is around the sort of the level that you can expect. We have -- obviously, other than the interest, you also see fluctuations in current exchange rates. So it will not be straightforward, but that's quite normal. I would also say here that the refinancing of Epiroc during the second half, I mean, particularly in Q4, doesn't have a material impact on the -- of the financial net. We have replaced, and I will come back to that, the bridge loan more or less during the Q4. Tax rate, worth mentioning, you see that year-to-date, we are at 24.5%. We have previously said that we will be below 26%. We have seen a positive impact also retroactively that we now can include from the tax reform in the U.S. U.S. is a significant country where we pay significant taxes, second to Sweden. So that's why we are at such a low number for the quarter. But going forward, we should expect the tax rate with this sustainable tax reform to be below 25%.If we then go into the balance sheet, we have, as I said, almost completed the refinancing. Other points to make is obviously this -- we also completed or announced the rating from S&P with stable outlook in the BBB+, good for us, and I think we're pleased with it. Other points to make, the working capital, especially inventory, which you've seen in the cash flow, improved or reduced during Q4. If we then compare with last year, then, of course, when we capitalized the company in the beginning of 2018, we also had the cash at a level where we should be sustainable, and during this year, we have generated cash. So we closed the year with SEK 5.9 billion in cash; also the equities, obviously, then the difference between last year and this year from the capitalization. When it comes to IFRS 16, we have a preliminary number of about SEK 2 billion that we will, let's say, increase the balance sheet with and also then the net debt. And I will come back to that a little bit.If we then look at net working capital. We did take it down with about SEK 0.5 billion during the quarter. The net working capital as a percentage, obviously, was lower. The average, 31.8%, is stable, but the period end number, if you calculate, is lower. We see improvements coming now with the supply chain program according to plan, not so much yet in the balance sheet, but we see positive signals.On the net debt, it was reduced by SEK 1.9 billion during the quarter. It's now of SEK 1.2 billion, was SEK 3.1 billion. The IFRS number will inflate the net debt with about SEK 2 billion as a consequence of the accounting treatment increasing the balance sheet asset side and the interest-bearing debt. Most of that will be long-term, part of it will be short-term according to the classification and the method that we have applied. The net debt was not impacted by the refinancing. We replaced the bridge loan with the long-term financing according to plan, so no real changes. There is SEK 1 million left to be replaced and that is scheduled for this month to be taken out and replaced with the long-term part.Then last but not least, cash flow. As Per mentioned, pleased to see the strong cash flow that we finally had in Q4. Obviously, contributed by good result, but also by the reduction in working capital. The -- much more than that is not to be said. About the operating cash flow, we had, as expected, investments were about on the same level. What I should mention regarding the cash flow, other than the SEK 2.2 billion in operating cash flow, we also divested a couple of portfolios with the customer finance, which we also did in Q3, that had SEK 200 million positive on the net cash flow. It's not included in the operating cash flow, nor is the repurchasing of shares, which we also did in the Q4 about the same amount, about SEK 200 million. All of those two items then is part of the net cash flow, which was SEK 1.9 billion for the quarter.And with that, I have completed the financial part, and leave it to Per for the summary.

[Per Lindberg, CEO, President & Director]

All right. So thank you. And I have already said all of this and I said that I am happy with 2018. I am happy with the solid quarter 4 with good growth. And, of course, you are all waiting for what's the outlook. And we are looking at -- if you look at 2018, we had very strong demand in quarter 1 and quarter 2, came down somewhat in quarter 3 and quarter 4. There is also increasing uncertainty in terms of what's going to happen on trade, global trade politics and also where is the global economy, where's the cycle, where's that going to go. So increased uncertainty, but we still see high level of activity among our customers. Our outlook is that we will stay more or less on the same level that we saw second half of 2018 rather than the first half of 2018. So that's really the outlook for the demand. When it comes to revenues, we had a very strong quarter 4, as you saw. We expect quarter 1 to be somewhat lower than quarter 4, but certainly a significant growth versus quarter 1 of 2018. So that's more or less the outlook going forward. If you look at the focus of the company, I already mentioned that 2018 was a year where we have focused on establishing the company, making sure that the brand is well known, that we have the capabilities and the capacity internally. 2019 will be a year where we focus on efficiency, on customer offerings, on agility and on resilience. And those have been the trademarks of old MR and now Epiroc, and we'll certainly continue to nurture those into 2019. So that's going to be the focus going forward.And that's it. That's the conclusion.

