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Executives

Hans Ola Meyer - Senior Vice President, Controlling and Chief Financial Officer

Ronnie Leten - Chief Executive Officer

Analysts

Markus Almerud - Morgan Stanley

Aaron Ibbotson - Goldman Sachs

Andreas Koski - Nordea

Lars Brorson - DNB

Alex Whight - JPMorgan

Anders Roslund - Swedbank

Ben Maslen - Bank of America

Atlas Copco AB (OTCPK:ATLKY) Q4 2013 Earnings Conference Call January 30, 2014 9:00 AM ET

Hans Ola Meyer - Senior Vice President, Controlling and Chief Financial Officer

Good afternoon, good morning and good day wherever you are attending. Heartily welcome to this Interim Report on Q4 and Full Year Results for Atlas Copco Group. We do this as usual with attendance here physically in Stockholm, but also a lot of participants on the telephone conference. We will start by me handing over the word to our CEO, Ronnie Leten, who will give his comments to the report and then as usual open up for questions in about 15, 20 minutes time. So, without further adieu, Ronnie.

Ronnie Leten - Chief Executive Officer

Thank you, Hans Ola and welcome everybody here in Stockholm and wherever you are in the world. As usual, I will go through the presentation and I will try to make it short. So we have enough time for your questions during this one hour. If I go immediately to the first slide, where we see the Q4 in brief as it says, whether we see today we see a rather stable industrial demand and the mining equipment remains weak. So this is a better takeaway from the quarter. And if you look back to Q3, you will have seen more or less the same picture. So, on other hand, I think we see more or less in Q4 what we have seen in Q3 maybe we have a bit more stable, if I can use and stress that word, industrial demand.

Service business, our hard work and our focus continues to grow. So I am very pleased to see that even in the mining side for those who are looking for that question or that answer, it develops at a good level. Unfortunately, we have to take measures on the mining equipment. We have businesses where we see minus 30%, minus 40% on the equipment side. And so that means of course you have to adapt your capacity, you have to adapt your suit, of course we had partly a soft lending, but more or less we can now do a base where we need to take more of these measures. And we are very pleased and I am very proud that we finally got Edwards after six months, so also Brazil and China agreed with the closing of the buying of Edwards for us. So this is in brief the Q4.

If I go now to Edwards, just to give you a bit more flavor on that, I will not read everything, but what we can say is that the last two quarters of Edwards were very solid, very strong. What means also if the preliminary statement what we got from the previous owners, it is right then we have to pay also the full additional payment in case and that will be somewhere at end of February. One hand, we pay the full price, but on the other hand, I am very pleased to see that it is a very healthy business doing great and that we have first happy customers and also happy collaborators that we can join together. So I am very pleased to see this development.

The figures, I would not spend too much time on that. We come back on that later one by one, but let me go immediately to Slide #6 and then I give you the overview of the geographical scenery. North America, if I take the three countries, Mexico, Canada, of course, heavily contaminated by the mining demand, but if we take the biggest economy, U.S. doing fine, doing good, we see an increased demand for industrial tools, mainly coming from MVI, aerospace, so that’s good. And also for gas and process was a good quarter this time. So we have a stable development for industrial compressors, so the Yellow Cannery is doing fine in U.S. and also we see good demand for construction equipment. But like I already said lower intake on the mining side in all the three countries.

When we take South America, yes, low mining and we know Chile, Peru, Brazil, they are all heavily involved in the mining, so that is lower. So you will see also minus 15% even I would say we are comparing with the good quarter last year but still minus 15% is a real drop. And that is an area where especially when it comes to Brazil where I saw soft development. A bit of growth in the construction side, so I am pleased to see that and that also happened in Brazil actually. Is it self helped, do we take share, I must say I do not have that really detailed information yet, so that is for the next months to investigate more when you get to step these things. But anyhow the figures were good.

If we go then to Europe overall unchanged, we see a small increase, but if we take it now from a positive side and that is also the reason why I wrote it here we see a positive France and Spain. And this has been many, many months since we have seen that. So that is good. Of course we all know it’s at a very low level, but at least we see a positive and the same is on Russia where we got a big drop from the mining, but there also we see a slight positive trend in the industrial compressors as also the industrial tools there doing fine there. But of course there are still markets we are just suffering. If we take here the Nordic part which was reasonable say softer compared to last year if we make the comparison, but okay on mining equipment and of course then you talk mainly the Nordic and Russia were not at the best. But service overall in Europe doing great all over.

Africa, Middle East, we had a very solid construction mining demand also the Southern part of Africa was very good. So the – if you take specific South Africa they got very good development and you know South Africa is significant market for us, so that was good to hear that we got that. I think when it comes to the Northern part of course its more compressors which were positive if I can say it this way.

Then I will go to one other big part and then we talk about Asia where we see solid development in industrial tools. If we take the two big countries there India and I think China we see a very good development for the industrial tools. Mainly again coming from MVI, but also the small to medium size compressors have done very well in that region. Lower in construction, so it’s tougher also in China still not really the market we would like to see happening there. When it comes to construction of course we all know just to repeat myself here from many times you have said of course we are a real niche player when it comes to construction in some of these markets. But again very strong development for service and that’s just all over and more specific also on the compressor side we have done a very good development on the service.

