Atlas Copco's CEO Presents at Merger of Edwards Group Conference (Transcript)

Aug.19.13 | About: Atlas Copco (ATLKY)

Atlas Copco Ab Ser A (OTCPK:ATLKY) Merger of Edwards Group Conference Call August 19, 2013 5:00 AM ET

Executives

Ronnie Leten – President and Chief Executive Officer

Hans Ola Meyer – Senior Vice President Controlling and Chief Financial officer

Analysts

Andreas Koski – Nordea Markets

Aaron Ibbotson – Goldman Sachs

Guillermo Peigneux – UBS

Markus Almerud – Morgan Stanley

Ben Maslen – Bank of America Merrill Lynch

Kenneth Toll Johansson – Carnegie Investment Bank AB

Daniel Schmidt – SEB Enskilda

Operator

Ola Kinnander

Hello everybody and welcome to the press conference regarding Atlas Copco’s acquisition of Edwards Group. We are very excited that you all could join us, here in Sickla outside stock home and as well as on the telephone and hopefully on the web. We have just heard that there are some technical problems regarding the webcast, but our IT folks are working on the issue and hopefully it will be resolved. But please make sure to call in, so hopefully you can always hear the conference that way and all presentation materials will be available on demand on the internet as well.

So I just want to introduce Ronnie Leten, our President and CEO, he will make a presentation and then he will take your questions and Hans Ola Meyer, our Chief Financial officer will also answer questions.

So over to you.

Ronnie Leten.

Thank you, Ola. Good morning and apologize that we do it so early on the Monday that we have on short notice this announcement, but I’m very pleased that we could do this, the announcement that we enter into an agreement to acquire Edwards a leading Company, and I will tell you a little bit more about this excited journey.

Maybe first I will start with the Company, it’s really a leader in vacuum products and abatement systems, as they also presented on their website for your information also, this is a listed Company on the NASDAQ so you will find all the detailed information also on their website. So that’s makes my communication a bit easier.

It has a long legacy, the company that is found in 1919 in UK and it has a very strong technology legacy, but also a very strong embedded relation with a lot of customers.

Revenue, just below £600 million for the Switzerland it’s around BSEK 6.4 in 2012. The company of our size around 3,200 people spread over 30 countries has a very wide sales and service network, most of the businesses are done direct and that’s also a lot of similarity with our business, so it’s the direct business and they have eight manufacturing facilities. The main ones are in Czech, Korea, and Japan and UK. And they have the technology center in UK.

And as I already mentioned, I think you can find all their detailed information on the website at edwardsvacuum.com. So I would say I’m very pleased that we have a great as this company is really a technology leader and you know Atlas’ since long a technology leader, so for sure I believe that in this case this merge could literally lead to fantastic journey in the future.

About the financials, I think that’s important, especially when you go entering into a business like that, you see here over the last five and I’d say five and a half years, it has an EBITDA this business and okay forget the 2009, I think you all remember the crises, you see that since the company has really made their move from the affect and I will tell you a little bit more about that, I think they really come to an EBITDA level of around 20%, and an EBIT level if you see here on the slide its around 11%, 12%, but one should know that there is a lot of restructuring costs and other amortization of sellers purchase price adjustment, it is also said on the slide which is around 4%.

The revenue, the geographical spreads, you see Asia 52% and that’s mainly China, Korea, Japan and Taiwan is the main area there which is I think also good because that is where the future business growth will be on earth and you have been – when you listen to us in previous calls we said that’s also one of our focused areas for the next coming 10 to 20 years. U.S. or the Americas it’s around one third of the sales. So I think a normal good spread of the revenue.

What is nor the rationale, why is Atlas Copco going into vacuum. I can tell you, if I take my own legacies at Atlas, I think early 2000s we had already done a deep dive into vacuum and look into the define the right entrance point to come in, because one should know that from a technology point of view the vacuum part and the compressor part they have a lot of similarities and even also when it comes to the customer relations, customers who are using it is a lot of similarity. I will come back later on that.

