Atlas Copco's (ATLCF) CEO Ronnie Leten on Q4 2015 Results - Earnings Call Transcript

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Atlas Copco AB (OTCPK:ATLCF) Q4 2015 Earnings Conference Call January 28, 2016 9:00 AM ET

Executives

Hans Ola Meyer - SVP, Controlling & Finance

Ronnie Leten - President & CEO

Analysts

Klas Bergelind - Citi

Anders Roslund - Swedbank

Jonathan Hanks - Goldman Sachs

Markus Almerud - Kepler Cheuvreux

Andre Kukhnin - Credit Suisse

Andreas Willi - JPMorgan Cazenove

Peder Frolen - Handelsbanken

Lars Brorson - Barclays Capital

Ronnie Leten

Good afternoon to all of you and I will like before I will refer to the slides, if we go on in the presentation. So, for those who are only listening to the telephone call, then can follow on with slide.

Normally, I start with the financial part, but this time, I also introduced a slide on the sustainability part, because we're really, really, really proud in being again on the Global 100 list, as you can see on this slide. So, I'm now on slide number 2 and that's great that we as a company there now for the tenth time in 10 years actually we're there. So and we also ranked as the top sustainable machinery company. We keep focusing as we also did on the -- and explained that also on the Capital Markets Day in November, we keep focusing on our priorities in the sustainability side, as on the ethical side, on the safety, driving for innovation and we also know what is the most sustainable part in a company, is about people and the people development. That is where we're standing for.

But, let's go now immediately to the next slide which say the Q4 in brief and that's slide number 3. Solid profitability in EBIT terms, in networking capital, in cash flow. We can say that the growth and the profitability of this company is strong. And really -- we, really, see also a record cash flow as you remember in tough times, where we're now in a tough market condition, this company is able to translate the value which we have created also in real cash. Robust service business continues to develop, sequentially at a good level in all business area. I think that's important, for some of you, this maybe a surprise with mining not developed here and there with all the [Technical Difficulty] I will elaborate it more later. Yes, okay, it's that we're still do a robust service business.

And that's also not a surprise, the order intake for equipment thus in almost every business except if you are in the medical business, we're -- in some segments, it's good; if you are in the motor vehicle business, it's good; if you are in aerospace; it's good, a lot of orders; if you are in steel, if you are in shipyards, I think it's [Technical Difficulty] and/or in oil and gas, not to forget that.

Agreement, Leybold, you have seen our announcement, we're very pleased to be able to grow further, acquire then in the vacuum world. So, that is working really well. We're still on the filing. It will take us most likely up to August, September before we have Leybold wheel on board, then can integrate it together with our other vacuum business.

Unfortunately as to announce that due to the European Commission decision on the Belgium tax ruling that we have to take a special provision, we'd see where the real ruling will come out if it really will land or will not land. The discussions are still going for those who are following that in more detail. And then we have -- we had the Board meeting this morning and we can announce that we propose a dividend of SEK6.30 per share and that we will pay that in two installments.

If I go then on the summary here, on the figures, what you see here, I'm not going to flip through more, you see the adjusted operating profit is close to SEK5 billion, 19.2% as margin and of course our cash flow, I mentioned already, you see here SEK5.3 billion as cash flow and the rest, I think, you can read on the slide yourself here.

If I then go to the summary of the year, what you can see is that, more or less what seen in Q4, continuous growth in service. I'm very pleased to see that, that all our strategic decisions we took to transform the Company more to service that also yield good results and create resilience in our business. Even when we have tough market conditions for equipment, we keep delivering good results and that means then in money terms and we have strong development over the year in the industrial tools and assembly solutions.

So, coming from the motor vehicle, we have also good development in aerospace and in the couple other niches. So, that was a very solid year for them or I should say, a very strong year for us. The revenue, we had record revenues, first time actually that this company come out with a revenue above SEK100 billion. So that's something to celebrate on and we have an operating margin of 19% plus, 19.3% to be correct and an operating cash flow of almost SEK17 billion, we just missed it with a couple of millions here, so a very solid cash flow. Adjusted earnings almost SEK12; of course adjusted for the tax provision we took and again on the dividend, I mentioned.

So, I must say on the year, yes, of course, someone would have expected a little bit more organic growth, me too. Unfortunately, we have not seen that due to, we all know the oil and gas, the mining part I think in China were the headwinds, but on the other hand, I think we also had a couple of good moves if we see how -- our moves on the industrial technique, our moves on the vacuum side and last but not least on the moves on our most profitable business, service which also makes a good bottom line and good cash flow.

If I then go to the slide 6 which is about geographical development and I'm sure I will get more questions later on that one, but let me start with the good part in the world, this time it's Europe. There is a long time that we were a bit dull on Europe, but this time, we can say that Europe is really doing compared to last year, it's definitely improving. A surprise maybe for those who are following Atlas, the strong Russia and that the strong Russia where we have is because we have a strong mining development and still good service development in Russia. But overall, I can say that Europe in most countries is very solid.

If I then go to North America and I'll pick South America and let's take first about North America, you see a minus here. If I exclude and then I'm talking about now the negative ones of course is the oil and gas. We're strong in Texas, of course oil and gas and for those who are following the utilization of the rigs, you will know that that is a tough area. So that's the negative. Mining, tough, U.S. is an expensive mining country now. So, we will see some closures, some stops in mining in this, so that is an area which also is negative. And then last but not least, from a comparison point of view, it's important to remember that end 2014, so the last quarter in 2014, we had strong orders from rental companies and why was that? Okay, they really want still to have tier-3 engines before they go into the Tier 4 [Technical Difficulty] which were a bit less expensive and that is what makes the comparison tougher in this time.