Australia, look this minus 35%. Yes, mining is extremely low if we make a comparison on the equipment part we can make and say that we are on the level of 2009 in Australia, maybe we have a small percentage difference but not much. So it has really dropped very much when it comes to the equipment side.

Yes, the – you’ll see here the overview, you’ll see many, many quarters a drop and of course these statistics is heavily affected by the mining development that we do it for the other three business areas you would see a slight positive one. So, the bridge yes I will not say too much on this, you see still the currencies minus four and that of course contaminated when you make a comparison not only on the top-line but also on the profitability part.

We all know these currencies – this time if we take it for the full year 2013 this time when we talk currencies we are not talking so much about Renminbi, Dollar, Euro, here we talk about other currencies, the mining currencies that we talk, the Brazilian Real, the Australian Dollar, the South African Rand, which really have dropped dramatically and lately you’ll just see the Turkish Lira. And of course that is where Atlas Copco is operating if you are working in 100 to (82) countries yes you get affected by this.

Price volume you see here that the volume - I’m pleased to see that even if the market is getting tough that we get really also the reward for the work we do on innovation and isn’t you see on the pricing level. We then take it by business area; if I go through that I’m starting with Compressor Technique and in Slide #12, a slight organic growth. So coming from yes the real day-by-day business, the small-to-medium size compressors that keep going. The big tickets as we have been talking now for many, many months is not really taking off. So let’s see what 2014 is giving on that part and we all know this big – the more – the majority of these big tickets of course coming from Asia and that is where we need to see that.

But service I’ve already mentioned it continue to grow, operating margin 23%, you could say ah this is significantly lower, okay, we took some here and there extra costs but on the other hand that they are giving the mix and the invoicing level of equipment it is the margin which is I think defendable. And the acquisition of Edwards I talked already about that, we do that and of course I’m extremely proud as I also was last time when we could say that we have this VSD+, now we also have extended range. So, this will definitely bring us good sales and also good market share. So, I’m very pleased and would like to congratulate the engineers who have been working there many, many years on that.

Industrial Technique, see this is what I would like to have, see 10% double-digit growth. So we were used to that. So we are back, coming from multi-vehicle almost say in all the big continents and then I’m talking North America even in Europe but of course then we have India and China as I elaborate before on that. But also in general industry and service had a very good positive development. So yes a very nice place to be these days in the Industrial Technique. Margin very solid. They do a very good work on really innovation and on their productivity and we’re also very happy to get two extra acquisitions so that also strategically we have really now a full range of bolting technique when it comes to low and high talk, we have it all now and we also have an assembly solution expert under the belt. So, this is going as we would like to be.

Mining and Rock Excavation, I would like to skip that slide very quickly. If you see minus 17 that’s definitely not the place you would like to be, but it happens. So, like I said mining equipment minus 30%, minus 40% in certain areas, but on the other hand the resilient part, the service part, the consumable parts is working. It – it’s not that I can say double-digit growing but it’s definitely positive and that’s good to see. If you take the production consumables, we see a positive trend that to say okay. That means there is definitely demand for iron ore, copper, zinc and all these commodities. So there is definitely a demand and the same is on service, because they go hand-in-hand.

The margin 18.8%, adjusted for an extra cost. Of course we get also lower volume, a bit more equipment invoicing so also not very favorable mix meaning that with the restructuring and the lower volume we have also a lower margin. You could say, yes we would like to have a bit more, yes I agree, but we see I think we will see here definitely a phase or a moment that we have to adapt to the new norm. We will like I write there also we would take further efficiency measures, which we have done, but also we will do even more. And also we here had couple of smaller service acquisitions with Archer and one here, which was in U.S. and one here in Sweden actually.

Construction technique, also here we saw some growth although it was tough in Asia as I had also mentioned there, negative development in Asia, but I think the other markets were okay. And we see also road construction, we have not been talking many quarters about that, but you see when we get some positive we like also to talk about it. We will say here we are coming (indiscernible) actions we come to a good result here.

Operating margin, 8.5%, one should know here this is the business area, which is affected the most by the currency. If you take the big customers in Australia, in Brazil and we all know how that market has developed when it comes to currency. One point and it’s not to make the comparison more difficult for you this year, but we moved one division, which was hosted in compressor technique, we moved that to construction technique as I felt that we have much more potential and synergies with the portable energy and specialty rental. So as we are a product driven organization it will allow us to accelerate certain going to markets. And so we streamline the organization in this area.

Group total, so on Slide #16 the overview nothing more special if you compare the operating profit then in money terms the two big takeaways is yes, the currencies, especially then “the mining currencies”, which has costed us significant amount of profit in transaction. And of course the mining and rock excavation volume and extra cost, which makes this gap of around SEK500 million where we have this. This is mainly because if you look to all the other business areas you could say more or less if you exclude currency you can say that they are more positive. So I would like to handover to Hans Ola.