[Ingrid Östhols, Vice President Investor Relations]

Thank you, Per and Anders, Then I think we should start with the -- continue with the question-and-answer session. And I think we'll start with the floor, and I already see one question.

[Olof Krook Larshammar, Analyst]

Olof Larshammar from DNB Markets. One question from my side. You have had a very good progress in the service business throughout this year, and I think 16% growth year-over-year in the fourth quarter. Could you, please, elaborate on the main driver for this development? And what are your expectations going into '19, and especially considering that you have been ramping up number of personnel within the service area as I understand?

[Per Lindberg, CEO, President & Director]

Yes. The drivers behind that development is really very systematic mapping of the fleet and the service needs of the fleet and trying to understand exactly who is the owner, what's the -- how many operating hours does it have, is it due for rebuild, et cetera? So that systematic work is really the baseline for driving the sales of service. So -- and of course, the size of the fleet as such. So of course, which means that the proportion or the volumes of equipment sold during 2018 is good news going forward. And the focus of service into '19 is to continue the growth, but also to focus on efficiency. I think the growth during '18 has been very satisfactory. But I think we can do better when it comes to efficiency, growing more efficient when it comes to service and that's going to be our focus. And one should also keep in mind that the service is both spare parts and service man hours. And the majority of the volume within service, the growth of volume within service, as such, has been man hours rather than spare parts. That is to be taken into account as well when you look at the service numbers in total. But back to your question, I think that's going to be the focus on efficiency and growth rather than on growth.

[Anders Roslund, Analyst]

Anders Roslund with Pareto. One question regarding the order intake outlook for 2019. You mentioned that you now expect or hope to stay at the level achieved during the second half of the year. You received a very big order in the fourth quarter.

[Per Lindberg, CEO, President & Director]

Yes.

[Anders Roslund, Analyst]

Do you expect that type of orders to come also in 2019?

[Per Lindberg, CEO, President & Director]

Well, certainly hope so. But the -- there is, of course -- we end up in this discussion in terms of what is a large order and what is some of the baseline order, and we've been elaborating internally because we had that question in quarter 2 and quarter 3 to understand is there some systematic way of understanding the baseload and on top of that the big orders? And there's not. It is -- I wouldn't call it random, but it's not easy to understand. Is there a pattern? No, there isn't a pattern. So basically -- and with that in mind, we say that the levels should be more or less on par with what we saw in quarter 3 and quarter 4. And on top of that, possibly a big order, who knows.

[Anders Roslund, Analyst]

Okay. So you don't include big orders in that forecast?

[Per Lindberg, CEO, President & Director]

Well, I mean, we saw big orders in quarter 4. We didn't see that magnitude of big orders in quarter 3. So you know if it's going to happen, it could top it up. But it's not easy to exactly forecast because we're not making the decisions. And of course, this is based on the decisions made by a customer. So -- but if you look at the general activity, and if you look at the sentiment in the market, it's still at a very good level, but the uncertainty has increased.

[Ingrid Östhols, Vice President Investor Relations]

I don't think we have any more questions from the floor. So I think we hand over to the telephone conference. Operator, do we have any questions?

[Operator]

Our first question comes from the line of Klas Bergelind of Citi.

[Klas Henrik Bergelind, Director]

This is Klas from Citi. So coming back to order intake and guidance, you are now saying that you're guiding for flat amount on a rolling 6-month basis. I think last time it was against the last quarter. So that would mean that if it's ex large orders, I get that to be SEK 3.3 billion that you're looking at or a run rate of SEK 13 billion on an annual level. It's a little bit lower than I thought considering that, at least according to my history, when I look at MRET, when you were part of Atlas, and how orders are trending at some of your competitors historically. Orders are typically, on a seasonal basis, higher by some 7%, 8% in the first versus the end of the year. Could you comment a little bit, Per, when you're using your data from 1990 that you referred to during the last conference call, whether that is the typical seasonal pattern? And why we shouldn't see it again?

[Per Lindberg, CEO, President & Director]

Well, you are right. I mean, the most -- the clearest development over the year when it comes to quarter-on-quarter sequentially is that quarter 3 is typically lower than quarter 2. And we also can see a slight uptick in quarter 1 versus quarter 4. Now as I mentioned already, the arrival of large orders is -- we don't exactly know when they'll arrive. So it's difficult to take that into some sort of a forecast. And we also, as I said, we've seen -- we continue to see high activity and pretty good optimism when it comes to our customers, but, again, higher uncertainty. So all of this combined, we feel that looking at orders received, more or less, on par with second half is what we expect. This is not necessarily more scientific in that.

