Atlas Copco's (ATLKY) CEO Ronnie Leten on Q3 2016 Results - Earnings Call Transcript

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Atlas Copco AB ADR (OTCPK:ATLKY) Q3 2016 Earnings Conference Call October 20, 2016 9:00 AM ET

Executives

Hans Ola Meyer - Senior Vice President, Controlling and Finance

Ronnie Leten - President and Chief Executive Officer

Analysts

Guillermo Peigneux - UBS

Klas Bergelind - Citi

Peder Frolen - Handelsbanken

Markus Almerud - Kepler Cheuvreux

Graham Phillips - Jefferies

Ben Maslen - Morgan Stanley

James Moore - Redburn

Max Yates - Credit Suisse

Hans Ola Meyer

Good afternoon, good morning, good evening, depends on where you are participating from to this third quarter release conference call and presentation of Atlas Copco’s third quarter. We will do a very proven concept. We will take 10, 15, sometimes even 20 minutes of comments from Ronnie and then we will all concentrate on the questions and answer session. We will take about an hour.

And before we kick off with Ronnie, could we just have the operator repeat the procedures for the questions and answer session please.

Operator

[Operator Instructions]

Hans Ola Meyer

Excellent. Thank you very much. And, of course, it’s allowed to put questions also here Nacka in the Atlas Copco mine. So with that, Ronnie, take it away.

Ronnie Leten

Okay, thank you, Hans Ola, and good afternoon all of you. And let’s go immediately as I’m used to do straight to the slides and I will go immediately to Q3 in brief. I must say when looking to the quarter, I’m pleased – I’m pleased with quarter three and why solid order organic growth, solid profit and, last but not least, very good cash flow. So that made me – giving a bit of a smile. We also get – and that’s long time ago, we got in every business area we got growth and that was also a nice experience to get.

In other event what happened during Q3 is we announced that we will have fifth leg, the Vacuum Technique, it was not the big surprise for most of you following up Atlas Copco and we have a new leader there Geert Follens, which you will have the possibility to meet when you come to the Capital Markets Day. And of course beside a couple of other acquisitions, we also close Leybold and CSK completely. So in summary, a solid quarter and that it’s the time when you like to be a CEO to lead an organization like this.

When you come to the figures, most of you have already seen it, so I will not spend much time on that. If you look maybe on the operating margin, what you see there, what is the difference between last year and this year, it’s the dilution of the acquisition. The Leybold and CSK bring it a bit down and maybe a bit surprise for you, but still a bit of a negative currency effect especially in this quarter compared to last year. The rest I’ve already elaborate on that. Sorry that we missed the cash flow. MSEK 5 billion would have been nicer, but it’s just not MSEK 5 billion. And the cash flow, the majority of the improvement is also coming from good work on the net working capital. That Hans Ola will elaborate a bit more on that.

Then if you look to the geographical part, I will start with North America, you see only plus one and I think I need to give you a bit insight on that. You see Canada and Mexico were weak, that comes from mining where you had a weak and most of the business is mining there, so it was weak in that area.

When you come to U.S. they also had the weak mining. Industry in total if you take it was okay, was definitely positive in that part. If you then go to South America, I think it’s not a surprise when I say that Brazil was weak, weak overall, but on the other hand, you had Andean region and Chile, which had solid development and that is driven again from the mining business.

If I then go – maybe update Europe, where you see a plus 7, flat industrial technique, which is not a surprise, because we are running at a very good level. Construction technique was a bit mixed but was positive, but copper ore businesses, which were positive and copper which were a bit negative and then also a strong East Europe and Russia in that area where mining was solid mainly in East Europe, Russia.

And CT was in general, it was slightly up, but you all say I’ve been able to read in the write up, you saw also that – the medium – this multi medium size industrial compressors was a bit weaker. One country which was tough, weak, surprise was UK.

If you then go to Asia, solid China, solid India, so of course and that means then you have a very solid region there and on top of that held by strong Korea, which is then semicon driven, so vacuum driven was good. If you go to China more specific, you see that mining and construction is tougher where the other business are okay and India you can more or less everything was okay.

If you then go to Africa, plus 22, more or less all businesses doing well with a bit softer construction business. And last but not least, Australia, of course the comparison was very easy, as you remember last year we had a cancellation and if you then get some order, you come to 42% plus.

So that was on the region. The order quarter, I will not elaborate so much on the statistic this year. It’s bridge, it’s very obvious that you see here a plus 7%, so that’s always nice to see, and that should be result in more revenue in the period to come.

If I then go immediately to the business areas, which is Slide 10 here, solid and even record intake. It’ a complete business area with a strong organic growth. Solid vacuum solution, even it’s, I’d say, strong, on the other hand, a tough situation in gas and process and this I have been seeing already several quarters and it continues to be tough. Also here we will take more measure as we go into the next quarter to adopt to the new norm in that business area which we have to do for Chile, because I don’t see immediately a turn up in that segment. And then last but not least very solid survey and development. Profitability giving the dilution from acquisition a very solid profit margin on Leybold and CSK, you have already seen that before.

If I take industrial technique, also here a good organic growth, so it continues to develop strong service, strong Asia, more specific China and India, we mean that. So it keeps developing over there and we have a good presence and gaining share in that boat. Record revenue, that’s all good and margin as you can see on the red curve, it is rock solid. We have definitely here predictable and even growing, so what you want more.