But anyhow vacuum is an attractive market segment it still has some growth potential. And I’m sure also and I would to do a bet review if we meet each other within 10 year or 20 years, vacuum will still be on earth, it will be a lasting technology. And one as mean when you listen to us also when we talk about compressors, compressors was there 20 years, 30 years ago and it will also be there within 20 years. So that’s the reason why – of one of the reason why we say this is a real good business fit for us. I will not say that this today a core business, I think it is adjacent business. I don’t want to say that is exactly similar to compressors, but it has a lot of similarities.

The second one is why this company, I already mentioned it when I was presenting the company it is a company which is really a leader in their field. It has top products, top service and top organization. They really have top engineers, top people who know the application of their customers, and when we were doing the due diligence, we really were please and excited when we were interacting with their organization. So also that was I think first segment but also the company made it’s really attractive.

And of course last point the company Edwards serves a market, an industry where also Atlas Copco is working. So many of our customers for tools or for compressors are also customers for Edwards vacuum. So these are mainly the basic core rationale augments for the acquisitions.

If we take now the full offer, if we really combine the Atlas Copco compressor offer with the Edwards compressor – vacuum offer. So I will make this mistake a couple times I think during the day now, so I should get used to the vacuum part. But you see we got a full range here, we go from 300 compressor bar and we go to 10 to the minus 11 millibar. So most – the air is most yeah – the space is almost empty of any miracles when you get 10 to the minus 11, I don’t think you will survey in that second.

So also here we will also use the brand as said on the slide, we will use the brand Edwards, because Edwards is a really strong brand, it has really a reputation in the high vacuum and a medium vacuum, it has that. What we are going to do is of course to leverage Atlas Copco’s presence and really also when it comes to the rough medium vacuum, we also introduce the Atlas Copco Vacuum Solution range. So I think this slide here it will give once it all is set, this will give us the full attractive market offer for our customers.

Already said it’s a growing market and I could make this slide more or less same for compressors. We have never done that. But I think it’s more or less the same. There are many new vacuum applications, there are many new compressor applications, everyday they are coming up and that’s also what we see in this market and also we see also an increasing vacuum demand, the intensity that we see up. Like I mentioned if you – there is more and more demand for the high purity, because there are new processes in place which ask for this type of technology. So is those growth drivers they will make sure that the market will keep growing.

There is from the Company point of view there are sophisticated process vacuum solutions that are provided and here on this slide I try to give you a bit of an insight for those who are not familiar with first the Company and with the business, that if you go to customers, what do you the lever the lever of vacuum ton, you deliver an abatement systems and of course you deliver service. And that’s also what this company does that.

And of course like it says on the slide here the vacuum is used in create highly-controlled, low-pressure, array of particle-free environment and we see more and more of that, there are manufacturing processes who are using that. And of course that is where the driving – the growth drivers will come from, how you do that, you have different technologies like they have been hearing me talking about grow compressors, turbo compressors, I think you will hear us in the future talking about dry pumps, turbomolecular pumps and other vacuum pumps. Sorry for that but that’s part of the game. I will do my best to convey that message so I will conduct some training on that part.

And now we the abatement system, which is the smaller part of the business, but I think is not an important, because when it to a vacuum, you really suck, we’ll know the (inaudible), we all know that I think the same, I think you’ll get exhaust. And that can be contaminated air and of course that needs to be treaded and there is more and more regulations coming in place where we have to control this emission and that’s the abatement system. And of course last but not least, there is a nice recurring business, I think it’s around 27% of their business which is recurring which service so that also is embedded and is a look alike as we have in the compressor business.

Synergies, other synergies between Atlas Copco and Edwards, for sure there are. But this project is a real growth project, it’s not the first priority its not, its that when you normally do acquisition you starting talking about what are the cost cutting exercise, what I really the really one-offs you can do on that one. In this case, there are some and I will elaborate a bit on that one. But the main driver for us is to really get synergies between the sales and service from compressors and from vacuum.

Like I mentioned I think there is a lot of overlapping when it comes to the usage, so we also say here, I think we leverage customer relations between Atlas and Edwards, and I think also the geographical footprint. So Atlas is present in 178 countries, so there are lots of potential we get. You have been hearing us talking about feet on the street, what does it certainly gives all that, of course it will not come immediately, this will take time, because our people need to learn and get familiar with compressors that also Edwards people need to get used to the vacuum and to the compressor side just the opposite I should say. So that I think is really the driver and we believe there is a lot of potential for us to enter into this type of sales and service synergies.

