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Edited Transcript of ATCO A.ST earnings conference call or presentation 26-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Atlas Copco AB Earnings Call

Stockholm Apr 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Atlas Copco AB earnings conference call or presentation Wednesday, April 26, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Hans Ola Meyer

Atlas Copco AB - CFO and SVP of Controlling & Finance

* Ronnie Leten

Atlas Copco AB - CEO, President and Director

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Conference Call Participants

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* Alexander Stuart Virgo

BofA Merrill Lynch, Research Division - Director

* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* Benjamin Gulliver Maslen

Morgan Stanley, Research Division - Executive Director and Co-Head of European Capital Goods Equity Research

* Graham Phillips

Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research

* Guillermo Peigneux-Lojo

UBS Investment Bank, Research Division - Executive Director and Industrials Analyst

* Klas Henrik Bergelind

Citigroup Inc, Research Division - Director

* Lars Brorson

Barclays PLC, Research Division - Director

* Markus A. Almerud

Kepler Cheuvreux, Research Division - Senior Research Analyst

* Peder Frölén

Handelsbanken Capital Markets AB, Research Division - Head of Equity and Credit Research

* Rizk Maidi

Berenberg, Research Division - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Atlas Copco Q1 Report 2017. Today I'm pleased to present the Chief Financial Officer, Hans Ola Meyer. (Operator Instructions) Speakers, please begin.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [2]

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Thank you very much. Actually, where we are sitting today, we hear you a little bit badly, Operator. I hope the rest of the participants have a clearer line. But I just wanted to say that if anyone else is having the same problem. We'll try to see if we can fix it.

But anyway, before that, welcome, also from my side, Hans Ola Meyer, the Chief Financial Officer of the group. I have with me, as usual, well, until today, at least, as usual, Ronnie Leten, our Chief Executive Officer, who will take over in a few seconds.

Today, we also have our Annual General Meeting and it starts in very short time. So this call we will have to restrict to one hour exactly. So we will try to be a little bit short, but also for the Q&A session, I suggest that all of you lined up ask one question, and then we'll see how we can continue on to give some chance to more people than a few to pose their specific questions.

So with that, I hand over to Ronnie, take us through the first couple of slides.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [3]

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Yes. So thank you, Hans Ola, and good afternoon to all of you. Maybe I can start to summarize the quarter. I believe it was this time a very solid quarter. And to stay a bit in tradition, I am very happy, but, as you all know, not satisfied yet, as I know there is always a better way. So we believe we can always do a bit better on that side.

But anyhow, it was a very strong growth in all business areas, record orders in equipment, as well as in service; otherwise, you will not make SEK 30 [ billion ], SEK 31 billion. It was double-digit growth in all regions, and that was since long that we have seen that. And it was particularly strong order growth in vacuum as well as in mining.

Solid order operating profit, 37% up. Of course, we are held by currency. We should not deny that. And you will see that later on in the flow-through bridges. And of course we are also positively affected by the volume. So I'm very, very happy to see this development.

If I go then to slide with the figures, where you can see the orders received, organic growth 18%. It was a long time ago that we got that, making it almost SEK 32 billion in the quarter. Was great to see that operating profit, which was if we take it adjusted for items affecting compatibility and you know this is the long [ FDI ] programs that we have for the options, it was almost SEK 5.9 billion and 21%, which was a very, very solid operating profit.

Later on, Hans Ola will elaborate a bit on the cash flow on the quarter. So I will not elaborate more on the figures.

If you look on the geographical spread, next slide, I think the big takeaway is that we see that every continent has a double-digit development, and that is great. Even South America, where we know that Brazil is still not growing as all of us would have liked, hoped. But the rest is really doing extremely well.

If we take the organic order growth per quarter, you see that the last three quarters we see a continuous recovery and that continues, so that is good to see. And if you really go back, you see that mid-2012, actually, that was the time it really flipped over, of course to the wrong direction. But now we see definitely continuation of the recovery. So we're really good CapEx, [ posted ] CapEx side.

Sales bridge, structural changes is mainly Leybold and CSK where we have good development in these 2 acquisitions and we have a couple smaller ones; that is good.

Currency is big, mainly also coming from the Swedish krona and still a good solid dollar.

Price is slightly positive, but I believe that is something what we will see in the quarters to come.

And then volume, already elaborated that. But very, very strong orders received. And also when you look to the revenue, SEK 28 billion long time, we got that on.