Mining and rock, maybe for you – some of you a surprise, organic growth. Of course, don’t forget, we had a bit of cancellation, as you remember what I said when I was commenting on Australia, but on the other hand, there are some replacement orders. I should not deny that part. So there were some good equipment orders. You have seen, I have commented already on Russia, Chile and a bit here and there. So that’s good.

The service business year-on-year down but sequential is up and we also know why year-on-year it’s down. It’s mainly from some closures which we had in the mines of mines we closed where we had some service conduct. Preemptive question, do you see more of closures? Have not seen any more, I’ve not heard anymore so that’s mainly also by sequentially we are gradually up and most but not least it is also good to see that we have consumer goods up.

I’m very pleased to see the profitability. You remember, the metric 18% is reached so now have to think about the new target for them but I’m very pleased that they made their effort. I think congratulation to the organization that they really worked on that, of course – and that comes from hard work. Unfortunately that didn’t suit but on the other had also that absorption because of a little bit more volume it’s helped. It’s not so much currency so it’s really the hard work and the absorption.

Then construction, organic growth, if we take that, total was plus 1% - not organic, the order growth was plus 1%, organic was slightly down. That was of course supported by the acquisition. Equipment was up but what we see here is specialty rental is a bit lower and that comes mainly from the oil and gas business. So you see that in the Middle East, you see in that in the Texas region which were good markets for specialty rental which is a bit weaker and that also is pulling down or makes the operating margin a bit tougher to reach for construction. So it can only make it 10.9%.

So by this Hans Ola, I’m coming to your territory because the rest I think I have said. So I suggest you take over here.

Hans Ola Meyer

A few comments on the income statement and balance sheet and cash flow as we normally do. What you can see here is of course the total numbers but the few comments perhaps what is varied inside, some of it is written in the reports and some of them you can view now. We always talk about the FX effect and compared to last year we had a negative impact on the operating profit with Q3 last year of MSEK75 million.

You were all following what is happening as we speak on the currency side. We have two currencies right now that are over sold. I shouldn’t say that because over sold is a judgment but are very much sold and that’s the Swedish Krona and the pound sterling. And you have seen that that is positive for us. We have strong connection with the strong dollar is good for us and the weak Swedish Krona is not hurting us. I don’t know how that will play out but if we take that as today’s situation, it indicates a much more positive bridge with Q4 last year going forward probably somewhere in the region of MSEK200 million to MSEK300 million positive compared to the slight negative in Q3 over Q3. But that is judging what we see today on the currencies and we don’t know where that fix.

If we move down a little bit from the operating profit, financial net included a little bit of extra cost from buying back an old bond loan that we had in the market and we used most of those proceeds to – sorry, we used proceeds of a new loan that we manage to get at a very low interest rate, 0.6% roughly for 10 years fixed and we use those proceeds to pay back the old bond loan. But that had a certain onetime cost of about MSEK70 million, MSEK80 million in the quarter.

If we then move further down in the so underlying you could say that the financial net was really pretty well in line or the interest net was pretty well in line with last year. I also expect that going forward we will see roughly close to MSEK200 million negative is a good expectation for the interest net. I should say also that we had of course in the operating profit as you have read in the report, we also had a negative from the revaluation of the long term incentive program or the option plan program that we have which affected us negatively MSEK166 million in the operating profit already.

And on the tax side 7.28% tax rate in the quarter which is roughly where we have expected to be in 2016 and I think that’s the level that you should expect also going forward. Of course you see that it was much lower in 2015 and the reason is of course the debate in Belgium that Belgium has with the European Union about the deductibility of certain costs in Belgium that has an effect of 3% to 4% on our tax rate in it.

So, with that we can move on to the next page which is the profit bridge. I don’t think it’s very dramatic on a group total level. Normal flow through if you look in the column which says volume, price, mix and other. We lose a little bit of volume on revenue when currency and acquisitions are eliminated but the effect on the profit is pretty normal from that and the currency numbers are pretty small so don’t read too much into and plus on the revenue and the negative on the operating profit.

If we then look a little bit more to the different business areas, you can see that we have a very strong result if you like or a flow through on the compressor technique business area. I would say we’ve also had quarters where it has been a pretty low flow through and this isolates a little bit between one quarter and another. It’s also true that particularly in the vacuum business we’ve had a good flow through to profit of the very strong revenue development that we have had lately.

Industrial technique is perhaps the opposite reflection, not so much profit from the MSEK140 million in extra revenue compared to last year. They are taking some investments into the organization because they have continuously been having organic growth for quite some time. I don’t read too much into that as a indication of a poor development of profit going forward but it’s just a note.

Mining and rock, not much to say, they are negative on the revenue and that helps us through to the profit. And on construction technique, they are working with adjustments as we speak on certain things consolidating certain operations to try to adjust the suite to the lower revenue volume that you have seen coming in the numbers that Ronnie already showed. So that looks like a little bit of a big flow through. So that’s on the profit side.

On the balance sheet, of course it looks like a hefty increase in nine months. We’ve gone from MSEK103 billion to MSEK116 billion. It’s roughly the cash generation is about MSEK2 billion of that explanation. Acquisitions have increased assets with about MSEK8 billion and currencies and other MSEK3.5 billion. So it’s really acquisitions and currency that take out the big part. So other things to comment I don’t think, we can see if you have any more questions later on.