Another one and what made me exciting when I was reading more and more of the due diligence reports, is the technology the technology crossbreeding from both sides, like I already mentioned Edwards is really a technology leader, Atlas is a technology leader you know that I have been spreading that coastal many times, and we see that when you bring this two engineers together is so a lot of potential.

So I’m sure within say three to four years from now you will see again a step-up which we will have done in compressors, but I’m so sure also in the vacuum part, so there is a lot of potential to gain here, and of course there are cost synergies, I think, I just mentioned the realistic costs something, the financial costs, all these areas makes it, which is for the smaller company of burden which is the financial cost, then these things will go away.

So that’s is the main one-off quick gains we will get, I’m not so sure for the quick one that we said okay, we will get cost cutting on more people, we will close more factories and all that note, I think this is definitely a well run company and they have done during the last five years, they have done the real strong restructuring where they moved a lot of manufacturing from West Europe to Asia and also to East Europe, that is more or less – or it has more or less taken place, of course there are purchased synergies that will be there, but I will call it purchase and financial synergies we will have. But not really that we go to close two or three other factories neither on the Atlas Copco side, neither on the Edwards side. Again it is a growth project.

I mentioned already, there is a lot of overlapping or similarity on the customer side. You see here a couple of examples of segments, where we are with compressors, where also Edwards is with vacuum, so there is a lot, we are in semiconductors, we are in pharmaceutical, we are in medical, if you remember, we are the market leader in providing medical solutions to hospitals, I think here you are spot on with compressors and vacuum. When we did the comparison we think between 60% to 70% of our industrial compressor users, and also using vacuum from any kind, so there is a significant overlapping on the customer side.

Similarity technology even for those who are not familiar with any of this technology or are not an engineer, you can see and this is not a made up, it’s really you say on one hand you had the compressors side, the other you had the vacuum, the technology has a lot of similarities, other differences yeah there are small differences, but I’m sure vacuum engineers understand compressors and compressors engineers understand compressors and compressors engineers understand vacuum of that way. So there is a lot of synergies, because I think we have a couple of where we are really state-of-the-art in the technology, we also have seen that they have areas where we really can gain a lot. So these areas, yeah, like I said they look very exciting once we are together in this area.

How does it look now for the group? This acquisition is around 7% for the group revenue. So its extra comes on top of that. You see here the report that figures to the left slide of the pie chart, what doesn’t mean. So compressors will move from 39% to 43% once we are together and these are figures until June 2013, so 12 months moving. The rest is more or less stays – more or less the same.

The transaction, as it says in this slide, I will not read it all. We have agreed with the seller that we do once 2013 is finished and we know the income statement, we will get, we will pay BSEK 9.25 and depending on where they are on the revenue and on the EBITDA, we got to pay maximum of BSEK 1.24.

So in total, the share price, the maximum share price could be BSEK 10.5, which is an enterprise value of BSEK 10.6 as you can see here on the slide, assuming a net debt of course that will develop of BSEK 2.8. And of course the transaction is only complete because, will be completed by a way of merger, of course, as the whole process which will take place, but approximately 84% of the current shareholders are really support this transaction.

So on the timing point, however it looks, of course the announcement today that is obvious. Then the company has the obligation to have an extraordinary range meeting to vote for the deal, which will most likely take place early October. And then, if everything works fine when it comes to the antitrust filing and other administrative matters, we expect to close yeah, early 2014. So that is more or less planning.

As last slide and would like to summarize the rationale, why we do it? It is a great segment to be in, vacuum as a total it’s a $6 billion, it’s still growing. The company is a technology leader, is really one with – in the toughest markets is a leader and has also for Atlas Copco a market customers (inaudible) which we know, which I know myself and you have heard me say many times, when I get the question around acquisitions what are you doing, say okay we only buy what we understand, if I understand, that I’m sure also there are more than 100 people and Atlas Copco understands that.

So and by this I would say I will be open together with Hans Ola for some questions from the audiences and from the phone.

Question-and-Answer Session

Ola Kinnander

Why don’t we start here in the audience, if someone here has questions?

Andreas Koski – Nordea Markets

Andreas Koski from Nordea. A couple of questions on the vacuum market. Firstly, if you talk about the market growth for vacuum products, would you say it’s similar to the compressor market, or is this market growing faster?