[Klas Henrik Bergelind, Director]

All right. A follow-up question to this relates to, hopefully, the conversation got turned to the medium term outlook, not only the next quarter, but we know that the latest peak in 2012 was mostly underground, where the replacement cycle is very short, some 5 , 6 years, particularly on loaders, a bit longer on the drill rigs. When we now listen to Caterpillar, they're saying that their customers, i.e. the miners are telling them that they should be ready for replacement cycle starting in 2020. Your trade cycle is shorter than Caterpillar service tracks, which are typically replaced at 12 to 13 years intervals. What have the miners told you from a medium-term perspective when you think about replacement, Per? I mean, you're guiding here for near-term, but can 2019 be the replacement year of the second wave? Or do we have to wait longer for that?

[Per Lindberg, CEO, President & Director]

Well, we expect, as you may remember, is that so far according to our definition and the way we have -- we talk to the customer, understand their investments is that the majority has been expansion rather than replacement. In 2019, we expect replacement to become larger proportion of orders received. So I guess, the answer is yes. I think we'll see more replacements in '19 than we saw in '18.

[Operator]

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

[Graham Phillips]

I'd like to ask question on this new order you've got from Anglo. It is open cut. So typically, it's not being where you've had a huge focus, obviously, with the underground mining machinery, typically more where you've been focused. What is it that you've offered there in terms of either new products? Is this a new area that you can perhaps develop more? And of course, where the current copper price is, it's quite a way below greenfield incentive price. So is this something you've done in order reducing cost for this customer that enables them to consider a project of this size as a greenfield?

[Per Lindberg, CEO, President & Director]

Well, what we had -- obviously, these are surface drilling machines. It's both from our ATS division and to a minor extent from [ SED ], so it's big machines and some smaller machines, so that's what we do. It's really the highest level of automation on all machines. And so this is what essentially what we will provide. And the incentive and the reason for them to go for a greenfield project, I guess you have to basically hear them. But I have seen part of the numbers that they provide and the cash cost that they will achieve in this mine will be fantastic. So I think that's really the reason why they go for development.

[Operator]

Our next question comes from the line of Matthew Spurr at BNP Paribas.

[Matthew Spurr, Research Analyst]

It's Matt Spurr, Exane BNP. So the first question I had -- let's go back to the Quellaveco, if I pronounced that correctly, on the greenfield. When you get an order like that for that project, is that all you're going to get? Or are there multiple opportunities to win throughout the life of this project?

[Per Lindberg, CEO, President & Director]

Yes. I mean, we do have an -- we have an agreement with them not only on machines but also for service, but service is not currently recognized in our orders received. So it's a substantial amount that also will be -- substantial service amount that will be done for these machines over a period of time. But that is not disclosed, the magnitude of that, but it's a significant number.

[Matthew Spurr, Research Analyst]

Okay. And then my follow-up was, I know you said it's difficult to assess this sort of what's baseload and what's large order, so try to ask it a different way then. Based on the current level of activity, where do you think you are for large orders in this quarter, let's say, versus Q1 and Q2 of 2018? I know you didn't announce any in Q3, but...

[Per Lindberg, CEO, President & Director]

Well, it's -- yes, I know. But the numbers in quarter 4, we basically have one big order and that's the Quellaveco order. And we saw more big orders in quarter 1 and quarter 2, not to the size of the Quellaveco order, but the number was certainly higher.

[Operator]

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

[Markus A. Almerud, Senior Research Analyst]

Markus Almerud here. So just to continue on the orders and then to pick up on Klas' question. So if I get it right, so I think you've said before that Q1 and Q2 was basically on par with Q3, if you were excluding the large orders. And that means that you saw a downtick in base orders, or however you want to see it in Q4, was there any reason for that? And also, if replacements are going to be a larger part of 2019, that means that the expansion is going to come down if you're going to be at the same level. So are you basing this on customers' hesitation or anything else that is behind this?