Moving on to cash flow, yes, a strong one, as Ronnie said, not so much stronger than last year which was already a very good cash flow quarter. You can see that it’s the release of working capital that is extra helping this year and then there are a number of other things that go back and forth, but that is basically the big explanation why we are even higher in cash flow this quarter than last year. Year-to-date, as you can see, it’s almost exactly the same number as last year.

So with that, we have a joint point…

Ronnie Leten

Okay. So November 15, a big day so you’re all welcome, we have our capital markets day and why do I take it up here, we will be at the center of the universe of compressor technique, so we will spend time with you in visiting the labs [ph] and the plant and showing new innovation and why this business area doing so well. But second one that we also do, we will also layout the vacuum strategy, so Geert Follens with a couple of people will really try to explain you why vacuum is such a good asset to have. So if you want to hear it, okay, sign up, November 15 is the place to be, we try to be very efficient there from morning – what was it – 12 o’clock or something?

Hans Ola Meyer

Yeah, yeah.

Ronnie Leten

So you will be able to fly out back to London or back to Frankfurt or even back to Stockholm.

Hans Ola Meyer

Don’t wait too long to sign up, because we can’t house too many people.

Ronnie Leten

We should say the first 100 get the special price.

Hans Ola Meyer

Okay, okay.

Ronnie Leten

Okay, enough from that. So then before we go the questions, here the outlook. Why I stay or we stay on this level. You see we have – first this outlook is – the marginal outlook is sequential, so don’t read it wrongly, so that’s important to know. We see also that vacuum and industrial technique today is running at a very solid level and even went up where CT, where I see some possibilities, but on the other end you heard me also saying about the gas and process and the oil and gas business where on one end, I see possibilities, but also see some head wind and then of course, we have CR and MR of construction and mining and rock where one end there is certain positive expectations, but on the other hand, you also heard me saying there is also a bit of headwind then that made me concluding on this level. So most likely I will get more questions on that side. Hans Ola, so let’s go to the…?

Hans Ola Meyer

Yeah, yeah. Exactly. So I suggest – we do like this, that we start with one or two questions here and then we move over to the telephone conference after that. Yes, go ahead.

Question-and-Answer Session

Q - Guillermo Peigneux

Thank you very much, Hans Ola. Ronnie, it’s Guillermo Peigneux from UBS. I was actually going to ask you about the outlook, precisely on – maybe some granularity on the compressor technique division. Now that you are going to have a fifth leg, so when you talk about vacuum, can you provide us with what kind of growth in order intake you got in the vacuum part of the business versus the traditional compressors? And maybe a follow up later on for Hans Ola.

Ronnie Leten

Yeah, I think when it comes to the vacuum and of course we will learn together also to lead and especially now with Leybold and CSK together on that part, it becomes not so easy for you albeit and announce it, for us it’s new area. But what we can say on the vacuum, [indiscernible] high vacuum has come very well, strong, high level, we also all expect certain cyclicality on that and you know my thinking about that, we will see. I still don’t see dark clouds in that area, so we are still reasonable comp innovation. The other part of vacuum – industrial vacuum as I’m going to call it is more a look alike, if I talk about industrial compressors, small to medium size industrial, it’s more or less I see the same pattern and I’m also learning, as you are learning on this, that is what we see where I believe there is some market to take mainly also market share. That is the mission that we do. When I see on the big size, I don’t see any light coming, of course, we get orders but we don’t get happy when we are not growing. So there I expect still tough times. And then you have a bit – the whole area around oil free, the medical, which has some point, but we got some positive points and then you got a couple of negative points. So maybe slight positive if I summarize my own long explanation.

Guillermo Peigneux

But in the quarter, is it fair to assume that vacuum deliver most of the growth – all of the growth into the region and the rest was negative?

Ronnie Leten

Yeah, yeah, for sure.

Hans Ola Meyer

No, most of the growth.

Ronnie Leten

Most of the growth, yeah, yeah.

Guillermo Peigneux

The rest was negative or?

Hans Ola Meyer

No.

Ronnie Leten

No, no.

Guillermo Peigneux

Okay. Yeah, thank you. And then second question is basically of the 100 to 200 assumption on the currency, I want to just basically to maybe try to narrate down into how much of it will be actually the British pound? So what’s the – the pound impact so to say? Thank you.

Hans Ola Meyer

It’s nowhere near the dominant factor in our bridges. Even if it collapses yet another level, it will not have that big an impact that the dollar and the euro development has. Well, let’s say the dollar, Swedish krona and euro, if you get that answered then you explain always the big part of the movement. But I’m – as I said, I mean, our pound exposure relatively neutral now a days, because we had a positive exposure when we didn’t have so much of cost and…

Ronnie Leten

Edwards.

Hans Ola Meyer

Edwards, exactly, but that we have now, so it’s not – definitely not a big negative nor a big positive for us. Euro, krona and the dollar is determining the big things for us. And that’s why I say 200 million to 300 million for Q4.

Ronnie Leten

Next year you will see it a bit better when we report when we report vacuums heavily and you would see it in the bridge.

Hans Ola Meyer

Yeah, yeah, and we can comment.

Ronnie Leten

Then you see it in this flow through bridge.

Hans Ola Meyer

Yes, one other question here probably.

Unidentified Analyst

[Indiscernible] I’m coming back to your outlook again. Given the very strong order intake, that’s surprised and that’s – is that the reason why you are not more bullish on your outlook because you compare with the relatively strong order intake or how should be interpret it?