If we will take this away, U.S. showed some growth. If we go then to South America and I will only comment on two countries and again I will start with a positive one, Chile. It's growing. It's good because there will be corporate investments from Codelco and a couple of services around that, gives a good development. And then I think we have a weak Brazil, a tough Brazil. Brazil is definitely tough in almost all areas where we're operating from an equipment point of view. It is really on the tough side.

If we then go to Asia and I will comment on two countries, again. I will start with a positive one, a very, very strong India. Really, India is up on the ladder. We see very, very strong growth there and in all areas, in all business areas, we see that in construction, we see that even in mining, we see that in industrial tools and on compressors side. On the other hand, the biggest country unfortunately is weaker, is tougher, China is tough. If you are not in the automotive, if you're not in aerospace and you're not in the medical in China, just to name a couple of segments, it's tough. So if you are on the shipyard, if you are in the steel, if you are in the coal, you're in the downside. So if you take that part, you see also that it's tougher for us in that area. So we really at that thing, the organization there where we can and on the other hand, we still don't have 100% market share, so it's also going for more growth in that area.

So and you see Africa, it's mainly the reason why it's strong, it's not because we certainly got big mining over there, don't get it wrong, it's mainly also that the Middle East is in here and the Middle East was solid compared to the quarter, the year before. So that is in short, the overview by region.

Here on slide number 7, you see the organic growth and that is the challenge, we're fighting that part. If you will make distinction between service and equipment, you will see service solid positive and you will see a rather negative equipment development mainly coming from a very weak mining and then also the -- driven by the oil and gas, the larger tickets in compressors which are also rather weak. If we then make a correction, if I can say and talk about a correction for the -- also structural changes we have done, in other words, the acquisition, you see a little bit better picture, but also this year and then I'm talking 2015, we see also a negative, of course, we landed several acquisitions, but they really did not contribute yet on the growth of the Company. Of course if we would have -- had Edwards two quarters earlier, you would have seen another picture. So, but it is what it is, we have to work harder to make it again positive.

The sales bridge, you can see the figures, currency, of course, it gets less and less compared to beginning of the year. Price, you see zero. If I really go to calculate because we don't [indiscernible], it's a little bit less than 0.5%, you can see 0.4% to be accurate. Whereas we still see some positive part, we still see some slight positive in CP and CR. So in compressor technique and construction technique, a little bit tougher in some areas on the mining side, but it's not really that it's really dropped -- fell off the cliff, but, okay, it's a little bit tougher and then we should also when you read on -- and you see that in the details when you read our papers, you see also on the industrial technique that comes mainly also from the price agreements which are built in the business of our Henrob business, if you remember the acquisition we did a couple -- was a year, a year and a half ago.

So, that is on the price and we still see some little positive development on price on the service side. The rest, I think on the volume, I have commented on that in the previous slide. So, I don't need to go deeper on that one.

So, let me now go to the different business areas. And then I'm going to slide number 11, saying compressor technique. Still solid growth in service. So, that develops further, but on the other hand, lower order intake for compressors. You said, okay, before you are writing low order intake for large compressor, now you are talking for compressors. Yes, of course, the large tickets are still tough, on the other hand, if we talk about the small to medium size compressors which we call it the yellow canaries, if we take that part, yes, it's slight negative, but why and where it's coming from and remember why they have settled so in previous quarters.

Oil and gas in U.S. is really a big part which drags it really down and then also you have in the [indiscernible], so the norm Atlas Copco brands in China, they also have a tougher development there. But if you take these two away, we have a positive level. So, that is something to remember. On the vacuum, is solid, strong on some same competitive players, especially the ones in the U.S., doing solid, the one in Asia is a little bit softer, but in the total it was solid order intake.

Leybold, I have already said and then we announced, was it last week that we also got actually this week, we got also the Italian piston company called FIAC which is coming on board, then we hope within a couple of months that we can close that. Profit at the level where it should be, say solid, nothing to say on that one only that we're back where we feel that this is a link.

Indus technique, all positive. I have mentioned a couple of times already, motor vehicle, aerospace, electronics, flat screen, all that part is doing fine. Strong growth in service, record revenue and a very solid margin. One could say the margin is a little bit weaker compared to quarter three. Yes, okay. This has sometimes also to do a bit of mix of products, what is invoiced and as you see the record revenue, so most of the time, that means that there is also bigger projects which some sometimes carry a little bit less margin, but nothing to worry on that or not to try to look for trends on that, at least I didn't recognize that.

Mining and rock, there was a time we like to talk about it, now is a time we don't like to talk about it, but anyhow, it's part of the family and I'm happy to say that it's still having growth in service. So, yes, is it tougher, do you see some closure of mines? Yes. But there is other upside. If you look to mines who are really the good ones that really looking for efficiency, for productivity and that is only one place and that's enough scope where you can get that and that is where we really getting the service.

Further automation, further integration, mid-life upgrades, changes here, changes there, I think that is what is happening there. So there is a lot of movements coming on. Unfortunately, sometimes closures that means reduction of people in certain area, but then increases in other areas. So managing the area is you need to be a little bit ajar today.

Consumables, weaker. We see that, I think, it goes on the China side. I think some of the areas there are weaker. We see those who are in Australia where we had a weaker development. So in total, so a softer consumable. We still -- I think, we have adapted to suit. So from that point of view, I think, we do fine also from execution point of view, I think, management there is doing what they need to do.

Unfortunately, is it very weak? And I use the word very weak demand for equipment in mining and if we have some equipment sales which we have and it's -- most of it is for construction. So, that is the area which is difficult. So also for the guys, it's not always easy and to adapt, of course we do and do I expect anything to change in the next coming quarter? No. I don't see immediately a reason why it would change.

The operating margin, 17.7%. One can also say here, a little bit weak, especially when you compare with quarter three. Of course, I also would like to see a bit more. Can we do better, is there areas for improvement? Yes, but the big hits we got on the currency and Hans Ola can maybe also elaborate later on that one a bit more, because it has to do with the mix of the currencies where we're selling and then of course due to the effect that the equipment is lower, you also get more on the absorption. So at certain moment, you have to adapt and you also have to see what you do on the design and development part and that is the process where we're in.