[Per Lindberg, CEO, President & Director]

Well, I'm not -- to be honest, I'm not exactly sure I understood the first part of the question. But of course, if orders is maintained at what we saw in second half throughout 2019 and if replacement is a bigger proportion than expansion, of course, that's going to be a lower amount of expansion, that will be a consequence. But right now we're just talking about the very near future, which is quarter 1, and we expect that to be -- again, I'll repeat, we expect that to be on the same level as quarter 3 and quarter 4, more or less. So that's where we are. And if you don't mind, can you repeat the first part of the question?

[Markus A. Almerud, Senior Research Analyst]

Yes. So what I asked was, I think, that -- I mean, Q1 and Q2 were very high, right, but I think you've said that if you were excluding the large orders, Q1 and Q2 and Q3 were basically at the same level, and now we saw it coming down in Q4. So I was just wondering if there was any reason for that, or if there were just any temporary factors, et cetera? Because you also have the seasonality in Q3, which was one of the reasons why it was weaker, and you said you've seen that in the past. If you looked at the data, et cetera, now it's coming down further from Q3. So just explain the dynamics if you can, or if you have any reasons for it?

[Per Lindberg, CEO, President & Director]

Well, as I said, I think we're still looking at a positive sentiment, good activity. But as you say also -- and there is fewer amount of larger orders in second hand (sic) [ half ] as compared to the first half -- second half compared to the first half. And whether this is a function of decision-making and our big customers or not, not really sure; or whether it's just a random pattern, not really sure either. When it comes to the outlook going forward, what we're saying is really, it's, again, very difficult to predict the arrival of large orders, such as the one we had in Quellaveco, for example. So it could happen that we receive one or more, which will have a quite significant impact on the individual quarters, but that, again, is very difficult to forecast.

[Markus A. Almerud, Senior Research Analyst]

Okay. And then also quickly, if I could just ask about the exploration as well. If you're seeing those kind of trends continue, what you're seeing in exploration?

[Per Lindberg, CEO, President & Director]

Well, we see exploration still being on a high and healthy level, not to the level that we saw in 2012, for example, but still on a high level. So exploration continues. And the forecast, if you look at the forecast for vital metals, such as copper, such as nickel, and associated metals, when it comes to electrification of the global fleet of vehicles, there will be a shortage come 2022, 2023, if we don't see major expansion, be it greenfield or brownfield. So of course, exploration will continue. But the current uncertainty, of course, means that people are not entirely sure where to invest and how much to invest. But will this exploration continue? Yes, we believe so. And will there be positive momentum in mining going forward? Yes. But right now, there is uncertainty.

[Operator]

Our next question comes from the line of Guillermo Peigneux of UBS.

[Guillermo Peigneux-Lojo]

Just a question on the second-generation of electric equipment. I just wanted to check the state of affairs now. I guess, there's 2 competitors on the ground, mainly with the same technology, but electrification used in different way, so to say. So you use modular batteries, whereas your competitor inside the mine uses a different technology there. Is it too early to assess which technology is, in a way, capturing the most efficient by mining clients? Or would you say that they are indifferent to the technology in terms of the battery technology? That's my first question.

[Per Lindberg, CEO, President & Director]

Yes. That's a good question actually. I think we are feeling and understanding is -- and our belief obviously is that we are having interchangeable batteries and a standardized cell factory is the way to go, and this is what we have in our second-generation, which means that we can upgrade the cells when new battery technology arrives and also make the change-over quicker for the customer. So we believe that's the way to go. Now whether that's going to translate into the customers' belief as well remains to be seen. So we've made our analysis and we're going down our route. So -- but it's kind of early to say exactly what the customers are going to say. But we also know that we are -- we believe that we are in the lead when it comes to battery technology and the applications in mining vehicles, and we intend to remain in the lead.

[Guillermo Peigneux-Lojo]

And then a second question maybe on the dividend. The proposal is SEK 2.10, which is a little bit short of the 50% or around 50% that you basically highlighted in the IPO prospectus. Is there any reason why, given the state of the cycle what you see in front of you, that you should be a little bit below your ambition or aim?

[Per Lindberg, CEO, President & Director]

No. I don't think one should read anything more than -- as I mentioned already, the underlying level, if you include Atlas Copco, would be SEK 1.80, and we are now at SEK 2.10. So again, it's a 16% increase. And we think that's substantial and a good starting point for Epiroc.

[Guillermo Peigneux-Lojo]

And my last question regards Tools & Attachments. I guess, good operating profit development there, good operating leverage. Can you determine how much of this is internal versus just basically mix and organic growth?