Hans Ola Meyer - Senior Vice President, Controlling and Chief Financial Officer

Thank you, Ronnie. We will try to speed up so that we leave some time or I will be rather quick. Just a few things that I normally comment on the financial net to see here as the difference between operating profit and profit before tax came in just above SEK200 million negative, more or less the same as last year. Going forward with the acquisition of Edwards and so on, now clear we expect that the run rate for quarter will stay actually somewhere in that region SEK200 million to SEK250 million negative. That’s the best estimate we can do today.

When you go further down and come to profit for the period you see that we lost a little bit more compared to last year, 15%. It indicates a slightly higher tax rate 26%. However, I see it within the normal variations, nothing very dramatic in that. I still expect 25% is a good estimate going forward. The reason it was much lower, 23.9% last year fourth quarter was that we are adapting to lower income tax rate in Sweden, for example, as you might recall, which made sort of a one-time correction at that time.

So, if we then move on to the next, the famous profit bridge, this is for the quarter, for the group. It looks as if it’s trying to prove that these types of bridges are very difficult to read on a quarter-by-quarter basis and this is not an exception. It seems that we are losing quite a lot for every kroner of lower sales, but I think the explanations, Ronnie have already touched upon, it’s really very much related to the drop of profitability in MR.

If we then look at the year, next slide which is number 18 I think, you can see that it looks a little bit more evened out and the loss of top line of SEK3.3 billion is giving roughly a third lower effect on the profit, so about 36% there. Now, that is for the group. So, if we look at the different business areas, you get even more confused perhaps on a quarterly basis. In compressor technique, I don’t think one should over read that, because you are comparing one quarter and the deviations are not very big in relation to the absolute value of the business neither on revenue and profit. So again, as we move quickly to the next slide, which again shows the full year, you can see that for most of the businesses we are in the range of 30%, 40% whether it’s up or down on revenue, but again here I just repeat myself, the opposite now suddenly is true for compressor technique. We are improving a lot in profitability if you take out the currency here. So the message we cannot rely to these bridges to give us the full understanding and the full explanation of everything, but at least it’s there and it’s numbers that you also can see from the report itself.

If I then move on to the balance sheet on Page 21, as you can see, the year has really been one of having a little bit more cash on the balance sheet and come 9th of January, you saw the reason for that. So we have the big acquisition of Edwards and then you can also see on the top intangible assets that we do buy other companies as well. So we pull that together, gives us a cash flow and I will again just point that the few lines, one is that in spite of releasing cash for working capital in this quarter, we did not manage to reduce inventory as much as we did in the fourth quarter last year. So, that is why we got a little bit less positive cash flow on that line and the rest of the negative difference with last year SEK2.6 billion versus SEK4.3 million is really to be fund in the operating performance. There are a number of issues. EBIT is – operating profit dropped SEK500 million roughly as you saw from the graphs. And then there are also some effects of non-cash items, which are very much related to rules for revenue recognition, for example, then that is a little bit more complicated to go into more details. But the run rate of the quarter is very much in line with the year, we managed SEK10 billion in operating cash flow for the full year and that’s as you say a run rate of SEK2.5 billion roughly.

So I leave it there to Ronnie to finalize.

Ronnie Leten - Chief Executive Officer

Yes. So a summary of the year and if I can say as a first center, a reasonable stable industrial and construction equipment with a slight growth if you take it on aggregate level, but a very, very weak mining equipment part, so which resulted then also in the figures you have just seen by Hans Ola. But on the other hand, we continue to invest – we are continuing to invest in market presence, I mentioned we are now in 182 countries. So we are really digging deeper into the market. We grabbed the service which we believe we deserve and also create productivity for our customers. And last but not least, we make sure we have the best products. So we are not holding back on that part. Of course, we are always looking to better portfolio management when it comes to the project, but there is no immediately reason to hold back on that.

And of course, this is a result, this is what it is where you – if you make that the bridge Hans Ola has already done. In summary you can say when you look to the operating profit, a big hit on the mining side, a big hit on the currency and the three other business areas have not been able to compensate on that and give this difference in profitability. And the Board is proposing a dividend of SEK5.5 as it was last year. When it comes then to the outlook, as you see we are always very sophisticated here where we expected to remain at current level. I am sure you have the possibility to ask more questions. Yes, after this now.

Hans Ola Meyer - Senior Vice President, Controlling and Chief Financial Officer

Thank you, Ronnie. We will turn to the telephone conference and we will also have opportunity to post questions here in Stockholm. Before we start though I would ask everyone or almost instruct that we stay with one main question and then a follow-up per person, that means that we allow more people to put questions as well, hope that can be respected. With that, I turn to the operator, if you can repeat the instructions for posting questions on the telephone conference please.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Mr. Markus Almerud from Morgan Stanley. Please go ahead.