We'll go immediately then to Compressor Technique; very robust, organic growth, almost double-digit, just below that. That is very solid, steady growth for service, and you know that is really what we will like to see.

And then the yellow canaries, the small- to medium-size compressors, had a double-digit growth. And I think that is a very good sign. We like to see that part. And also an increase in all regions as you see on the slide.

Operating profit, 22.5%, very solid and very pleased to see that type of development. Especially you take into account that we have a bit of negative effect from some of the acquisitions we have done lately, so will drag the profitability a little bit down. But it is definitely closing to our magic 23%.

Then vacuum, what can I say on that? I'm very pleased with the development. If you see on the graph, we have over the last 2, 3 years almost doubled that business, of course, by acquisition, but also by organic growth. So strong, strong growth for the semiconductors in the logic as well as in the memory. And we also see a good development in the industrial vacuum, as well as in the high vacuum.

Leybold, our latest bigger acquisition, if I can say that way, is on track, as well as CSK in Korea is in fact. So the integration work and the plans, what we had before the acquisitions are on track.

And the operating margin, we had a very good flow-through, which also Hans Ola elaborate a bit on that later, but made almost 25% on operating margin, even taking into account the acquisition of Leybold and CSK, which drag it down.

Industrial Technique continues to develop. Good double-digit growth, 16%, which is very good, good to see in all the different areas. But of course strong still in automotive. But we see a bit of same sign as we see on the small- to medium-size compressors. [ Also ] general industry doing well, and service continues. And the operating margin is solid, rock solid, 23-plus EBIT margin.

Mining and Rock Excavation 28% organic growth, which is great. As you know, we have significant business in service and consumables, and these businesses are not growing 30%, 40%, 50%. But this time we had a double-digit growth in the service and consumables which is very good. That's an understatement, I will say. But I'm very pleased to see that.

But equipment orders almost doubled. So we missed -- we have a couple percent as the doubling compared to quarter 1 2016, so which is a very strong order income for equipment.

And the profitability, a very good improvement coming from 15% to 20%, which see that we definitely can have a good development in Mining and Rock Excavation. So I'm very pleased to see this development going through, and we're looking forward to next good quarters in that area.

Construction Technique and this is operating without the Dynapac divestment, so it's hopefully for everybody clear. But also here we see the good order, up double digit, 10% as it says; strong equipment demand.

But also what is good to see that specialty rental is coming back with good growth. As you know, that was bit affected by the oil and gases in Houston and the Middle East, but that has more or less recovered and a good development on service. Operating profit a very solid 16.4%.

And by this, I would hand over to Hans Ola, elaborate a bit on the P&L.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [4]

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I'll take a few slides from there and then come back to Ronnie.

On the Slide #13, you'll see the numbers that you've already seen. The strong improvement on the operating profit margin; we'll come back to that in a second.

On the financial items, which then is between the operating profit and profit before tax, we have a slight increase compared to a year ago. And it basically comes down to that we have actually a little bit more gross debt. We borrowed very handsomely long tenure money last year, which we are not at all displeased with at this moment. But it means that since extra cash that we also have in the balance sheet doesn't pay very much right now. We have a little bit higher interest net than last year.

Going forward, I think we've taken into dividends and whatnot that comes out, it will not have any big impact because we're taking it primarily from cash. But somewhere in the same region is that we are talking right now I would guess is a good estimate.

Then if we turn to the tax items, of course in absolute the tax goes up quite heavily, but in line with the profit improvement. So the effective tax rate stays exactly the same at 27.2%.

As long as the situation continues as we know it right now, i.e., for the next couple of quarters, you should expect something similar for the near term going forward on the tax side as well.

We move then to the next slide, #14, what Ronnie touched upon. You can say this way of separating currency and one-time items and acquisitions and LTI program effect gives us, so to speak, the organic improvement. And that is a very strong, almost 40% flow-through, which I think is indicating that we have seen some very recent strong increases when it comes to revenues and the activity in the company.

And then, of course, the flow-through of profit is specifically strong in that face of the upturn.

And particularly on the next slide you can see that on two business areas more than the others, even though all of them are having a nice flow-through or profit. And it's Vacuum Technique and our Mining and Rock Excavation that I'm talking about. And here, of course, the revenue levels have quickly come up very strong, even more than in the other business areas, suddenly. And then the flow-through is very strong, I would say.

When we go to the next slide, the balance sheet, we come to the cash flow also, but really you can see on the balance sheet that the cash generation is there. And, of course, before we give back some dividend, it has increased the balance sheet quite a lot only from that.