Ronnie Leten

Yeah, I think if you listen to old institutes and – because that was one of the thing go up of course we also look in that that if you take this institutes and you also take the Bostons and McKenzie’s and other (inaudible) and ask them to make an estimate, you see its around 5% a bit more than a 5% what to you say, if you take it from compressors it more or less also come to bar but of course one should know that think you have a couple of cyclicality’s in this business, we should not deny when it comes to the semiconductor business, which has another cycle than you have been in general vacuum, so that’s but if you take over the business cycle that is what we have worked with.

Andreas Koski – Nordea Markets

And then on the competitive landscape, would you say this market is as consolidated as the compressor market, or is it more fragmented and this would make it more easier to find further acquisitions in this segment?

Ronnie Leten

Also there is not on homogenous compressor market. You have been – we have low pressure, medium pressure, high pressure, you have gas and that’s a bit of same what we have in the vacuum mark and that’s in one of my slides, that have tried to do a bit this to say, okay you have the ultra high vacuum, we have the high vacuum, we have the medium vacuum and you have the rough vacuum.

Depending a bit on what type of segment you are, you have more consolidation, the more challenger it is the more consolidation you have and that is also where this company Edwards is also market leader. And then when it comes to market leader, it’s a method of yeah, getting more market share. It’s a bit same where we are with the oil-free business of Atlas Copco. It’s a battle of market share. It’s not the battle of acquisition. When it comes to the medium and rough, I would say it’s more fragmented. There are more potential, I would say acquisitions you can say or potential growth area.

Andreas Koski – Nordea Markets

And lastly, if you can mention Edwards’ main competitors?

Ronnie Leten

Depending again. I would say Ebara and I will say Gardner Denver give or take just two.

Andreas Koski – Nordea Markets

Thank you.

Ola Kinnander

Anyone else here in the room at a moment, okay, let’s take questions from the phone then.

Operator

(Operator Instructions) Our first question comes from Mr. Aaron Ibbotson from Goldman Sachs

Aaron Ibbotson – Goldman Sachs

Yes, hi there. Good morning. And I have several questions, but congratulations on what seems to be a good deal. So first question is, are there any other buyers in the wings that you’re aware of? And, should somebody come in with a higher bid, do you have any exclusivity clauses with their Board and what penalties would be if they back away from the deal, if any?

And related to that, I’m just curious since this company was IPO relatively recently, if you looked at it at the time and why you decided not to buy it then? And then I had one question on the Service business. So contrary to Atlas Copco, Edwards gives some decent disclosure and they basically openly say that they only capture around 10% of the recommended service opportunity in general vacuum.

And if you look overall in their business mix, they think that they have around 30%/35% of their service opportunity that they capture. Is this something you’ve analyzed separately, and do you share that analysis, and do you think you have a room to maybe, so if this is correct, double the service opportunity over the next few years? That was my initial three questions. Thank you.

Ronnie Leten

I think when it comes to service, of course we have investigated that part, because you know my passion for the recurring business and we looked into that also, is that the business which we can capture, is that the business which is really recurring and is also sustainable, profitable, and that’s also what we found, it’s definitely for sure. The main service business that it gets today is on the high vacuum part that is where with the Samsungs and Intels of this world which is one of their biggest customers, that’s also when they capture also the service business. So from that point of view I think it’s rather similar as we have.

Yeah, do they capture 10% of the general vacuum, yeah. I think we also know that we still don’t have 100% of our industrial compressor service, so I’m not surprised when they say, because they have a bigger challenge a standalone company to capture that, because their presence is not as densified as our presence. And if you want to capture service, you need to have a very dense network, if you don’t have that you are too expensive, you will not capture that because then the customer will do it himself.

So I believe really there is still potential. And that was also when I was explaining in the presentation about the synergies. That is one of the synergies which we will really work on and try to capture within the next coming five years.

Aaron Ibbotson – Goldman Sachs

Is it okay if I just try to clarify? I guess you made it very clear in the beginning, which makes a lot of sense when you look at the type of acquisition, that your focus is revenue synergies. So I was just hoping, if at all, you would share sort of a view that on the service side, which is currently running at something like just around $2 billion maybe, are we looking at – do you think you can have revenue synergies, or doubling those over a five year period? Or do you think that’s too optimistic with Atlas Copco’s high service densities? Do you think is there any type of revenue synergies that you’re willing to sort of maybe share that magnitude or rather than just saying that you think they are there.