So, I think, when we carry on further, I think, we will get -- if currency stays like that, I think, we should do a little bit better and I hope that my colleagues on mining and rock excavation also hear that. So we're really looking forward to a better result.

Construction technique, soft order income, if you compare, remember already what I said about the rental part, so that is the biggest hit we got. Good development on service, so that's good. I think that has changed with -- if we look back in 2014, I think we do much better here on service, we found the momentum how to do that. So very pleased on the execution and the performance of that team and we do great in specialty rental. I think that's also an area where we also have strengthened our business development.

I'm pleased to see also that we get the acquisition of Varisco, Italian pump manufacturing. So, now we have a reasonable complete offer in our portable energy portfolio. So, we have air, we have power and we also have pumps, liquid in that case. And the operating margin is at the level more or less giving a low. Road construction business in this quarter which drags it down which is a normal expected margin for this period.

So, then I'm coming on the Group, the operating profit you can see here and maybe Hans Ola, you will take over?

Hans Ola Meyer

I can continue, most of the things in the top of this slide, you have Ronnie comment already before. Let's move down a bit in the income slides and profit before tax is up 5%, thanks to that we had a little bit less negative financial net this quarter. However, if you look into it, the interest net is about the same as a year ago. Going forward, I would say that we're looking at the SEK200 million, SEK200 million-plus negative of interest net going forward, that's in the next couple of quarters perhaps.

Then, if we look at the tax which is the dramatic item this quarter and Ronnie already commented upon it. We have a hit of about SEK2.8 billion which is a worst case tax provision you can say. We will see how that pans out in the next couple of quarters, what the Belgian government will say in response to the EU Commission etcetera, etcetera. Apart from that, we had a, if we adjust for that, as you can see, we had an earnings per share of SEK3.15 already in the quarter and with it SEK0.85 as you can see.

The tax impact, apart from that, was actually very favorable in the fourth quarter due to that, we had some favorable issues in other countries, not so big, but where we then were able to release some tax provisions. Going forward, partly and mainly due to this news in Belgium, we have to expect that the run rate of tax will increase compared to the 24%, 25% that we have gotten used to in 2014 and 2015. So, we're looking somewhere between 27% and 28% only because of that impact.

If we move to the profit development in a little bit more detail, this is the full Group and you can see in the -- visualize the revenue bridge as we call it on the operating profit bridge. I think the only comment here is that you see the SEK217 million negative bridge on the operating profit versus SEK613 million on revenue means that the fall through of the lower revenue was a little bit more on the operating margin. I think that you can say that it's mostly due to that in the last quarter or two, we've had a drop of orders received, as you have seen and Ronnie commented which means that the utilization in some of the plants is somewhat lower than it was in the beginning and certainly somewhat lower than last year.

If we look at the different business areas in the same way, I think the only thing that I would point out really is that the currency and Ronnie already touched upon it in MR differs from the effects of the other business areas and the reason in this quarter is that the currencies that are important for MR like South African rand, Australian dollar, Brazilian reais and the Russian ruble etcetera took a very negative development at the end of the year. So in spite of the dollar keeping up reasonably well compared to last year, including even the euro, this is the effect the difference between the different business areas. So, that had an impact which of course impacted the margin, as well for them.

We move to the balance sheet, again, I repeat myself, here is a SEK2.8 billion effect due to the tax provision and the provision because we haven't paid it yet of course, it is still here as a non-interest bearing liability. The other point that you can recognize is the very nice and strong reduction of inventory that happened at the end of the year. And if you take that little bit further, you can see it here that in the cash flow statement, we released a lot of cash from the working capital, primarily the inventory. So that's the link with the balance sheet that you saw on the previous slide.

A record both for the quarter and certainly for the year, about SEK3 billion more this year than any other year in the history. So if you don't get growth, this company at least to get cash. So that's how it works. And cash is reality, my boss always says accounting is some kind of an opinion he says, but I'm not willing to agree to that really. But anyway, let's move on.

Earnings per share and dividends, of course, now you've seen the proposal from the Board that is SEK6.30 as you can see and you see also the earnings per share with and without this extraordinary tax provision which I think is important to remember looking at the trend of where we're.

And then finally, before I leave it to the questions and answers, these are some useful dates because as you know, since last year we split the dividend in two parts. One, directly after the AGM and one, six months later. And the reason for that is that we're holding back on cash to give to the shareholders, it's basically that it gives us -- allows us to have a much better cash management planning in the Group which is constantly cash generating. So this fits much better with the profile that we have and that helps us to be more efficient on cash management as well.

So with that, we conclude on that almost. The most important thing is left, so I leave it back to Ronnie.

Ronnie Leten

So, our very important sentence. So as you see here. We go for the demand to remain at current level and you will wonder why just to give you a bit of bread crumbs on that. I still see a positive development on service. Is it booming? No. But there is still some solid development going on. On the equipment, it's mixed, that make it also difficult just also to react to all these things. If you see still a good development on the industrial tools business, so we believe that is still at good level. Mining is already low, if we see on the equipment side, can it go even lower? Yes, as long as it has not reached zero, yes, but it becomes less and less significant on that part, so that is to say, okay, it is low, I don't see it immediately big drops anymore, but okay. I've said that also before. So and this time, I was wrong.

And then I think on city side which is the biggest part there, we have also a mix, it was the big tickets, we have been really talking about oil and gas and the small to medium sizes, the mixed one, but we look to all this and that is also a flat part of that.