Markus Almerud - Morgan Stanley

Hi, Markus Almerud from Morgan Stanley. My first question is on the margin in MR. Do you see the margin aftermarket falling at all or is it only in the equipment that you see the majority of the fall, that’s my first question. And then if you can talk a little bit about the dividend and the consideration that you had when the Board has been keeping dividend steady despite very, very strong balance sheet and continues cash flow generation? Thank you.

Ronnie Leten

Of course, when it comes to the aftermarket when we really look to the day-by-day business on the aftermarket it more or less stays at the same level. If I go back a couple of quarters that people were really concerned about say pricing in that. Of course, when it is this type of market where you are in, you always get more negotiation, but I don’t feel that that is the main issue. I think for us a big challenge in aftermarket is always if we want to grow you must make sure you keep the same efficiency. And that is the challenge we have but that we also had a year ago and we have to say.

So and to answer your question, I think it’s not when you get the margin it is in volume and under absorption from factories and also the sales organization. And last but not least, I should stress that maybe I have not stressed enough, we have not hold back on design and development. So you also get that because you divide by less volume. When it comes to the dividend what are the considerations? First, of course when you look to the earnings per share they are not as they were the year before, so that we have a payout ratio where we said 50. So you can say okay, you only make 9.93 – 9.95. So okay, it’s half, we keep that.

On the other hand, we have done the acquisition which we have paid, this was almost SEK1 billion, which we have been doing so from that point we are doing. And then yes, you see let’s keep a very healthy strong balance sheet for what is going to come like we also explained that last time. So that were the three considerations which we said let’s invest in the business. I think the dividend is healthy and let’s take to that level.

Markus Almerud - Morgan Stanley

Thank you.

Hans Ola Meyer

We take question more from the conference and then we go in to Stockholm here.

Operator

Our next question comes from Mr. Aaron Ibbotson from Goldman Sachs. Please go ahead.

Aaron Ibbotson - Goldman Sachs

Yes, hi, there. Good afternoon. I have only got one sort of question, but it’s divided into smaller bits, but it’s all about Edwards. And so first of all, can you talk about this or am I just going to get that you can’t comment on it?

Ronnie Leten

You are allowed to ask.

Aaron Ibbotson - Goldman Sachs

Okay, fine. So very good then, so if I look at the EBITDA number that you have given in pounds and the top line number you have given, I get an EBITDA number of about £50 million in the fourth quarter and revenues up 50% year-over-year. So my first question is basically is this correct and was anything in particular that drove that massive growth? Do you now expect a sort of meaningful slowdown going into the – going into 2014 or is this sort of a, okay, call it, second half in Edwards that was very strong, is that something you see can continue at reasonably similar level or is there any obvious reason why this should drop off dramatically? And then my second question was just on related to, but just on your guidance amortization of $250 million, Edwards obviously have their own amortization so to speak, has that been effectively nullified now when you have realized intangibles, so the total amortization from the Edwards acquisition will run at roughly $250 million or the sort of £20 million or so that Edwards are currently doing themselves being added to that? That was my question. Thank you.

Ronnie Leten

I suggest the last one you take later after my part on that one. Aaron, you spotted very well when it comes to the sales and the EBITDA and the figures. So I am impressed that you really got that, but the last four months in Edwards were very strong. So they really get lot of semi business that was good. I think there is a lot of fabs on place and that really accelerated their order book and also their output, which lead it then to a very good EBITDA. Having said that, okay what about 2014, because this was history and it is always nice when you look to the multiples and all this part and from the buying side, but its history. I don’t think that you should extrapolate quarter four and multiply it by four I think that would – I would love that it would be. If we look to it, I think you should be somewhere say quarter two, quarter three is say a more normal figure I think for that type of business. So it was really accelerated the last perhaps two, three, I say four months you could say that it was really good. And we were of course very happy, because we had agreed on the price, so the money stayed in the company, so that’s also the reason why most the prices $50 million, $60 million lower.

Hans Ola Meyer

Perhaps one can add just what Ronnie sort of hinted at that this business with a few large customers on the sector like that, has a tendency to be a bit more lumpy in aggregate and what we perhaps can see in the big business area in Atlas Copco or something. So that is behind the…

Ronnie Leten

Yes. And we know and this we all will learn together, so saying we know that it has certain cyclicality and that is also where we need to make it more resilient and that’s also the task in the years to come for the challenge for Atlas Copco to invest more in general vacuum and others.

Hans Ola Meyer

On the second question, Aaron, no, you are right the assessment of the assets that we buy is starting from scratch so to speak, so it’s correct that this is the full amortization of intangibles that we will carry when we consolidated in Atlas Copco. I stress again though that we are talking preliminary numbers and unaudited financial statements and all of that. So we will of course come back with more information as the year progresses and that becomes more and more finalized as you probably know a purchase balance sheet has one year of a lifetime to be final, final, but this is absolutely the best indication we can give right now.

Aaron Ibbotson - Goldman Sachs

Okay, perfect. Thank you very much. But just Ronnie to your comments I’m going to stop soon. But as I’m sure you can appreciate for the outside when you structured the deal the way you’ve done, there is maybe some fear that the Edwards organization would have been extremely keen to over these last four months sort of deliver everything they could and but your feeling is not that, there was a sudden ramp.