Ronnie Leten

Yeah, you read me very well, that’s for sure. And also, although you see a lot of people being optimistic about mining, but we should also look in our figures with all the respect, we do good work and I’m not going – we also should see when we make the comparison, we had a cancellation, yes sequentially, it goes a bit up, I will not talk it through down, but I’m not going to say that we certainly will get every quarter double-digit growth. I hope I’m wrong, I really – I hate to be wrong, but now I hope to be wrong, but I don’t believe it and that’s the reason why I’m a bit – and in fact it came also like I explained, it’s a high value. It’s already high. The last quarter, okay, because sometimes people wait a little bit for ordering, invoicing or something else.

Unidentified Analyst

Also in the industrial technique, you saw the general industry both coming up, not only the automotive sector, but you had other areas and --?

Ronnie Leten

You should also know that in the last three, four years, we invested – we did a couple spot on acquisitions in aerospace in this – in the semiconductor, in the phone business or the low torque also in the high torque and that is where we get some traction. We get some share in general that is what I want to get at the end in the tools business, in industrial technique business. Of course broader exposure and only what is 50% on motor vehicles, so that is the mission and yeah, it gets something.

Unidentified Analyst

And finally the big compressors versus small and medium size, it used to be the vice versa, that small and medium size starts to grow first and then the bigger items later?

Ronnie Leten

I think what we see, of course, if I split now in three instead of two, the big oil and gas, what we – the ones as big as this whole is a tough business and you see that other of our colleagues is that even going bigger. And there are not much – there is not much investment going and fewer gas boosters because sometimes we get there is not much in expanders, there is not much, so it’s a rather low. That make me also really mention that specifically. I think when you come to say the small medium size and the big ones in the middle, there I see some regional development coming in and you see them in the U.S., you see that also in Asia, even in China. When it comes to the small to medium, it’s a bit mix where you saw softer Europe where the U.S. was okay, where you saw Asia and China, India that is strong, China okay just to give you a quick and of course Brazil I don’t need to say that I think you normally see. So it’s a bit – it’s a question mark for me on Europe, how is it difficult is to into third quarter to leave the yellow canaries in Europe because with the holiday.

Hans Ola Meyer

So, should we turn to two questions from the teleconference list?

Operator

Yes, the first question comes from the line of Klas Bergelind from Citi. Please go ahead, your line is now open.

Klas Bergelind

Yes. Hi, Ronnie, I’m Klas from Citi, a couple of questions please. Firstly on North America, did I understand you correctly, the weakness in general industry in IT but better momentum in industrial compressors. So early cycle is getting worse which I expected but larger compressors also improving. So my question is where are you taking market share or is actually demand improving on the larger side in North America?

Ronnie Leten

I think if competition was not listening and they would say we take market share. I think we do well and if you read our track record in launching new versions and new models, I think it gets attraction also the whole area around energy is stronger than ever, so that is where people see and also see that energy is costing, even people say oil and gas lower but we talk about electricity here. That is for sure.

When you talk about general industry on the tool side of course there is also a transformation they can place in U.S. and that also gives the effect on that, but I would not read too much of that because that market for us is not the biggest market. So sometimes you conclude wrongly by only leading that sector because it’s also not fully geographically spread even not in U.S.

Klas Bergelind

It’s a lot of focus on North America currently and if short cycle is coming down by sort of CapEx related investment is coming back I thought that was interesting but maybe…

Hans Ola Meyer

To elaborate on that, yes, that can go a bit to go further. I think we see more talks with rented companies. We have a bit of exposure to that sector and you see certain activity talks, I’ve not seen [indiscernible] otherwise you would see them, they are talking. So also the people on the oil and gas, if you talk to Texas, if you do that you see a little bit more positive talk on that one but okay fine, we would see. On the other hand when you look to industrial technique and the automotive, it’s on a high level and we should not underestimate that and then don’t forget we are mobile driven, new mobiles. Then I think we also we get more activity.

Klas Bergelind

Okay. My second question is on the margin in vacuum technique to 200 basis points increase seems to be largely driven by volumes or are there any other effects driving the margin here, increased share of services etc. And then on Leybold and CSK has not yet looked on the margins on 7% in the quarter, how much is PPA and where can the margins go to and by when? Are we still talking 15% margin in two to three years?

Ronnie Leten

Yes, PPA you take, I will take the other part. Yes, the vacuum margin, if you do this type of volume in the semicon and in the high vacuum where we go and then couple even on the service which is also then growing, you have a very good flow through, that’s for sure. So the look is volume driven, I can say that. When it comes to Leybold and CSK, and of course you would see also next year little bit more on that as we get separately board things. The Leybold’s margin is mid-single digit and that will take a bit of time. I don’t see it much moving, hope I’m wrong next year and why not because we have to do a couple of synergy projects so that would take a bit of time to do that. And as we knew, when we boarded we knew perfectly what we need to do but it would take some time. So that is an area what we need to do and may be you can…

Hans Ola Meyer

And on the ambition you mentioned it yourself that obviously we have that ambition still there about mid double digit margins is definitely what we are hanging for but after integration and whatever you have to do to get that. And on the dilution of course it’s on the specific acquisition which you have to remember is a small still a relatively very small part in the third quarter of vacuum business. But if you look at it roughly on 3 to 4 percentage points is what we would classify as being the PPA dilution if you like.