So, if you take mining, a bit negative at construction, a little bit negative. CT, flat; IT, up. So we said, okay, that is more or less to remain at current demand at current levels. So that was our conclusion, because if you look to our outlook from quarter three when we made the quarter four, where we missed it, where I missed it, the mining was softer on mining than I had thought. And second also on construction side, because I had expected also that the rental companies would start to order and that selectively. And we were not -- at least I was not wrong to make that clear. On the industrial and on the CT side, but on the other one there really, we got the difference.

Hans Ola Meyer

Great. Thank you, Ronnie. We're running a little bit longer than we normally do. So if it's okay for Ronnie's schedule, perhaps we can take a few questions. Just after 4 o'clock depending on the queue of the telephone line. But we start here in Stockholm, first, with the first question and then after one more, perhaps, we go to the telephone conference.

Question-and-Answer Session

Operator

[Operator Instructions]

Peder Frolen

Peder Frolen, Handelsbanken. Could you please help us understand where you are in the sort of inventory adjustment process? Given what you see in your order book and where that weakness obviously is, do you think you will continue to sort of produce less in the coming months? And tied to that is a follow-up, Hans Ola, could you please help us with how much the SEK1.4 billion in lower inventory quarter-on-quarter impacts the EBIT?

Ronnie Leten

I think on the inventory, like I also said sort of in the beginning, solid productivity or solid profitability I said. And then I meant and I hinted also on the development, on the inventory, because this is a matter of efficiency. And we have been working the last two years with much more focus on that area, because it's not so easy to reduce inventory when sales goes down and then in a relative terms. But construction technique did some best work, mining weak and rock excavation did great.

So, these two business area really make the difference. I think you have a bit here on compressor technique and even in indus technique in absolute terms went up, of course due to Henrob and a couple of other orders. So it's really in these two areas or segments or business areas I have to look and there should be more coming. I think they can do, but that's on efficiency side. One should know you have, when it comes to -- if you want to run a good service business and especially that our equipment last for some of them 20 years, so you need to have some of the legacy spare parts and you keep them in inventory, of course you have these and you need to keep them active.

So on one hand, there is not 100% flexibility on that side and the most improvement should come in the manufacturing side and there is still something.

Hans Ola Meyer

I will disappoint you with the other, because I will not give you a number. But I can say a few things. If you compare -- you're alluding to of course that the heavy inventory reduction indicates that you had a very low utilization of plants etcetera in the quarter and that should mean a negative impact on operating profit. As I said it myself, it's true. But how much and exactly that type of an analysis we never been able to do in the past and I cannot do it for the fourth quarter even in details.

If you look at where it comes, is of course, you see in MR for example, a revenue quarter of almost SEK6.6 billion and an order intake in the same quarter of SEK5.8 billion something. So there is a big amount of that inventory reduction is coming from there as Ronnie said. So, obviously, you would expect that that negative impact is primarily seen in that business area and that's also true. But again to say if you reduce by 1.4, it leaves to exactly this negative margin development, if it would have been SEK800 million less, it would have -- that doesn't lend itself to that type of analysis unfortunately.

Some of this invoicing that we do in fourth quarter might really make utilization in the plant in the third quarter or even in the second quarter, so if there is a lot, then some would be in the same quarter. I can't give you a specific answer to it, but it has affected.

Ronnie Leten

We elaborate on that in our management meeting, we even didn't take it as, say, an explanation. We know that in construction technique and in mining, it goes down. Yes, it really brings some -- a little bit absorption, but --.

Hans Ola Meyer

And some quarters and now, I'm actually referring to the third quarter. Sometimes, gets perhaps a little bit high profit margin really compared to where the run rate and the trend is. And if you have that after another quarter which is a little bit negative affected by the distribution of costs and utilization of fixed costs etcetera, then you see what happens between the third quarter and the fourth quarter, not more dramatic than that in mine and Ronnie's analysis.

Ronnie Leten

Yes and I think I mentioned on the profitability, yes, I think if you look to mining and rock excavation and the profitability, try to understand how can they go from 20% to 17.7% and what in the hell is this okay, partly is currency is one thing. 20% was high, 17.7% was maybe a little bit low. So I think -- and you really heard me hinting it should have been, but they took a couple of costs here and there which we didn't talk about that is a bit more under-absorption even there due to less demand out there.

Hans Ola Meyer

If we have -- yes, we have one question more here before we go to the telephone conference.

Anders Roslund

Anders Roslund, Swedbank. I have a question regarding CapEx demand for industrial technique and compressor technique. If you look in the manufacturing sector, it looks like automotive is still growing and could you elaborate a little bit what we should expect for the near future?

Ronnie Leten

I will try to take my crystal ball and calling Anders, because I don't have more than you. But you see I think on the motor vehicle side, the models, I think we get more inroads in certain models, also products. So, I think on one hand, there is still some good demand also in the aerospace and on the other hand, we also have the right products. So, I think, we will be a little bit helped from that if you take in industrial technique side, so at least that this -- where we cross our fingers for.

When it comes to compressor technique, it's also the mix. And then I need to go the tour of the geographical tour if I do that first. China will be tough, of course, it has already been low. But I think when it comes to the bigger tickets, you take that how come it's lower, no, we get some orders. It's not that we don't get anything, you write a little bit in the mining, we get orders. What we're missing and that I don't see coming back, that's also CapEx is this big orders, very big orders.

I know I mean in numbers where we were selling sometimes 10, 15 turbo-compressors, I don't remember the time since the last order -- we got an order like that and that makes the big difference. That you have in China. And China is one of the biggest compressor markets. That's one thing. Then you have oil and gas to look to you on the CapEx. We've seen these guys are not really -- you see if you count the amount of rigs, what they're using, so that also makes it have you reached the bottom, let's do with that. I was actually -- it was on Monday I was talking to the guys in Texas. I called three guys and say, hi, Ronnie, I think the oil prices, I think now we have reached the bottom and say, where I have heard that before. And that is -- these two are big part.