Ronnie Leten

You maybe and a couple other interactions which we have been talking about service and when you were asking the ambition of course where can you grow and if you just take the similarity with Atlas Copco’s compressor part, I would say if you can grow the service business 10% every year, I think you have done a great job, because you should think about how many people you have to put in the filed, you need to train them, so if you just make the math quickly Aaron and you say okay in five years you can double it, I think that – I would hope to do that, but I don’t believe in that that anyone can do it.

So I think we should really have an ambition that we have a good solid growth area in the service side, but more in the high single digit levels maybe say the 10% level, because I don’t see any reason why this would be fundamentally different for the compressor business, and for the vacuum business.

Aaron Ibbotson – Goldman Sachs

Okay, thank you.

Ronnie Leten

Yeah. Then I think are there other buyers, yeah you know now its in the open, I’m sure there are other companies looking into that and I would be very disappointed if some others will not look to its and see there is a procedure, because there are minority share holders and of course they also have the right and we should respect the minority shareholders and they can also look into that, so that means its all in the public.

There is a procedure to follow; we do not have exclusivity because that is legally not allowed, so I would love to have it but I think as it is a listed company, we cannot do that. And when there is a higher bid coming, I use to say, or we use to use a phrase of one of our previous Prime Ministers as [Belgian] he said let’s solve the problem when the problem is there. So I would quote him, so we will solve that problem when the problem is there, but I can tell you of course and you know me of course we have if it happens we will anticipate the right solution.

Why – and then the second question was about the IPO, yeah, when you have talks I think we have never went into final negotiation previously with this company, I’m not denying that we have not looked into that because I look – my first time I looked into this company 2006 already, but at the time, the time before the IPO, I looked into we talked but okay we didn’t come to it then. So it was not my fault I would say, that I didn’t want to date more, I use that other [word] I think you should maybe you should ask the seller why they have done that part at that time. I think they are better informed on that one than I was.

Aaron Ibbotson – Goldman Sachs

Okay. Thank you.

Operator

Yeah. Our next question comes from Mr. Guillermo Peigneux from UBS. Please go ahead.

Guillermo Peigneux – UBS

Hi good afternoon, it’s Guillermo Peigneux from UBS. Just a couple of questions. Can we get any hint as to how Edwards’ Service business compares to yours in terms of profitability? Is it similar to the one you have in Compressor Technique or is far away from it? And then secondly, regarding the operating leverage of Edwards. Can you put any framework when it comes to how vertically integrated is this business model and how we should be actually modeling this, going forward, in terms of drop-throughs and so on.

Ronnie Leten

Are you taking the operating, I will answer. Yeah, on the profitability it is a solid profitability, but also in this business as also in compressors you also have a bit of a difference between profitability levels in certain services, I think when it comes to high end services, their premiums are better than if you do just having service people doing some regreasing where is less profitable, but I would say the, I’m not going to give you details, I suggest, that you then talk to Mattias in that part, he will – I’m sure he will love this question, to say that it is a solid recurring profitable business.

Hans Ola Meyer

On the operating leverage, you know Atlas Copco as a very asset light company and that’s the background of your question, I would say that we now have a company that is in equal terms in the category of asset light, with similar philosophy regarding outsourcing, regarding how, what they manufacture inside and what they purchase et cetera, et cetera, to be a little bit more specific, if you compare with Atlas Copco, the fixed asset ratio of buildings, machinery and equipment et cetera is slightly higher to revenue than Atlas Copco.

But on the other hand, Atlas Copco is very low on that, if you take in the working capital needs on the other hand it compensates. So that’s why I say just as Atlas Copco is a relatively light asset model and hence the leverage when revenue and top line goes up and down should not be dramatically different than what you can find in Atlas Copco. But we’ll have to give more color on this, of course when we start to consolidate this company in 2014, and then we can give more comments about it.

Ronnie Leten

One thing, maybe I think it’s a good question Guillermo. I think one thing when you are going to compare the balance sheets and you take Atlas…

Hans Ola Meyer

Yes. I hope you say, what I forgot to say, otherwise, I will complete it. No, no you go ahead.