Klas Bergelind

Okay, perfect.

Ronnie Leten

But not on the full vacuum business and then I’m talking on the acquisition.

Klas Bergelind

No, no, no, absolutely.

Ronnie Leten

If you come to the capital markets day, you get a full layer.

Klas Bergelind

I would be there.

Hans Ola Meyer

Not on the resale though.

Ronnie Leten

But one thing is I think what we do and that is also if you go back, when we announced a whole vacuum journey which we go through, our aim is to be the market leader and to make it a strong profitable business which we believe we can do when we develop further. We are investing heavily, heavily and not from the balance sheet, but – they are over the P&L in the industrial scenery in the vacuum. So on R&D in feet and the street, in integration, this will take us sometime. I would like to do it in two months but it will take us maybe two, three years. That we will elaborate a bit more also in the capital markets day.

Klas Bergelind

Good. My final question is on the growth on orders and compressors, it seems like its flat x vacuum but if you also try and back out gas and process which was weak in the quarter, what was the growth then for CT given that industrial compressors are now showing an improvement?

Ronnie Leten

Now I have to overarching…

Hans Ola Meyer

As we said to the previous question here, I mean it’s not vacuum, it’s not representing all the growth in compressor technique. So they are even including gas and process like growth.

Klas Bergelind

Okay.

Ronnie Leten

It’s not double-digit.

Hans Ola Meyer

Yes, yes. Thank you.

Ronnie Leten

The other question from the telephone conference. Yes.

Operator

The next question comes from the line of Peder Frolen from Handelsbanken. Please go ahead, your line is now open.

Peder Frolen

Thank you. Good afternoon, Ronnie and Hans Ola. My first question is on the cash flow and maybe the inventory side, you released net working capital at the same time we saw reflective sales quarter-on-quarter while you normally see a decline, maybe you could share some light here and perhaps even more importantly in combination with the outlook. You’ve not reduced inventory as much as you usually do in the quarter. You do have a very strong order situation in vacuum and a flat outlook. Maybe you could shed some light on how that equation actually looks like?

My second question was on the compressor side, if we look at your numbers you can see that safety in orders while vacuum is plus almost 40% and in the safety flat order situation, you’re right, the service is doing all right, industrial compressor is doing all right and then basically it’s mostly gas and process left. So my question is really how we discuss and process, and if you compare that to a historic level what are we running at now that, I was expecting that couldn’t go much further down. So those are two questions, thank you.

Hans Ola Meyer

On the cash flow, I’m not sure I fully agree with you about a poor inventory reduction in Q3. Of course, it has a little bit of a challenge because you have the acquisitions coming in and you also have a little bit of quarter to quarter currency moves, which tends to drive up the reported numbers. In fact, we think that the cash flow part of the working part – the working capital part of the cash flow is a good indicator because a lot of that comes from inventory reduction actually. So I don’t see that you would expect that it’s something that is really an indicator for Q4 or something like that. I can’t read that…

Peder Frolen

Okay. So maybe the volume component of inventories is actually down quarter on quarter. Oaky, that’s great, thanks, Hans Ola.

Hans Ola Meyer

Yes, absolutely down. Absolutely down. It’s basically – CT does a lot to that and also MR and the other two are more…

Ronnie Leten

Less, so yeah.

Hans Ola Meyer

It’s less money, yeah.

Peder Frolen

Perfect, thanks.

Ronnie Leten

On that Peter, I think, we are really getting traction down in the organization that was a bit frustration in all of us, but it’s moving in the right direction. When you come to your question around compressors and – yes, gas and process is very low. And that’s also reason why I’m really talking about that and you would see – we need to do some more on adapting the suite on that. It’s low and it drags down the full CT part of that. I think the other – if you take away that part, you – and you know we – the service, we don’t grow double-digit, that you also know, so it has some growth and you can see more or less the equipment in the same context or in the same level out of that.

Peder Frolen

That’s my point. Gas and process needs to be down 20-plus-percent because it’s like 50% of compressor, so am I wrong here?

Ronnie Leten

No, you are very close. It’s a tough…

Hans Ola Meyer

And perhaps one extra comment on that, you know, we have said it many times, gas and process is not the biggest part of CT by a long shot.

Ronnie Leten

No.

Hans Ola Meyer

But it’s very lumpy. So sometimes you actually have a good quarter even in a bad trend and I think that is a little bit of the explanation also why it looked so negative in this year-on-year comparison.

Peder Frolen

Thanks a lot. I will get back in line.

Hans Ola Meyer

Thanks. Do we have any more follow-up? Yes, a question or a repeat, I think, here in Stockholm. So we give it to a new question instead.

Unidentified Analyst

Thank you. [Indiscernible]. A question on pricing, pricing is zero I think in all the division for this quarter, where do you think we will start to – when and where will we start being seeing positive pricing?

Ronnie Leten

You see pricing there – there are two drivers in the whole pricing in – or now you can say three because you can say one with a very negative one is competition, which is the negative. The other one, the two positives is innovation coming up with new products and all that. And the third one is inflation, it’s the inflation that helps. You should also know the way we report. You have a big part is service and that I think you can say, yeah, you need to do innovation and surveys and all, but that is not so easy to get done and then really – make it in the category pricing to really get – if you don’t have a strong inflation, we get some, but it’s very low. So that is what you should read out of what we are – our figures there. It’s – of course there is price pressure in different areas, but of course we also get – we got positive flow through, otherwise you don’t make this profitability, you don’t make. But today if you see industrial prices because I see it on one end to sell to you, but also I buy from him, it’s both and that’s is where we need to see efficiency, innovation, to keep the margin on the right level. When would you see some – I think you will see next year some coming.