Ronnie Leten

No, no.

Aaron Ibbotson - Goldman Sachs

That were unexpected in the last..

Ronnie Leten

No, no and Aaron, I fully agree because you could say okay use the weapon they do more that would be fantastic and I would like to use that methods everywhere. It’s actually not because the order book is still there, it’s definitely real orders worked, I think the customers came up, they came with a couple of projects which came across at even I think the people inside and that was there even out, hope to get that part that one. So, it’s that they have preempted the order book, it’s – we will go away in a normal quarter at least as good as I know the business today and when I talk to the people running the business today people from Edwards, people now from Atlas Copco it seems to normal, going into a normal quarter as planned so to say.

Aaron Ibbotson - Goldman Sachs

Very good. Thank you. I get back in the line.

Hans Ola Meyer

Can we stop them? We have room for two questions before we go back to the telephone conference.

Unidentified Analyst

Thank you. Good afternoon everyone. (indiscernible) from UBS. A question regarding pricing. Are you actively pushing up prices in emerging markets to cope with the currency depreciation and are you getting a pre-buy on the back of it. And then a follow-up on Compressor Technique when it comes to large kits, Gas and Process and Oil and Gas in markets. Have they recovered from or do you see them recovering as we’re speaking in 2014 or they continue to (be in that) cluster? Thank you.

Ronnie Leten

Yes of course what we try on the pricing especially in markets where we talk South Africa, Australia and India when you get this of course immediately I tell you I’m immediately on the phone when you see that where do you try to compensate that, but you’re always too late. So, that’s first thing. So, you get a lack. Then when we can we do and why do I use the word can you also have local competition and see what is the balance there because you can push up the price but maybe you don’t sell anymore. So, you have to see what is the local competition today, you also have the same pain okay then they’re happy that the market leader is doing that and for sure after a couple of months everybody will follow and that’s what we do. We try to do as much as possible to push it.

There are countries who are very used to that like South Africa, they do immediately, countries like Australia they fight back because that is an order because also they have local production so there is more, more tougher to do that. Yes, on the compressor side and the bigger tickets it has been soft in 2013. The Oil and Gas part, so the Gas and Process business as we call it of course it has to do a lot with fuel gas boosters with geothermal with LNG, so that’s where we are because we are not really on the big gas – oil and gas size seeing a shaft that’s what we know there. So, we need to look to these segments and you see LNGs, LNG ships, that’s an area where you (indiscernible), that’s an area where we see more activity, but okay now let’s show me the money, that is the next part of it, but it looks at least that there is activity, there is more activity part on that. But a lot is also the time that we were doing fantastic in Gas and Process was also the time that air separation was good because that is where Atlas Copco is very strong. And you know also air separation was a lot to do with steel plants, lot to do with steel plants in China and you know not but. So, that business is very low. So, I have a and you hear me is I’m a more positive but okay now I have to see if it comes.

Andreas Koski - Nordea

Yes, yes.

Hans Ola Meyer

One more question.

Andreas Koski - Nordea

Andreas Koski from Nordea. The measures you are taking in Mining and Rock Excavation, how the support profitability going forward, what kind of savings do you expect and what should we think about the operating leverage? Should it stay around 40%, 45%?

Ronnie Leten

Of course, first about the measures we are taking is to adapt for the new body. We need to reduce – we have to reduce the weight that is the first thing. So we need to adapt, that is the first point. I think if you look back to companies and you look to the volume, then also we came up with a margin of 20 plus and of course we exclude the currencies, because that’s an area, where because you should look to Australian dollar, the value if you take the rands, of course that I can never compensate whatever I do in restructuring. So, if you exclude that part, we should come back to the level where we were if you take the same volume at one. Consumables service are doing good. I think that is not again excluding currency is not really affected, it’s doing fine. So, I am – if we go through this cycle, which will take us maybe one, two to get back in that, I think we should normally that’s at least my plan.

Andreas Koski - Nordea

And the second question is regarding your sophisticated outlook can you please break it up by the business areas?

Ronnie Leten

No, we demystify it. I think if we say the industrial construction part that I have the slight more positive look and that was also the question when you were asking about gas in process. I have – that’s more where I hope it comes, but of course why? If you take it geographically, you hear and you read, Europe is doing a bit better here and there, is it coming? You have U.S., okay, now lately was a bit different, but okay, I think when it comes to our CapEx, it must come. But on the other hand, South America, what is Brazil going to do? Big question. Is China after Chinese New Year what would see, I am waiting for to see in March in China is it coming? That you could see when I listen to our Chinese people on the street and then say, yes, because there is thing, but of course it’s a lot of self-helped activity. So I think it could be slightly positive.

On construction, I think is a lot of self helped. We have done a lot of work. So that I think we should be able to do that, but then the big, big question is around the mining. What will it be? Can it go much lower? I think there is not much equipment anymore, not many people buy to-date drills. So from that point of view, I don’t think it can go much lower. And like I said in the beginning of this presentation, consumer, production consumer shows slight positive part. So if you read my outlook, you can take it maybe a bit on the more positive side than depending on where I sit from the zero base.