Ronnie Leten

That’s the reason why we are two here.

Hans Ola Meyer

Exactly, exactly. Yeah, yeah.

Ronnie Leten

Now when you’re looking that I think if you see the last four years, five years the record on the investments and the move they have done going from say UK-based manufacturing and now more to Korea, Japan and Czech. So they have invested a lot in new equipment, in new buildings and of course that is also on the balance sheet. So if with that compare with Atlas where we had done this more or less spread over the last 10 years, 20 years we get a totally different asset part on that front. Is that the one?

Hans Ola Meyer

No, very good. Then we have a third one, no we should of course say in relation to your first question as well Atlas Copco has a higher – to your point the higher service to total revenue share, and that is also of course something that affects how the profitability vary, its between high revenue year and a low revenue year. But if we take all these three things, I think you have a good picture of it.

Guillermo Peigneux – UBS

Yeah, thank you very much.

Hans Ola Meyer

Thank you.

Operator

Our next question comes from Markus Almerud from Morgan Stanley, please go ahead.

Markus Almerud – Morgan Stanley

Hi, Markus Almerud here at Morgan Stanley. First of all, can you talk a little bit about the end market exposure for Edwards and, in particular, how much is semiconductors? And, when looking at your slides, this seems like Edwards is more geared towards smaller applications. In terms of the technology, is it possible to use that technology to broaden the product portfolio and to join with what you already have, or is it impossible? If you could just talk a little bit about that, please. And then, can I just confirm, did you say that was about one-third which is service for Edwards? Thank you.

Ronnie Leten

Yeah I think when it comes to the end market part, one thing is that they have a very good website and also a very good annual report, which is extremely detailed. So I would first recommend you to read, its good reading and then you will get more info on that, but to ensure on they are around 45% I think its semiconductor, it’s around...

Hans Ola Meyer

Yeah its around 40% (inaudible).

Ronnie Leten

Yeah what that is – yeah I think depending on what size you are.

Hans Ola Meyer

40 yeah.

Ronnie Leten

Yeah. So that is where the majority of their – the biggest bit, I think the general vacuum is, I think it’s 28% to 29% or something like that. Now what is the synergy coming back, because we talked about sales and service synergies and we also heard me saying about technology synergies. Of course, that is what we will work together on it with vacuum Edwards engineers and the compressors Atlas Copco engineer is to expand the product offer.

Once you know that Edwards has already product offer for general vacuum, it’s not that they don’t have it. It’s only that they have focused of course more on the semiconductor because there is the market where they are the undisputable leader when it comes to that part and that is where their [biotope] and their biggest work is and also will be in the future, I think we will definitely keep focusing on this market more than ever.

So to have the first in mind, first in choice vision with the Intels, the [DCMC] and of course definitely Samsun to make sure that our customers are – that are successful. So that is the yeah, the mission of this project is really to expand the product offer.

Ola Kinnander

Anymore questions on the conference call?

Operator

We have the question from Mr. Ben Maslen from Merrill Lynch. Please go ahead.

Ben Maslen – Bank of America Merrill Lynch

Thank you. Good morning, Ronnie. Good morning, Hans Ola. A few questions please. Firstly, just coming back to 2009 when Edwards lost money; even with restructuring, given the semi exposure, it seems like this will be a more cyclical business than Compressor Technique is at the moment. How much do you think you can reduce that natural cyclicality using your Atlas business processes, or should we assume that CT will just be a more volatile business, going forward?

That’s the first one. Secondly, margins; you’re saying it’s doing about 15% at the moment ex PPA. Just what scope do you see to improve that? From previous deals, you’ve often given us some guidance as to whether you think you can get them up to divisional averages. What scope do you see at Edwards? And then finally, Hans Ola, just on terms of financing, given you’re buying it out of cash, just what you think the impact will be on net financial. I’m assuming it’s fairly low and, given your own PPA, what margin will the business come in the Group at? Thank you.

Ronnie Leten

Yeah, coming back and I will think that first when it comes to 2009, of course 2009 I think you see also that the volume has dropped significant and I think this company and other companies were not alone, of course there were significant restructuring cost also included at that time, so if you recalculate it a bit, you would see that they still are positive, but I think what has changed between 2009 and today, I think the organization is much more agile, I think also they have a more – worked more on the service side, so you hear me talking about resilience and agility, I think they have worked on that.