Then I think you see the people investing in Europe, you have heard me very high about India. But then I took down in Brazil. So this is a lot, is mixed one. I think if you take everything away from the oil and gas in the U.S., it's positive. So, Ronnie, what is it now? Yes, it's a very mixed picture that I think I'm positive on Europe, positive on India, positive on the states minus the oil and gas, negative on Brazil, tough on China and overtaking the real big ones.

Hans Ola Meyer

Good. So, should we move to take two questions from the telephone conference, please.

Operator

Yes we have a question from Klas Bergelind from Citi. Please go ahead, sir.

Klas Bergelind

Starting with the aftermarket in mining, just on the development by regions, the negative delta seems to be North America, now adding to the weakness that we already see in Australia, how can service and spares be up in other regions to offset this? I mean North America and Australia have the miners which are typically toughest on lowering cost, volume should have dropped there quite a lot, did you take any new service contracts, climbing the service ladder or is this just easy comp in other regions?

Ronnie Leten

I would say, yes, you are giving the answer. But I think, yes and actually that's a question, Hans Ola, you saw us looking to each other, that's actually a question we had expected then. Yes, I think we see mines closing and you see that in the most areas in the high cost regions you see that and I'm thinking then about Australia, I think and mainly U.S., that we see.

But on the other hand, we see other mines still and that's what I call the good mines investing in efficiency, because there, they really make money, they can make money and of course they're very keen on CapEx spend that I think they really spend a hell of a lot on efficiency, on productivity and then you come up, you have to make at a certain moment, the compression and climbing the service ladder or do a mid-life upgrade or do an automation and that is where we get the activities. And we still don't -- that we should not forget, we still don't have 100%, the one-to-one reaches -- I use that one to all our mining customers. We still have a lot more to take which we let -- before on the table, we didn't work. Now, we're maybe much eager to get this part.

So it is a mix of negative and a mix of positive and Hans Ola and myself, I think we had a one-to-one with our head of service in mining and to debate that part and that is also what we came out. So you heard me also saying a positive part with confidence. Okay, I can be wrong, who knows? But at least that is what we talk from the people who are day-by-day spending into this. And then on price, maybe that's another one.

Klas Bergelind

There is a follow-up.

Ronnie Leten

Already looking to me and then I see [indiscernible] and I'm sure Klas, who had the same. Of course, price, the mines are really pushing hard and really want to have efficiency and really say, yes, you make money on this and money on that. And that is again where you have to work hard to create value, there is some of them we get hits and some of them we take, that is -- it's not an easy place today. I must say, I'm of high appreciation for the guys today who have to face the purchase people on the mining side.

Klas Bergelind

Okay, very good. My follow-up is -- well, follow-up, switching to the balance sheet, now buying Edwards, Schucker and Henrob was a clear way of expanding into higher growth segments, more consumer-led end markets, are clearly good given the disappointing growth outlook elsewhere. The more recent deals, however, while I appreciate this strategic logic, is a little bit lower growth. So here is the question really what is the next strong growth area for Atlas, is there any or should we expect more M&A to consolidate and get synergies in services such as in vacuum and compressors?

Ronnie Leten

Yes, I think, of course, like we did with vacuum, as we did with SCA, as we did with Henrob, of course, we're looking to spots where we can leverage our capabilities and technology or I forgot to say aerospace just to say as a success area, it's the journey we started maybe four, five years ago. I think we're constant on that. I think you don't -- unfortunately, you don't see these successes because there is also a lot of minuses and today the headwind is extremely strong.

Just take Brazil, you get a drop, 60%, 70% of the top line, you need to find the hell of a lot of alternatives to become a positive one. Now, I'm talking construction and it's not that we're losing market share because that's my first question, when you -- when I see this, I'm on them and that is we do moves, we do portfolio management. So we're working on these areas, but of course the headwind is tough. What are the next one, to be honest, I will -- not going to say that, I will not say it in public, but of course we -- I am not going to let it be like it is, that's for sure and I think there is still some potential, that's for sure.

Operator

The next question comes from the line of Jonathan Hanks from Goldman Sachs. Please go ahead, sir.

Jonathan Hanks

Just one on price mix. It was flat in compressor which is the first time in a long term. I'm just wondering trace aside deceleration, how we should think about this, is this just a bit of a blip and we should expect it to go back kind of positive plus 1% next year?

Ronnie Leten

One should also know that, I think, when -- the way we report, we have price on service and price on equipment. Of course, we don't give them in detail on both areas. One, those who are following Atlas since long they know also that price on service is a lot to do also with good inflation. So we need a little bit inflation. So I'm praying every day for a bit of inflation, because that will help us, makes the price -- I can say, discussions of price, conversations with the customer much easier. So that is one where CT is affected, that one.

And then, I think, when it comes to price, of course, pricing on the efficiency products, but we have the GA VSD, the Zs, the larger one, I think that is productivity, you sell productivity and you don't talk about price, you talk about efficiency, productivity. Of course, where you get, the tough part.

You have heard me talking about oil and gas [indiscernible] on that one. Of course, they get and some of the low-end in China, they get price spreads, that is where we need -- how can we beat that? This is supposed to come with other offers and that is where innovation, bundling, all this type is working on that one. That is what is happening on that.

Price is equal in creating value and that plus, of course, partly is inflation. It's still positive and you heard me saying that, of course, not the double, the 2%, whatever like we had before, it's not there. But on the other hand that is maybe we didn't talk so much about that because that's typical at Atlas Copco, is about the cost, steel, copper and a lot of other commodities have come down which is bad for one calling mining and rock excavation, but it's also great for our products. So, that also support our margin.

Hans Ola Meyer

We should, perhaps, just add in, not too long, but zero price in our table from one could actually be from plus 0.6 to our last 0.4. I'm not saying that was the case in exactly this quarter, Jonathan, but for us it's really a low or almost a stable type of development, so that's how we reported at least.