[Anders Lindén, Senior Vice President of Controlling & Finance]

Sorry, can you repeat the question?

[Guillermo Peigneux-Lojo]

Yes. In Tools & Attachments, you did have better-than-expected performance, I guess. And I wanted to check whether the -- you could share with us how much of that is just internal cost savings or internal efforts versus organic development?

[Anders Lindén, Senior Vice President of Controlling & Finance]

Can you...

[Per Lindberg, CEO, President & Director]

Yes, I will. I think if you look at Tools & Attachments, we have tools, we have attachments, and attachments has done fine essentially throughout 2018. And the issue that we have -- that we had during '18 is really around tools consumables. And we have faced headwind when it comes to raw material price. We have basically been able to fend off the raw material price through price increases and internal efficiency, but we kind of tread in water when it comes to the profitability as a percentage. So I don't know if -- that probably doesn't answer your question, but that's where we are right now. So the leverage that you've seen is volume-driven, that would be my assessment primarily.

[Operator]

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

[Alexander Stuart Virgo, Director]

Just following up on that the T&A question. I wonder if you could explore a little bit more around the dynamics you mentioned, and have mentioned before, around the bottom end of your portfolio and your initiatives to move away from unprofitable business. Obviously, it's hampering the top line development. I just wonder if you could talk about how much longer you feel that is something we need to be aware of over the coming quarters and year. And whether or not you can see the end of that, if you like, or is that something we're just going to have to wary of for a slightly more longer term? And I suppose just to ask the previous question a slightly different way. How much of the 300 basis points year-on-year margin improvement would you attribute to that initiative, i.e., avoiding unprofitable business?

[Per Lindberg, CEO, President & Director]

All right, if I answer the first half and you look at the flow through. As we mentioned previously, we do our portfolio primarily in tools. We do have some core products where we make -- we have profitability levels that we're quite satisfied with. Part of the portfolio is not satisfactory. We're dealing with that, and we expect to be able to resolve part of that at least within the coming couple of quarters.

[Anders Lindén, Senior Vice President of Controlling & Finance]

And when it comes to the, let's say, profitability improvement, yes, I don't really want to quantify it, but there will be an improvement on the relative margin from -- obviously, from divesting less profitable business. So we can see a better flow through without being too specific at this point.

[Operator]

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

[Graham Phillips]

I had a follow-up question on cash flow for Anders. So it's a really good fourth quarter cash flow. Can you talk a little bit about the impact from working capital? I think that's the main reason it has come in stronger. Then also separately related, but is IFRS 16 going to have an impact on the P&L as well? You've indicated the operating leases will have an impact on the net debt. But does it change any of the accounting for the P&L -- in the P&L for IFRS 16?

[Anders Lindén, Senior Vice President of Controlling & Finance]

Yes. If we start with the cash flow, I like to talk about the cash flow. The main reason for, let's say, the reduction in working capital is inventory as we had a very strong finish. Obviously, not all of the sales have been paid and turned into cash. So if we look at the different components of the working capital, obviously the reduction has been in inventory more than in the other -- in the receivables. So I don't know if that answers your question, but we are pretty pleased with the development for sure.

[Graham Phillips]

And which business -- because that will have impacted the margin. So which business of the three business areas would have had the benefit, Service, Equipment or Tools & Attachments?

[Anders Lindén, Senior Vice President of Controlling & Finance]

It's a little bit everywhere to be honest, but obviously with the strong revenue and deliveries from the equipment side, that obviously made the difference. But we have worked hard in all areas. So I don't really want to be too specific here either, but certainly the equipment deliveries have made a difference.

[Graham Phillips]

Okay.

[Anders Lindén, Senior Vice President of Controlling & Finance]

On the IFRS 16, as we have mentioned, there will be very marginal impact. We will have, obviously, a very small, and I think, let's say, plus on the operating profit and a small, very -- even smaller negative impact on the profit before tax, before -- after financial net. But it's really immaterial considering the size of the company. So...

[Graham Phillips]

Okay. And then on particular division as, again, of the business areas, Equipment, Service or Tools & Attachments, in terms of the P&L profit increase?

[Anders Lindén, Senior Vice President of Controlling & Finance]

No. I mean, it's -- the numbers are so small, so it's not noticeable in the larger scale.