Unidentified Analyst

Yeah, thank you so much.

Hans Ola Meyer

And the central bankers succeed.

Ronnie Leten

Yeah, that would definitely help, but even also from a couple of innovation areas, I see some markets which are – where it’s turning.

Hans Ola Meyer

Eventually, they would succeed one way or the other.

Ronnie Leten

Yeah, yeah, let’s hope.

Unidentified Analyst

Thank you so much.

Hans Ola Meyer

Okay. So that was it. Good. So I think actually we have a number of questions on the telephone conference, so we go back to that.

Operator

Yeah. Your next question comes from the line of Markus Almerud from Kepler Cheuvreux. Please go ahead. Your line is now open.

Markus Almerud

Hi, hi, Markus Almerud here. I would like to start with U.S. where you’ve mentioned here that the [indiscernible] bit positive in the U.S. I know it’s a difficult quarter to say anything about, but can you maybe say something about progression throughout the quarter and how was September in particular regarding the industrial landscape in the U.S.? And then on the MR orders, you had equipment orders being up sequentially, can you talk a little bit about if there was any particular large orders which are positive or if there is just a positive sense in general that the base orders are basically progressing positively, and if you are in a positive trend there? Thank you.

Ronnie Leten

On that, Mar, of course, when you are living in the mining, you are born as an optimist; otherwise you don’t survive in that area. I’m not in the camp of seeing, okay, overall, a positive area on the mining. Of course if you are in copper, if you are in zinc or even in nickel, you will get traction. There is good prices, there is demand, you need most likely to do replacement and that’s also what we see. So the orders what we get, some are little bit bigger than others, you get that and that you see if you look geographically where is the copper and the nickel coming from and the zinc, you see South America, Chile, Peru, you see Russia, you see copper countries in Africa, that you see. But when you are in, again, for iron ore, then I think you will maybe get some orders, but that will be more automation or this will midlife upgrades that part and that we see, you have seen the announcement we’ve made from the BHP order, that was this type of upgrade automation because that has to go with efficiency because you know what the pricing is doing. For us, I think it’s the majority are replacement orders on the equipment, but I call it – sorry that I’m on the other side sporadic demand, if I can use a statistical term, but not – I would say not really tailwind that we don’t have.

Hans Ola Meyer

It’s also to – perhaps just to clarify that, there was no huge order that made it in Q3, there was a couple of good orders, but otherwise we don’t sell if don’t have any good orders. So that’s at least not the reason.

Ronnie Leten

Yeah, I think when it comes to U.S. and – was it later part of the quarter ore demand, I think they didn’t see much difference, of course, we – of course you always have to clean it from certain events we do ourselves because we had best launch of new products for the Quincy brand, which was a great success, of course, that always pulls a little bit and that happened in August, it comes into September, but when you really look the underlying market development, I cannot see a big difference. There is for me – and that I mentioned already in the explanation, when you talk to the people in Texas, they are a little bit more positive, we see also the oil price, you see some rigs coming up and that has a bit of an effect, it’s like the mine expo has a positive effect mining and rock excavation guys with the same look and feel.

Markus Almerud

Okay. And can I – just as a follow up on that, you mentioned the base metals and then iron ore, what about gold? What are you seeing there?

Ronnie Leten

Yeah, I see also there some replacement, but on the lower level, I think. You see some activity, there is some work [ph], but not that I will mention it as one of the key indicators.

Markus Almerud

Okay, thank you very much.

Hans Ola Meyer

Thank you. I look around and I think we continue on the telephone conference.

Operator

The next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.

Graham Phillips

Yes, good afternoon. Graham Phillips from Jefferies. My questions are going to be around compressor technique and also industrial technique. First of all on the compressor technique, Ronnie you referred a couple of times to gas and processing need to do some work there. Can you give us an indication perhaps how many people employed in that particular subgroup of the roughly where it is 19,000 in the division.

And also related to the acquisitions, Hans, you talk about the PPA amortization having an effect obviously starting to have effect in the quarter. But I was just trying to work out how much of the group level PPA is and I think from the annual report last year, I get a number of around MSEK920 million, I’m not sure if that’s right but potentially that could almost double I guess if you take into account the acquisitions that you’ve made this year. Could you perhaps give us a bit of a steer on that? Thank you.

Ronnie Leten

[indiscernible] to get there. I’m not sure, I don’t have the numbers Graham on what you referred to the annual report in my head. But if you refer to that, that was the depreciation and that the effect of this would be that it doubles I doubt it very much. But was that correctly understood?

Graham Phillips

Well it’s just – there would have already been some PPA because of Edwards. Now we are going to have more PPA from the couple of acquisitions. Of course I’m trying to have any none?

Hans Ola Meyer

Significantly smaller on the other hand on Edwards acquisition, so that’s what – we can come back and see if we can look at what is written in the annual report and make further comments after that perhaps.

Graham Phillips

Okay, right because I mean I guess there will be need to perhaps particularly when you’re owning on compressor technique and vacuum technique separated. I’m sort of understanding between what EBIT is and then perhaps what the EBITDA level is?