Hans Ola Meyer

Perhaps also looking at the length of the outlook, I mean, we are not talking as you know about next year, talking about next quarter mostly and that’s the horizon and that underlines what Ronnie is trying to say that specifically with investments, it should have been very strong signals already for that to materialize, so that’s perhaps…

Ronnie Leten

And going back to Aaron’s question, this is excluding Edwards, because if we were to compare Edwards quarter one last year now maybe we have an increase, but it’s excluding.

Hans Ola Meyer

Should we go to now – no, we have two questions at the time. We go to the telephone conference and then we come back here.

Operator

Our next question comes from Mr. Lars Brorson from DNB. Please go ahead.

Lars Brorson - DNB

Thank you very much. A couple of follow up questions if I could, just on the outlook Ronnie, thanks for that. Hey, can I just ask whether you have seen anything in January so far in your industrial businesses in emerging markets to make you more cautious here? And also can I just confirm that the guidance is adjusted for normal seasonality, which of course historically has seen orders up 10%, 15% quarter-over-quarter from Q4 into Q1 of course 2013 being quite weak though?

Ronnie Leten

Yes, for January yes, if again the Chinese never have the – the Chinese New Year at the same day so they disturb again the statistics because January was rather a short month in China. But if I – one market where I am a bit careful with let’s talk on the negative part is Brazil where we need to see what is really going to happen. Of course you have also there the seasonality because it’s the holiday period and then we come into carnival, so always January, February are difficult to read. But I saw the last quarter and yes, that is something where I need to watch out. Of course, you have markets like Turkey which is also significant now with the lira dropping okay and then having interest rates up what will that give to the business, who knows, so that is something. If I take South Africa, I would take that as an emerging market. I think it was at the end of the year good. India was okay. So that’s a bit of a mix I have on that. Russia again January in Russia is so short because they have another two weeks holiday. So January is always difficult for us to interpret. I never make any conclusion out of January, I always take the two months together.

Hans Ola Meyer

On your follow-up there yes, we tried to look through the normal seasonality as you say when we talk about the outlook of steady or up or down that’s what we tried to do, yes.

Lars Brorson - DNB

Thanks. Hans Ola, can I just ask just on your headcount reductions in mining, you hare taken 400 headcount out in the Q4, you took 1200 out through ‘13, that’s about 10% of your total headcount in that division. On the basis now that we see stable demand in that business, do you expect to be done with those capacity adjustments in mining or should we expect there to be more to come on the basic and let’s say mining has stabilized from a demand perspective?

Hans Ola Meyer

Ronnie alluded to it already in the initials. I think you can continue to answer the question.

Ronnie Leten

Yes, I think there is more to come. We need – I think we did and the management did there some of the activities, especially on the manufacturing side weathered it, but there is more to come on that side. We have some areas where we need to adopt because we had planned a bit of a soft landing. And of course now we are entering in a bit of lower equipment production also because we have the inventory part, so there will be some more layouts on that part of reductions unfortunately, but it is.

Lars Brorson - DNB

Thanks.

Ronnie Leten

Next question from the telephone please.

Operator

Our next question comes from Mr. Alex Whight from JPMorgan. Please go ahead.

Alex Whight - JPMorgan

Good afternoon everybody, it’s Alex at JP Morgan. My first question is just on trying to understand the compressor technique margins a little bit better, the volumes, FX were up SEK240 million at the sales level, but then EBIT declined SEK20 million at the EBIT level. I am just trying to understand if there is a big mix impact there or is it the acquisition dilution that you talk about. And I guess if it is the acquisition dilution I mean is this just one-off acquisition-related costs as the transaction is closed or is it just sort of lower margin and therefore we will continue to sort of drag that business down over the coming few quarters as well, that’s the first question?

Ronnie Leten

Yes, no, I am – of course it’s SEK23 million and if you compare with last year where it was SEK24 million plus. Of course it’s a drop, but it’s probably its mix where you get that drag down the margin a bit. And then we took some extra costs where we had done some movement of some activities, operations which we, yes – we adopted, but we didn’t announce it as extra cost because this is – we take it as it is and we felt it was not worthwhile of really making a special note for that. It’s not or Hans Ola must correct me on the acquisition dilution I think that is not the part, it’s not much..

Hans Ola Meyer

No, it’s there, it’s there, it’s always there whenever Compressor Technique acquires it will dilute.

Ronnie Leten

Yes.

Hans Ola Meyer

But not more than in the most recent quarters there you are right about that. But let me just highlight again what Ronnie said also in his initial comments that about 24% is a very strong quarter last year. And of course some quarters do have a little bit of an accumulation of course that doesn’t happen in a corresponding quarter and I think it’s – that’s how we see if you could call it normal variations or whatever but nothing specific on the acquisition dilution.

Ronnie Leten

And I think if you compare with last year we also had a bit of currency outs.