[Graham Phillips]

And then perhaps just another follow-up is on the service. You talked about what's happening with sort of orders. How much more headroom is there in discovering these bits of equipment that you've mapped that you said that are not being fulfilled on service needs, who owns and what the size of the fleet is? Because trying to understand what the sort of normalized level of service order or organic sales growth is quite difficult to know when we think very strong numbers coming from you in recent quarters.

[Per Lindberg, CEO, President & Director]

Yes. I think there's still plenty of potential in mapping the fleet and making sure that we touch every piece of machine, and also the target is to have 100% of all the business on a machine. At the end of the day, that's going to be unrealistic, but we expect that 70% could be possible, and we're certainly not there yet. There is plenty of potential going forward to continue to work with an increased service proportion.

[Graham Phillips]

All right. And you mentioned that it is dilutive to margin to the service profits because it's more man hours and spare parts. At some point, the spare parts follow because presumably these guys are working longer-term service equipment, but they're going to be using your spare parts and they might not have previously been using your spare parts?

[Per Lindberg, CEO, President & Director]

That's correct.

[Graham Phillips]

So you would've -- is the margin impact that significant that you've mentioned it, or should that then reverse at some point, I don't know, in the coming year?

[Per Lindberg, CEO, President & Director]

Pardon. Can you repeat the question?

[Graham Phillips]

The point you made about the biggest bookings in services being for man hours rather than spare parts, so -- and that's lower margin. So at what point do the spare parts actually start to actually come in as your man hours are actually using your spare parts rather than someone else's?

[Per Lindberg, CEO, President & Director]

Well, that's a difficult question. I don't know exactly when that would be. I mean, we -- as I mentioned, I mean, the focus going forward is to increase efficiency in service, in general, but also making sure that the growth is more efficient than we saw in 2018. And that's going to be the focus. Exactly when there's going to be more spare parts in the mix of between spare parts and man hours, I am not exactly sure to be honest.

[Ingrid Östhols, Vice President Investor Relations]

Okay. We have time for one more short question.

[Operator]

Our next question comes from the line of Tanuj Agrawal of Barclays.

[Lars Wauvert Brorson, Director]

It's Lars from Barclays. Per, I had a slightly larger, bigger picture question on copper, your biggest metal exposure after gold, obviously, and arguably a big upside surprise to your growth in 2018. We've seen some 2 million tons of peak production capacity come through in approved projects over the last 2 years. You mentioned Quellaveco. Obviously, that was in your numbers in Q4, approved in mid-2018. That was at the tail end of that. I think that means we are now at a 20-, 25-year low project pipeline beyond projects in construction. So that's what we call probable or highly probable project and would suggest we might see a bit of an air pocket in CapEx growth among your copper miners in 2019, 2020 potentially. That's, at least, the picture I am starting to hear out of some of the big EPC vendors. Is that a picture you could recognize? In other words, do you look at your copper business in 2019 and 2020 as being a declining business?

[Per Lindberg, CEO, President & Director]

No, not necessarily. I think we already mentioned the outlook going forward. But copper, if you look at that -- if we talk to customers globally, especially I think I mentioned, South Africa -- no, Southern Africa and South America, I think they are quite bullish going forward in terms of their expansion projects. And as I already mentioned, we think that the -- if you look at the projections for copper balance, production and demand, if we don't see a major expansion beyond 2022, 2023, there's going to be a shortage. So exactly how that's going to play out over the next few years, difficult to say. But I'm not -- we're not seeing that copper should be necessarily weaker than the average, so to speak.

[Lars Wauvert Brorson, Director]

I mean, obviously, South Africa is tiny in the scheme of the things, as it is very much a Latin American market. And I guess the point I'm trying to make is, there aren't many board-ready projects out there that can be pushed through in the near term, particularly given where copper price is today and some of the permitting and environmental issues we continue to see. And so that's why I'm flagging what I suspect might be a bit of an air pocket amongst some of the copper miners in the short to medium term?

[Per Lindberg, CEO, President & Director]

Okay. I was referring to countries, such as Zambia, rather than South Africa. But we'll see, we'll see whether you're right or not.

[Ingrid Östhols, Vice President Investor Relations]

Okay. And that was actually the last question. We have -- time is running up. So I think we have to end this session. And thank you very much for joining us. And hope to see you again next quarter. Thank you.

[Per Lindberg, CEO, President & Director]

Thank you.

[Anders Lindén, Senior Vice President of Controlling & Finance]

Thank you so much.