So coupe with the cyclicality, I think they are in a better shape than they were at that time, because at that time they were in their move or I should say in their restructuring, so they had to focus and stick to their mission to get the restructuring work and unfortunately 2009 came in between that. So from that part, because I looked very deep into that, because I don’t want to come in this type of business where we cannot find remedies for covering certain cyclicality.

Now on the other hand when you look to the cyclicality of the semiconductor market then I got the question earlier here about the growth, what we have seen is that and we all know that, I think the end market the semiconductor end markets, if you see or if you look around if you take – look back to your office 10 years ago, you had a PC, today I’m sure you have much more electronic equipment, so the semiconductor market is delivering more to an end customer market which gets more consumer driven, so that means that there is less, less, and less cyclicality in that part and, yeah you say you an ensure your any gadget what you say that is all in it.

So that means also that Samsung, the Intel, the DCMC’s and others , when it comes to their investments, of course its still Capex driven, but they behave a bit different than before in that one. So we believe giving the study we did that okay there will be over cyclicality, we also have that in CT, we also have that in our tools business, we have definitely that in our mine business, but I don’t see that will significant more than we have in city today.

Having said that and that was coming back to previous question, of course our goal is to expand our business in more rough vacuum, what you can say general vacuum which has of course is widely spread, so that is I think the second remedy or overcome part that we do, and of course then last I believe the service part which we will we would like to develop further.

Then when it comes to the margin, this is around if you take – like you mentioned also, if you recalculate the margin and you come back to the EBIT, I believe it is around 15% EBIT margin business, when we look forward, where we will see how far we come, I think my main objective is now, is really to integrate the company and make sure I start growth projects, that is the main thing.

Of course when we work us through and we know and I think you have seen that also how we have done that with CT of course when we work with the right technology leadership, we get the right pricing power, we get the right densification on the service side, margins will come and that is I think the strategy which we will try to apply in this case. So its not that you will not hear me say yeah, this business will be a business within five years of 20%, you know I would like to see within five year that this business has been growing and had the solid margin of 15% and if its more okay its better.

Having said that I think one should know then that of course the first one or two years we will invest, we will have of course extraordinary transaction cost. Hans Ola can talk a little bit more of that, so that’s for sure, if you exclude these, we will like to run this company as it is and gradually start to other growth projects, that is the aim of this project.

Hans Ola Meyer

I answer the way I head your question Ben, so if I misunderstood it please continue to question, but on what Ronnie mentioned, yes of course we expect to see some financial synergies and then I mean on the financials, financials meaning that our borrowing capacity our cost of borrowing is much lower than Edwards currently, so you can from the official numbers of Edwards and us you can see that there is a gap of 2.5 to 3 percentage points on borrowing cost that will be nice to have. In order to come to that situation as Ronnie alluded to, there will be some transaction costs in order to get into that situation, but I see them as one time when we do it and we can comment more specifically on that.

But on a run rate of course we expect to get a financial cost situation than what the company has had today, if you look at more of the profit margins on operating profit that’s set where its not very surprising, its just to make the numbers and you see that it will be dilutive to our margin of course, very few acquisitions we have made ever that has been able to produce an accretive effect on the margin, but we make more money, and this is of course also a profitable company, so we will increase the profits.

The effect on the group, as I said its pure math but its expected to be somewhere in the region of a percentage point negative effect on operating margins and compressor technique in a similar way you can make the numbers for yourself. That’s a little bit how I understood your question, but please if you missed it Ben then correct me.

Ben Maslen – Bank of America Merrill Lynch

No it’s great, very clear. Thanks.

Hans Ola Meyer

Okay.

Ben Maslen – Bank of America Merrill Lynch

Thanks Ronnie, thanks Hans Ola.

Hans Ola Meyer

Thank you.

Ola Kinnander

We have about 10 minutes left for the press conference, we will actually – we have any more question from insider room here in stock home.

Hans Ola Meyer

Yep one here.

Unidentified Analyst

Thanks, my name is Jonathan from the Wall Street Journal. You talk about this as a growth strategy mostly, but if you look at sort of how it changes both the geography and the business area revenue, if there is a move away from mining and is this a move away from Europe?