Do we have any more questions here in the -- otherwise, it doesn't look like that, we go to the telephone conference, there are many questions still waiting there.

Operator

The next question comes from the line of Markus Almerud from Kepler Cheuvreux. Please go ahead, sir.

Markus Almerud

My first question is on the geographical, if you can talk a little bit about the U.S. and what you saw on the industrial side, but also on the oil and gas. I mean, yes, year-on-year, it was down, but can you talk a little bit about what it looked like throughout the quarter, Q4 compared to Q3 and also what it looked like during the month, because in many ways this is a big swing factor? That's my first question.

Ronnie Leten

Yes. Now I have to get my memory upon that. I think on the U.S., if I see it and that's the way I approach this part is the -- and first on, if you look to compressor technique, of course you have to take away the vacuum part, because that can swing also with some of the big players in that area, so they can destroy the comparison. But what's definitely difficult on the industrial side is and then I'm talking on the compressor side is and that's negative is the oil and gas.

That is really, really negative. I think the other parts and then talking about industrial technique, I think, is solid, is good development, that I think is working fine with automotive, aerospace even because you should also know and that's maybe a contradiction now, even we get more and more oil and gas, because, okay, we started from almost nothing, but you remember that we acquired the copper company, so they're also gaining share, so that is a positive part.

And think on the compressor side, yes, I think is, of course the big tickets are not there and the real gas and process compressors are not there. The other part is okay, in all -- we have a good medical business, that is an area which we have been focused a year, a year and a half ago that does very well, so -- and it's also very strong. You must know that we have almost 50% market share in that area. So in that we're focusing on. So that gets all the small part, give the -- a good -- still a positive development, let's say in this way. But we get the hit and this is a big hit there in oil and gas. It's not the minus 2 or minus 3 and that's an -- it's a big hit. So, to absorb that big hit and make it positive, you need to have a lot positives.

Markus Almerud

And when you say that it's really, really negative, I mean, is it also between both sequentially and also year-on-year? So, did it get even a lot worse -- it got a lot worse in Q3, it fell off a cliff in Q3, they fall off a cliff again or are we kind of, do you see what I mean?

Ronnie Leten

Of course, you cannot go from cliff to cliff, but I think it still was going down in Q4, yes, yes, yes. Sequentially, it was still down and that was also my conversation I get with the guys on Monday. Okay, have we now reached the bottom of the cliff or are you -- still see some negative development? Then, yes, okay, we'll see where the oil will land at the moment. But it was still softening in Q4 on the oil and gas parts when it comes to the compressors.

Markus Almerud

And then my follow-up if I can just ask, the very dramatic drop through in mining and rock in Q4, I mean, I would assume that the services grow faster than equipments. So, you have some positive mix there and then I come back to Klas' question, it is because -- there should be an income mix you want to that services are growing with a higher margin than you have on the equipment side, are we seeing prices dropping quite significantly on the equipment side or is there something else which make that come out the way it does?

Hans Ola Meyer

And you're particularly on MR, I ask?

Markus Almerud

Yes, yes, particularly on MR.

Hans Ola Meyer

No, that's why you saw it as you say. I mean, the currency does a little bit of course and that explains something specifically on the sequential basis, you see that of course. And then the other part, yes, we're growing year-on-year on service, of course, from one quarter to another. It's not a very dramatic change. I think we've touched upon the reasons for the drop through. Partly is of course that you cannot put any quarter on a perfect Excel sheet formula and say this would give this revenue and this mix will give exactly 19.5% in margin and this one will give 18.0%.

There are costs involved that are not exactly distributed equally over the quarters etcetera. So, I think, between currency, between the fact that two relatively low order intake quarters in a row means that you are producing, you are using the fixed costs much less, let's say, you get much lower utilization than what you had in the two previous quarters for example.

So, it's not a new price level on equipment, certainly, not I mean either we get the order or we don't, more or less there. And on service, we've already commented on it, that we don't see any negative pricing on an aggregate basis for MR either.

Ronnie Leten

I think when it comes to mining and equipment, it is not matter anymore on price, I think, this is a matter of having an order.

Operator

The next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead, sir.

Andre Kukhnin

Just three quick ones. Firstly on China mix for CT, could you give us the idea on the latest word is versus industrial gas and process in vacuum now, given further declines in gas as process?

Hans Ola Meyer

You mean whether that has had any change on the gas and process on the large compressors in China or?

Andre Kukhnin

Just more in terms of 2015 sales or orders composition for China and CT specifically, how much of that is still gas and process versus industrial in vacuum?

Hans Ola Meyer

The development is it in all areas of CT or is it [indiscernible].

Andre Kukhnin

Just actual mix rather than development.

Ronnie Leten

I think when you take gas and process, China is very weak. And then I'm coming back a bit where I said a bit earlier when it comes to say the mid-size of large compressors, we don't talk about the big. The big ones, if I go to say right, the big ones is very low. The large ones, I think, there are still some orders coming home, the only thing there is that you never get the big quantity orders, that is over and then I think when you come to the small to mid-size, I think we see good development for the Atlas Copco brand, when it comes to quantities, it's a little bit more tougher when it comes to the low-end.

So you remember that we always said, you have the tier-1, tie-2 or tier-3, I think the tier-3 is tough and that is quantities, that is where you have the tough, but tier-1, tier-2, I think which we sell on the Atlas Copco brand, there is still good development, is it really growing? I will not say, yes, that will be an outlook from my memory, I think it will be maybe flat to a little bit negative.

Hans Ola Meyer

If we continue on CT in China, we have to remember now in the numbers we present and so we talk about, it is also including vacuum, if you look at CT as a business area. And contrary to half a year or a year ago, we have not seen the same positive development from vacuum in that part. Ronnie said that it helped us in the quarter in North America, particularly, that's not there.

Ronnie Leten

And that is when we make the comparison last year, we got the order for China from an Asian player and that -- yes.