Hans Ola Meyer

Absolutely.

Ronnie Leten

Yes.

Hans Ola Meyer

Yes.

Alex Whight - JPMorgan

Okay.

Ronnie Leten

So, but it’s not something what keeps me awake whatever on this I think it’s still a clean, clean result.

Hans Ola Meyer

Yes.

Alex Whight - JPMorgan

Sure, okay. My second – sorry.

Hans Ola Meyer

Go ahead.

Alex Whight - JPMorgan

My second question was just really around the sequential decline in mining aftermarket volumes that you saw. If I look at the sequential trends for one of your close competitors that provides a bit more quantitative data when it’s supporting them. Q4 historically would have been up kind of 10% or more relative to Q3. Would you normally expect the aftermarket to increase sequentially in Q4 and then finally what’s driving there, the weakness there?

Ronnie Leten

I must agree with you also when you look to correct it with the one-time cost that you come up to 18.8 and you would have seen maybe a 20% that is also what I would have liked to see. I think there are two explanations one is partly a bit of mix where we see mix into mix I think on the equipment side where we got some equipment invoiced with lower margin, so that is one which dragged it down. And then the other one and again it’s a bit the same as we had with (CT) and I have to apologize you if we confuse you a bit. Of course we have announced this one-off cost but there is definitely everywhere in the world when it comes to mining and equipment it’s cost here and there.

But I don’t want to really bundle it for everybody and make a shelter. So, they get it is, it’s very visible and yes this is the one-time costs here and there but has now taken place adapting to the new suit, it’s not only happening in Sweden, it’s also happening in U.S., it’s happening in China, it’s happening in India, Brazil, in Africa, it’s happening all over here and there to adapt to it. And that is what you see and that we will most likely and I’m not going to make any projection now on the profitability but this is what I also expect we will most likely see the next quarter and maybe also in quarter two in that business area.

Hans Ola Meyer

And we move back to Stockholm here. Anders.

Anders Roslund - Swedbank

Yes two questions; Anders Roslund, Swedbank. First order and cancellations in the mining sector and two the strong organic growth in industrial tools for this market growth and what is your own initiatives?

Hans Ola Meyer

On the first one yes there are some cancellations in the quarter, but much less than in the Q3 which I think that we commented to the tune of SEK 350 million or something like that. So it’s less than that in Q4.

Ronnie Leten

It’s much less than that.

Anders Roslund - Swedbank

Is it half or..

Hans Ola Meyer

Well it’s much less than in Q3. There is some – on a direct question I can’t lie, yes there are some cancellations in there.

Ronnie Leten

Yes.

Anders Roslund - Swedbank

Okay.

Ronnie Leten

But it’s low, it’s whatever, of course now you get, of course you will really look to it but it’s not there.

Hans Ola Meyer

Yes, yes, yes, yes. In a normal quarter two years ago..

Ronnie Leten

We would even not talked about this.

Hans Ola Meyer

We wouldn’t have talked about this.

Ronnie Leten

On IT if I would ask (indiscernible) I would say is all self-helped. I think this is two, I think it’s like when you play soccer is always the same guy who makes the goal because he is there say we have the right products, we have also have the right people with a feet on the street and the business is there. Let’s be honest there is a lot of investments taken place in aerospace, there is a lot of investments taking in new models, in China, in India, in U.S., in Europe.

Hans Ola Meyer

In MVI, yes.

Ronnie Leten

Yes, in MVI, but the people are there. So I think but we also have work to look over the last three, four years to get the full new product range. And I think we should be very proud that we have that part. And also I think just to remember we acquired another company was it two years ago, SCA and that also helps us, because we see that was really what the car business needs is in need of that. And I think we have now really expand that with under the hands of Atlas Copco that business has grown very well and that helps us. So sales held with tailwind.

Hans Ola Meyer

Alright, yes.

Anders Roslund - Swedbank

Hi. A follow-up question, on you Page 7 mining brokers’ commission to NICK, you talk about service and consumables, and I can only see unchanged very low slightly lower. So, it doesn’t seem to be much in your comments here. So I am wondering whether you saw anything recently that basically breaks that up?

Ronnie Leten

Yes. I think when it comes to consumables you should look to Atlas Copco on consumer of 2 lakhs, what I have been talking about is 1 lakh is the production consumables. And there you go these are really influenced by the iron ore, the copper, the zinc and all that. That is the one I have been alluding on. I know the other one is expiration is come and that you can read in other companies whatever, that’s another leg. And that of course when you look to Page 7, it’s a total, we have not elaborated on that one. So that’s the freedom I have been giving you in that.

Anders Roslund - Swedbank

In services and spare parts?

Ronnie Leten

Yes. I think the service part, the service part, this is slightly positive. If you take it in total and then they take it then, I really look at always this price volume, that is – it’s not really rocket sky, it’s really slightly positive on that one. That is where we see that. There was a lot of talk was it nine months ago when in the society about where you are also living about pricing and all that part and everybody was nervous that all the respect I don’t see that. Is there of course push in efficiency, productivity, yes, yes, of course that is and that is – I am happy for that, because that is also what we need to get, because then you see the difference in service.