Ronnie Leten

That’s why we urge you to come to Antwerp in November.

Graham Phillips

Great.

Ronnie Leten

But you spotted good I think. It was a new acquisition and you want to know.

Hans Ola Meyer

The quarter is not fully reflecting.

Graham Phillips

Not yet, yes.

Ronnie Leten

On the gas and process, I will not elaborate too much in detail on that one because I would have to respect certain areas here but I think it’s an area everywhere in the world it’s areas where say okay, there is for the next coming years, there is no projects. We have to do what different so we have then to move - the move activities and operations and there we need to do, and that is what is what we do. But I promise you when a significant will affect your expectation or whatever we will let you know. But you know how Atlas Copco works when it comes to certain add a patient to the new suite if I can call that way, not to use the restructuring. Of course on the micro it is tied as a patient but it’s not so significant but it’s significant when you want to understand the result of CT.

Graham Phillips

And then just finally in our industrial technique and the low incremental margin there 4%, if we look at I think the business is still dominated by automotive or other OEMs or sub suppliers, is there a mix issue because you talked about the growth in general industry. When we think about the mix in the business maybe moving more primitive to more general industry aerospace and defense, the incremental margin on that sort of work is lower or is it not perhaps that much detail you can go into on that.

Ronnie Leten

I think of course it is always so I’m not going to say that everything is carrying the same margin, so that is always a mix. But when you look to that the majority is that we are heavily investing, that is what we do because but I – and we agree with the whole business area. But we want to do is really investing and getting organic growth and be strong in this joining technology and this new areas. So we put a lot of feet in the street, we’re building new operations, we have new innovation centers, we are investing that and cost a bit of money so we do that.

Hans Ola Meyer

This is not the main explanation but every time you are at record levels of revenue, it means that there has been some good project invoicing as well – I mean bigger orders and those have not been higher. So there are a couple of these explanations but then again we don’t want to make a big story out of that specific quarter flow through.

Ronnie Leten

I don’t think that’s the reason I am answering also like that because we look to oversell on this. I think it’s not a real strategic move or something which you would see within one or two years, the margin dropping significantly, that I cannot say on the contract.

Graham Phillips

You talked about good service increase and I remember when you given the service proportion in the past, this was one of the lowest contributions to service but you were aiming to grow it and again you would imagine that service is a higher margin business.

Ronnie Leten

Yes and service is growing in industrial technique but the other business in those I think is also growing.

Hans Ola Meyer

Yes and there its – to your point it’s also significantly smaller portion on service growth is impact and how that is impacting.

Graham Phillips

Okay, thank you.

Hans Ola Meyer

Thanks. Yes, another question please from the conference.

Operator

The next question is coming from the line of Ben Maslen from Morgan Stanley. Please go ahead, your line is now open.

Ben Maslen

Yes, thank you. Afternoon, Ronnie. Hi, Hans Ola. Two please to me, first just on M&A, you are adding 3% to 4% to the top line from acquisitions. Can you keep that pace how does the M&A prospect pipeline look? And then Ronnie just more broadly on China, we can see lead indicators picking up, how did China perform within Asia and within your businesses what’s growing, what is still under pressure, more color around that would be helpful? Thank you.

Ronnie Leten

Yes, the M&A, you know Ben how we work and there is small acquisitions, they come almost every month. You’ve seen with our track record was already this year and there is definitely more appetite. And you know it will not be different from the past, so it’s in that area where the same region geographically maybe the same but also the different sectors which we have done will be more or less the same. If you come up, if you would say, Ronnie doesn’t mean, you will buy another big vacuum company maybe not the first absorb that part and that’s the first to create a good strong integrated stable business but the orders are industrial technique when it comes to compressor that is the main one of course when we find the right assets in the mining side. And you know a couple of areas which we have been talking before, so they are still on the agenda and one day – like on the vacuum, one day they fall and then we go on that.

When it comes to China, I make it myself a bit easy. We can say but taken from our business areas are industrial part is doing better than our conception mining parts. So industrial technique, vacuum, compressors have a positive development where we see construction mining having a tougher development, tougher right. So that is happening but businesses are doing well motor vehicle because that industrial technique, flat screens, food and beverage, medical these are businesses which are doing great which is getting tough and still tough. You know this way of production given the more difficult [indiscernible] I must say when you are involved in very special seal you see some investments. And also but we see lately is that more and more events is gaining on the energy. I mentioned already in my start line I was talking we see more and more advantage especially if we take the area, big area around Shanghai it is the talks when you go out qualified on energy as you’re having Europe or you have in the States. But there are spots in China where it’s not yet there, so that is a good news for us because they see what it means to carbon dioxide, what it means to cost of energy so that is a good part to hear and when someone was asking me about market share that I had in mind when I was answering that question.

Ben Maslen

Got it. Thanks, Ronnie.

Ronnie Leten

Thank you.

Hans Ola Meyer

We continue. And we make a break on the teleconference. We take a question in Stockholm here.

Unidentified Analyst

Thank you. Looking at mining and rock excavation, I was wondering, I mean, in the past, in the way of invest a little bit in R&D and then you scale back and now you are capturing growth ought to some extent and I’m wondering about whether you are gaining, to certain degree, you are gaining market share in the mining equipment area or consumables, you’re going to bypass the investments, you saw delayed effect on that?