Ronnie Leten

Its definitely not the move away from mining, so when we look to the different business areas overheads had the task to grow, there is no hesitation when someone come up with a good project, that we say okay this is mining or this is construction we don’t like. I think we look definitely to the value creation opportunity the lasting value creation opportunity, that’s what we are looking at. So that is one and the second is moving away from. No.

Hans Ola Meyer

The Europe.

Ronnie Leten

Once we know that in Asia, with a – just population and the amount of people living there, I think for a company like us a global player Asia is a big part is already a big part for Atlas Copco today and is still growing. So we keep investing in that area in that region, so its not just purpose that we say okay, we don’t invest anymore in Europe, its not true, because just to give you was it a year and a half ago we bough SCA Schucker, which was for the business area investment technique, a significant investment, we keep doing it, you see us doing businesses, we keep doing that, and of course one should also know Edwards has the headquarters in UK, I don’t know if you can say that that is Europe, but –

Hans Ola Meyer

They have their headquarters there but if you look at where they have the market exposure is not really in Asia.

Ronnie Leten

Yeah, the market exposure is there. Of course the Samsungs and the DCMC’s are in Korea, in China and in Taiwan, that’s for sure. But on the other hand, you also have Intel to take that which is on the other side. And general vacuum is more spread as compressors is spread, you will see that moving on. But does not – I think, when we are debating the strategy I think I have not, we don’t have an opinion on what geographically I think we look today, the return on that part. I don’t have an opinion if it is now a Germany, or Sweden, or India. I think we don’t have that part.

Ola Kinnander

Thank you. Unless there are any more questions here inside room let’s go back to the phone for a last question or two. Okay back to phone.

Operator

Our next question comes from Kenneth Toll Johansson from Carnegie. Please go ahead.

Kenneth Toll Johansson – Carnegie Investment Bank AB

I have a question on the longer-term outlook for this acquired business. A lot of the products, as I see them, are quite high tech. Do you see an opportunity to expand the product range also to, let’s call it simpler products, in order to expand the Vacuum business even more in, say, two or three years when you have integrated the Edwards’ acquisition?

Ronnie Leten

Yeah, I think that’s definitely spot on and when we hint to the synergies, when we talked about sales and service that’s obvious, that is presence, when it comes to technology, that’s definitely where we believe we could together expand our product offer. And I see a lot of similarities if we look back with compressor, if we look back 20 years ago, when say, when we were really standing on our oil-free legacy, which we stand, still stand on, but we have been able overtime to really expand our total product offer in compressor.

And I think that’s what I believe we could do the same on the vacuum side, but it will take us time, I think this question, if you would ask me again in two years, I will push it forward, because you cannot really change that say the engineers, because we need to have new engineers, because the engineers today are working on the semiconductor part, on the solar part, on the flat screen part. So that we need to keep, because we want to stay and grow in that business, but to expand that I think that will take us yeah, five to 10 years to go on that and that is when you asked the long-term approach is definitely the long-term approach.

Kenneth Toll Johansson – Carnegie Investment Bank AB

Sure. Thank you.

Operator

We have another question on the phone from Mr. Daniel Schmidt from SEB. Please go ahead.

Daniel Schmidt – SEB Enskilda

Yeah, this is Daniel Schmidt from SEB. I think most of the questions have been addressed already. Just a technical question; have you any requirement when it comes to acceptance levels for the bid that you placed?

Hans Ola Meyer

Sorry can you go…

Ronnie Leten

The acceptance level.

Hans Ola Meyer

I mean how many percent of the shareholders?

Daniel Schmidt – SEB Enskilda

Exactly.

Hans Ola Meyer

Well, the merger is such that if we have a two thirds majority, the deal will happen.

Daniel Schmidt – SEB Enskilda

Okay. And you already have 84% that’s signed an agreement with you guys when it comes to the vote at the AGM.

Hans Ola Meyer

That is correct.

Daniel Schmidt – SEB Enskilda

Okay. So the only thing that could derail it is a counter-bid then I assume.

Hans Ola Meyer

Yes as Ronnie commented in the beginning.

Ronnie Leten

That’s also correct, yeah.

Hans Ola Meyer

That’s also correct.

[Call end abruptly]

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!