Hans Ola Meyer

So that part is the comparison.

Ronnie Leten

Yes, especially specific on China.

Hans Ola Meyer

I think I heard you, Andre, looking for a mix in terms of percentages, but I will disappoint you there. Then we should have 46 divisions in Atlas Copco, we only have 23. So there you'll have to satisfy with those answers. Sorry for that.

Andre Kukhnin

I understand. The next question was just on FX because or transactions wise, simply because there is quite a big -- I know on memory Edwards was over-hedged and this year made some benefit coming through and from my understanding Leybold, you've just bought had hedging that should be running off and benefit in 2016 and against that you've got, I guess SEK. So, can you just help us with what kind of roughly we should be looking for the transaction impact for 2016, given this quite a few things are moving that we can't really exactly estimate?

Hans Ola Meyer

I mean, this will take by and large, as you talked about the Group, forget about hedging, it will not have any impact. I mean, the comment you made quite rightly is that when we make acquisitions, those companies might have a different hedging policy than we have and that might take a little while after the acquisition to adjust into the Atlas Copco policy of not hedging basically. But, in all fairness, if you look by and large again, if you're not down to the decimals of decimals which I cannot even see, then if you can see the exchange rates of end of 2015 will by and large be the effect we will see in Q1 and so on, go on. So that's how it plays out.

Andre Kukhnin

And just a final one, a follow-up on M&A. Recently pick up with a flurry of deals. How should we read that, is this the beginning of a trend you are seeing than their expectations and willingness getting to a point where really filling up and we should expect more or is that just timing that you announced several deals at the same -- I mean, a few weeks' time?

Ronnie Leten

It was by coincidence, because some of them I would have liked to come out a bit earlier and if you take like FIAC could come out, I had expected that early December already. But okay, there were legal conformations we need -- you need to wait because there were operation in other countries and then you come to the period of holiday in here and there. So yes, then the length of all of it closed.

Hans Ola Meyer

I mean even if you expand, you get the full fourth quarter or even third, fourth and the last couple of weeks. In that period, it's been a little bit more perhaps than, you bet, it's purely coincidence. We're working on the full agenda all the time.

Ronnie Leten

There is always on the acquisition side, there is always things small and yes, big, big things are not -- they take a little bit longer before that could, but small ones are always in the air. So, we're always on the hunt.

Hans Ola Meyer

We take another question, but, I think we can take 10 minutes more, because we were a little bit late getting into the Q&A, but then we really need to move on. So again, some of the final questions then on the telephone conference.

Operator

There is a question from Andreas Willi from JPMorgan. Please go ahead, sir.

Andreas Willi

Just two quick questions, please. First one on industrial technique, it had a bit dip in organic revenue growth, while orders were strong in prior quarters and remained strong, is that just a question of timing of bookings there or do you see some signs of weakness in the markets maybe smartphone, other areas that have maybe recently been questioned a bit more about growth trends? And second question just on CapEx, what we should expect for full 2016, is there any big change there?

Ronnie Leten

For our own CapEx, is that what you mean?

Andreas Willi

Yes.

Ronnie Leten

I think for our own CapEx, I don't expect big things. I think if we compare 2016 with 2015, I think 2016 will be maybe a little bit lower. It will be not significant difference.

Andreas Willi

No major differences we expect.

Ronnie Leten

That will be a more or less of that. You can take more or less 2015 figures for that. Then on the industry, I don't think there was any significant, but I picked up, you mentioned on the smartphone, but that will not make -- that's not material. That is, I think, you know indus technique and you know they are very well if you were at the capital markets, you know our exposure on motor vehicle with the Henrob, with the SCA. Okay, sometimes if we land the new model in Henrob, okay, it could come a bit more orders and that is also what we're, of course, happy to say that [indiscernible].

But I think the rest is really moving on. Will we get this boom? As I can call it which we had in 2014, 2015, yes, most likely I think there are, you have to see a bit the model changes, but we still are positive in this area. We have a good technology. We have good inroads. We have a couple of other segments where we're working hard to pick up. So, I'm not negative for that industrial area.

Hans Ola Meyer

And your question was particularly on the revenue which is lower and lower organic growth. This is not a surprise. We've had a period where MVI without the new acquisitions was really growing way above double digit for a while and we haven't expected that to be able to continue to be honest. So, it's not a surprise that revenues came in as they did. The good part was of course a couple of significant orders on the assembly systems side or on the assembly solutions side. So, that's -- but we don't read more than that into it.

Ronnie Leten

And of course the comparison becomes also more challenging.

Hans Ola Meyer

Yes, not surprised that it comes on the growth now.

Operator

We have a question from Michael Boam from Highbridge Capital. Please go ahead, sir.

Ronnie Leten

The question might have been answered. So, is there another one in the line?

Operator

We have a question from [indiscernible] from BNP Paribas. Please go ahead, sir

Unidentified Analyst

Two quick questions. First one is, I mean we have seen some demand weakness for equipment in compressor technique now for two, three years, larger demand weakness. I'm just wondering, do you know if on an organic basis your installed base is still growing that means that the current delivery rate of compressor are above the replacement rate of the older compressors, so is the installed base growing for compressor technique?

Ronnie Leten

Answering on the say, two, three years, of course, what you see first to make that analysis and then I will answer your question on the installed base. Of course, one thing is that the big gas and process compressors I think that make a big difference. So, take that away first, because that is the big orders you also see, if you look to a couple of other players, we have in that market.

So if you take that away, it kept because it's also little bit tougher still on the organic growth. If we look through the installed base, because they are dragging that of course for the service, that's important, we still see some slight growth from the installed base. And even you see now also when you look to recently also like in Europe, you see in certain areas also that's picking up again.