Hans Ola Meyer

Good. Okay, you go back to the conference on the telephone and take two more questions please.

Operator

Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead.

Ben Maslen - Bank of America

Yes, thank you. Hi, Ronnie. Hi, Hans Ola. Just on mining and rock, just to clarify, I guess you have taken perhaps more restructuring cost above the line than some of your other mining payers, just to clarify what you said, you are saying, there was bit of a short-term drag on the margin at the moment from these actions that would drop out in a few quarters? And then related to that, how far would you say you are from kind of rightsizing the business to current demand levels on the equipment side? Where are your production rates now in relation to orders? Thank you.

Ronnie Leten

Yes. I think as I mentioned I think was another question when it comes to production levels, I still feel that we take it on the – specifically and now I am talking mining, we still have too much inventory. So if you want to reduce that, that means that you will produce less than you really invoice. So that is for sure, but this will not take place in one month, because we cannot do that. Unfortunately, I would love they have done that because you have a full product range. So this will be spread – that work will be spread maybe over a year or even longer, I really have to adapt to a new norm. So that is what takes place and that is also the reason why you said we need to adapt to the new norm. Will it be have an effect on the margin? And I am talking really about equipment margin. Yes, I think I would be here really lying if I would not believe that. I think we need to adapt, there are a couple factories where we are working hard to do that. There are other places where we have done the work, how far have you – are you halfway, are you – I think we have further and halfway, because Hans Ola mentioned also I think here on the amount of people, I don’t think we will lose as many people as we have already done, but there will be more to be done on that part.

Hans Ola Meyer

Thank you, Ben. And more questions on the telephone conference please.

Operator

Our next question comes from Mr. (indiscernible) from Handelsbanken. Please go ahead.

Unidentified Analyst

Yes, good afternoon. Thank you. Just a clarification to begin with, mining orders sequentially aftermarket, you talked about consumables, ex-exploration flat, exploration down and service flat, is that correct?

Hans Ola Meyer

Okay and compared to Q3.

Unidentified Analyst

Yes.

Hans Ola Meyer

Yes, that’s basically correct, yes. There are not very big percentages here, we are not talking double digit on any of the components of these three year spare parts, service or consumables, but your description is fine.

Unidentified Analyst

And then just very simple follow-up for Hans Ola, FX is moving all of the place, what can you tell us about the Q1 on EBIT what we knew today?

Hans Ola Meyer

Well, you picked right words. It moves all over the place. We unfortunately cannot say that the currency headwind is behind us. It will drag on for a while into next year. Of course much less if everything stays as today in the second half. But both in Q1 and Q2 just making the numbers that will be a headwind. Then of course there are some specials now and then that is difficult to predict. Somewhat less than what we have seen in the last quarter perhaps, but still negative that’s what we expect for the first two periods.

Unidentified Analyst

Yes, you see also the peso and (indiscernible)?

Hans Ola Meyer

In the last week only, the Indonesian rupiah now is there all the emerging countries are again having a hit on the currencies.

Unidentified Analyst

Very, very quickly, invoicing at CT I have sensed very, very strong fourth quarter, was that more than normally strong in your book as well or…?

Hans Ola Meyer

There is – this is not a first time that the year ends with a rather strong invoicing. Sometimes depending on the customers, sometimes depending on the sales force of ours, but that’s not unusual. But it was good but you also recall that we have talked about waiting for some more invoicing in quarters before and with some delays, yes you get it after a while.

Ronnie Leten

But it’s strong there I think when it comes to CT it is rather, an imputative seasonal behavior that December is…

Hans Ola Meyer

Is rather strong, yes so that was no exception from...

Ronnie Leten

And you see like last year we got a very much better December also on the mining side what we did this year didn’t get because it’s normal. The guys were not pushing – the customers were definitely not pushing for getting the equipment.

Unidentified Analyst

That’s clear. Thank you.

Hans Ola Meyer

Thank you. So any one final question, not in Stockholm, yes one final question in Stockholm and then we have to stop after that and I apologize for the – just a moment. I apologize to the people on the telephone conference, but we are of course available to answer your question as quickly as possible after the call. Sorry about that. So the final question here in Stockholm.

Unidentified Analyst

This is general question. Have you benefitted from the strong kroner compared with weaker euro and weaker dollar and the currencies in the world around?

Hans Ola Meyer - Senior Vice President, Controlling and Chief Financial Officer

No. We don’t really have that mix in our portfolio, so a strong Kroner in our case is actually hurting us in terms of real profits and also in translation. As we alluded to a couple of times weak emerging market currency or even a weak dollar is of course, it means that it’s a stronger Swedish kroner, so they are on the other side of the coin. That is not helping us now. So I am sorry. The time has run very quickly when you have fun as always, but as I said don’t despair, there are people and personally as well that we can turn to your questions after the call as well. Thank you very much for attending and see you in a while. Bye.

Ronnie Leten - Chief Executive Officer

Thank you.

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