Ronnie Leten

I think when it comes to the mining and rock excavation and the R&D, what we have been temping more is R&D automation. We had a journey that we take four, five years ago, we acquired copper companies, which we integrated, which also boost a bit R&D investment that we had slowed down a bit in these areas. But on the other end, we have more investment in automation, yes, when you have been in mine expo, you see a couple of new products, you don’t make them in a month, so that R&D we have been doing over time. So that is what has happened. And if you take the big Pit Vipers, yeah, there is not many orders, and I think it’s not a surprise, I think it’s the basis today, but the site of that a little bit different, now we are really down, but we have kept very strong core and kept R&D, but the factory is not full, but that is to have eyes on the tarmac [ph].

Unidentified Analyst

What you saw is brought for everyone or actually you see that yourself you are growing more as an organization with in mining equipment and other…?

Ronnie Leten

If I look back six, seven years and look now, I think we are – it was a nice work, more sustainable in our offer. I think so. So I think that R&D effort has yield some strength, but you know market share, especially if you take an underground, because – then with another Swedish company, I think it doesn’t move so quickly and mine is not changing from one day to another. I think what is important that I think the players in that business that they really come up with new – so now the theme is automation, how to integrate that, how to make less people in the mine and getting more ore out, that is the theme what we go and then to use that also in the OpEx to get lower OpEx because the mine start to look to OpEx, which is again a good thing.

Hans Ola Meyer

Yes, we have another question here in Stockholm.

Unidentified Analyst

Yes, regarding the mining – and it’s [indiscernible] again. The improvement in the sequential mining development has been rather good, is it the first step of recovering to about 20% or what’s your next – it’s a new normal where you are now?

Ronnie Leten

I try to explain it already before, you know, I’m in the gamble like I said, careful – wait – not wait, but see and then say, yes, so on that one, I would like to be, say, put myself to under promise and over deliver. I hope I’m wrong on that. I really hope. Of course if I take the facts, yes, we are most exposed to underground. It is since 2012, we see constantly a drop, machines cannot go on forever, needs some – either midlife upgrade or a replacement. We are also coming up with new automation features, which gives possibilities. Yes, so I think there is definitely qualified discussions going on speaking more than maybe before. There was always talks going on but in order to what the market is. That I see. I see consumables up as a sign. You also see the prices have stabilized. The price of copper is not bad. Of course, historically, much higher, but it’s not bad. Price of zinc, nickel, it’s not – end of the month it’s good, so people will do. When you talk the same – and which is also big exposure for us, if you talk about gold ore, and it’s not so big exposure, but we have some talk. Iron ore, we talk in other part. So we have some area where we see some traction and that’s also where we get – all ore is, the copper, zinc and other, the other part. So I’m a bit, say, yes, I’m very happy for whole organization for myself, I see that, but I’m not going to say, oh, no, we got strong double-digit and we are really done here. And that’s again when you look to our outlook, that’s again – it’s also built in that model.

Hans Ola Meyer

We are running slightly out of time, but we have one final question from the telephone conference please.

Operator

Yeah, the next question is from James Moore from Redburn. Please go ahead, you line is now open.

Hans Ola Meyer

Is he on the line?

Operator

I believe, yes, it appears he is in the queue. The next question is from Max Yates from Credit Suisse. Your line is now open.

Max Yates

Hi, thank you. Just two questions I have. Firstly, just oversea, you are benefiting currency and we are should see that come through on the margin next year, how do you think about that? Do you think of retaining all of that at profit level or will you use that occasionally where you can’t – to gain a competitive advantage versus your peers and try and stimulate growth?

Ronnie Leten

I would say I would never do that because I in order to believe in that, that price is that you use that to get the market share in our business. You get innovation, productivity, the driver for the market share, which then comes to a normal margin to really play with the price all the time and, say, coming out as a CEO, let’s be aggressive, do that, that will not work. That will lead to a disaster because the salesmen, he loves to sell, he will definitely use all the margin I’ve given him to do. He will lose it full. That’s is not the way you steer a sales organization, that will never work. Never, never.

Max Yates

Okay. And just a follow-up on industrial technique. You talked about automotive being at quite a high level. When you look at the model schedules of your customers as we go into next year, how do you think about the growth of the automotive part of industrial technique?

Ronnie Leten

There is still some good, say, input on that side. And if you take on China, where maybe 10 years ago we would not say that, now there are many new models where we also have [indiscernible] even our – part of the cycle, so that is where we definitely see good development. That’s also the reason why we have in Asia, mainly China, because – but there is also bit of India, the reason why we have good success and also in Japan and in Korea because we should not forget these players. That is a very, very strong health in our growth. It’s a little bit less in Europe there we see, but there is still some activity and you can say it’s – in the U.S. between Europe and China when it comes to the level, but also there, there are still some good quotation, good projects going on, and not only for our tools business, but also for our riveting business and also for our adhesive business. So I still see some potential – growth potential in automotive vehicle business in next year.

Max Yates

Great. Thank you.

Ronnie Leten

I’m not talking it down as this was the conclusion.

Hans Ola Meyer

Thank you very much all of you on the telephone line and here in Nacka, Stockholm. We repeat again, we hope to see many of you in Antwerp on November 15. So with that, thank for today. Good bye.

Operator

This now concludes our conference. Thank you for attending. You may now disconnect your lines.

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