So that is not an area where I have heard that the opposite. Yes, in certain countries, it can be a bit shifting. But if I look to the total, I have not that impression. I have not seen a figure where we can say that the installed base has stood up. Bear in mind, now I will give you a bit more thought to that, if you take China and you heard we already saying if you are in flat screen, if you're in medical, if you are in automotive, yes, it will be much more installed base, much more utilization.

If you go then go and visit the shipyard, you would see maybe 10 compressors and three or four running, that is what -- where you are confront with. And that is the reason also when you have heard me when I am mentioning a little bit another question previously asked on the service side, of course that has an effect on our operation in that area on the service side. But of course you gain it somewhere else. Of course, you try to gain it somewhere else. But really on units level, I am not say -- I don't see that the installed base has come down.

Unidentified Analyst

Another question, you talked a lot about mix trends by end market and it would be quite helpful if you can give us as a percentage of sales the exposure to automotives, oil and gas, chemicals, aerospace, medical that kind of end market if we can get a breakdown for 2015 sales.

Hans Ola Meyer

Are you talking about the Group or--?

Unidentified Analyst

Yes, the Group level, yes, please.

Hans Ola Meyer

We don't have it by-heart to be perfectly honest, neither one of us. I think that if you look at the way that it is described in the annual report of 2014 and then of course you haven't seen the 2015 annual report, yes, you get a lot more indications of where that has moved, whereas having the numbers again off the top of my heart, the moves are not dramatic between segments and the end markets as you say, if you look at the Group in total, what you will see will come out is of course mining and you will see that the oil and gas, be it not so big in 2014 has also come down a little bit. But again, it by and large, I think, it's mining that they will see there.

Ronnie Leten

What you'd see is mining down, oil and gas down, semi up.

Hans Ola Meyer

That's very likely. It's the mix of the four business areas and their relative weight is perhaps a good indication, without going into the details even of each business area and the MR has come down.

Ronnie Leten

Because what we try to do and that is we never talk about that, we try to do two type of hedges, the natural hedge on the geographical front--.

Hans Ola Meyer

Now we've done natural hedges, not financial hedges.

Ronnie Leten

Natural hedge, yes, we don't do financial hedge. But we try to get everywhere in the world. So that's also what we're selling in 182 and even be 183 countries. So we're more or less everywhere in exposure to different, all different currencies. But on the other hand, we also try to be as much as possible in all the type of segments and sometimes we're happy that we're in the segment and sometimes we're disappointed that we're in that segment.

But that is what we're trying and it is where we see that possibility in compressor technique because everybody is using compressor there, we see the same on the vacuum side, of course not so many like CT but this maybe 70%, 80% same and then the same is on industrial technique. Of course you have segments which are a little bit more overweight. That's what we try to do and then you have of course the mining part and you have the end of construction, that's the way what we try to do.

Operator

We have a question from Lars Brorson from Barclays. Please go ahead, sir.

Lars Brorson

I'll keep it short. Just a couple of very quick follow-ups actually. Hans Ola, just on the inventory reduction in MR and sorry to belabor with the point, but can you talk about where we're now in the inventory destocking as far as MR is concerned? On current order run rate, are we in for another sort of big inventory destocking event in the first half of this year? And maybe just finally to Ronnie, could you talk a little about what you see on the copper side within mining? I heard a couple of I thought conflicting messages copper price obviously bad for MR, but yet you highlighted Codelco and other sort of copper areas that seems to have been good also on the servicing side, some of the big metal exposure for you, just a brief comment on that Ronnie would be helpful because that, to me, it feels like could be an incremental negative as we move further into 2016?

Hans Ola Meyer

Yes, I think we start with a follow-up to please, there is the first question earlier I think on the inventory reduction and destocking in MR. I can't give you as I said to Peder here, the breakdown that gives you an idea how much it has exactly affected the operating margin. Don't see it however [Technical Difficulty] this is a destocking, destocking which you would find in a distribution channel for example where there is a very clear, let's say, pipeline that looks more or less the same and you just decide whether I have two weeks of stock or I have two months of stock, it doesn't really work like that with lots of equipment that has different delivery schedules etcetera. So I'm not expecting that you would see on a sequential basis, anywhere near this type of heavy destocking, if you call it like that or reduction of inventory.

Over time, now I come back to Ronnie's main question all the time that we can be more efficient in the chain, but that is something that happens over years not over one quarter to another. So, on the other hand, we should also remember that the big part of inventory in MR is consumables and spare parts related to the big service and there you need to work on the structural changes to bring that down dramatically from where they are now, further down, so to speak. So we should keep that in mind. So, now we're not expecting to see a dramatic change in the short perspective.

Ronnie Leten

And then on the capital side Lars, I will take it a bit geographically, I think you have heard me saying when I went through it. I think we see still in the area officially you see some positive development, I think and you know which commodity it is and that is most likely copper, I think, in India, is also doing and what is that is coal, surprise, surprise, but that's the main part and then maybe the biggest surprise where we also have seen good development is in Russia. That is where we see good development going on in Russia and then that's in different commodities.

So these are the areas which we have seen positive, it's tougher, there are some orders here and there in Africa. There are orders here and there in Australia. But it's on the very, very soft. It's almost sporadic if I use a statistical norm here, it's rather weak and where and that is we have all our colleagues in the market were delivering equipment and that is where mines are focusing on because as the commodity prices are going down, we need to get the breakeven down in the mine and how do you get that is productivity, productivity and that's a lot has to do with automation. There, we see some orders coming and that can be sometimes booked in service, because it isn't great, sometimes it is a new machine which has all the bells and whistles, that is what is happening today in that market, but it's still at the low level.

Hans Ola Meyer

Good. Thank you, Lars, for those questions. And thanks everybody here in Nacka and on the telephone line. We stretched rotations and took 1 hour and 15 minutes, longer than usual, but many questions of course. Hope to see you again on the 26 or hear you again on April 26 for reporting the first quarter. Thank you very much and good bye.

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