The other thing to note from last year is of course acquisitions gave more fixed assets and that you can clearly see compared to last year. And on the passive side, it's not much drama, to be honest. You can see that there's certain impact of a weaker Swedish krona on all lines, but also this increase of gross debt that I talked about before.

All that profit and balance sheet items turn into cash flow, or should at least. And I think we're happy to see that it does.

Of course, SEK 3.5 billion in operating cash flow is very nice, even though it doesn't compare so strong towards Q4 where we had a record, record generation of cash.

There are two items basically. The profit is fine. That indicates a stronger cash generation. But then we have net financial items which only partly is seen in the profit and loss statement. But from a cash point of view, we have a number of internal currency exposures that we hedge with internal loans, et cetera. And when you roll these over from time to time, it creates also movement on cash that over time will be compensated. But you can see that it swings quite heavily from one quarter one year to the same quarter next year.

And the other point is the working capital. It's not surprising, of course, that we consume more working capital when the business is growing like it is right now. But I should also point out that it is not the strongest quarter for cash generation from working capital in Q1. We always have a little bit of negative. Why didn't we see that last year Q1? Well, at that time, the underlying business was actually shrinking, and now it's growing.

So for us this is a solid, to use a good word from Ronnie, solid performance in our mind.

So with that, keep it short, and I leave it over to you again, Ronnie.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [5]

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Okay, Hans Ola. And then we come to the near-term outlook slide with the famous one sentence where we said that we believe that the demand [ got ] to improve somewhat.

Now just to elaborate a bit on that and also to make everybody clear how to read that. First, I think when we talk about demand, so the environment of the business where we are living in, and this is also sequential development. So that is, I think, is important to understand that.

But to elaborate a bit more on that, we have seen in and during Q1, and we saw that already in Q4, actually, that we saw solid improvement and we saw also that improvement confirmed.

Now for Q2, we expect this improvement to continue. So for the climate overall in the business, we see that.

However, and one should not forget that some of the customer segments are already on the very high level. So that, I think you should bear in mind when you integrate this very, we should say [ critical ] sentence but I think --

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [6]

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Short.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [7]

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-- short sentence may be a better one, to help to read that. And I'm sure during the call you will get a couple questions around this.

So that is what I'd like to say about this, Hans Ola.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [8]

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Excellent. Thanks, Ronnie. And before we turn it to Q&A, just one quick one, and that will spare us a few questions on it, so I'll take it right away.

I forgot to say that the impact of currency, which we saw in the first quarter to be about MSEK 570 on the operating profit level, the best estimate we have today is that it will stay roughly on that level comparing Q2 last year to Q2 in 2017, this year. So roughly about the same, that's what we expect.

Thanks a lot. With that, Operator, can I ask you to repeat the procedures for the questions, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Klas Bergelind from Citigroup, Inc.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [2]

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My first question is on pricing there in mining and rock. Very strong demand, and this has been ongoing since the third quarter of last year. And we're hearing a little bit about lead times getting a bit extended, not across the whole mining space but where you are operating in underground hard rock where demand is very strong. Despite this we're looking at pricing being flat for you in the quarter, which is a little bit surprising to me. Could you talk more about what you see in terms of price negotiations in mining and rock and whether we should see pricing improve here next couple of quarters?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [3]

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It's a good question, Klas. Of course, that on pricing, and pricing has to do with two things. I think pricing has to do when you create more value for the customer coming from innovation. And I think you have heard me saying this already many times. So that is part where we see that we get compensating for the value we create for the customer. And second is a bit the competitive landscape where we in. I believe when the business get a little bit better that all the players in the market get a little bit more disciplined and that will lead to some price inflation for us. That is what I see coming. Of course, but what I would like to see, and that is also how you should read our price index here is in the service part and in the consumable parts, we need a bit of inflation [ about that ] to get that. I think on the equipment, competition is still there. But I'm going to say, I don't hear our guys to be too negative on the price. So I expect some positive outcome in the quarters to come, like I already mentioned when I did the call part. But we still living in a competitive world, so don't underestimate. And the volumes are not there where they used to be.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [4]

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Thank you, Klas. I hate to interrupt. I hear almost, without you saying it, that you have more questions. But can we turn to the next question, please, and then we'll circle back if we have time, Klas.

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Operator [5]

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

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [6]

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And I wish you the best of luck, Ronnie, and to Mats. (inaudible) going forward as I see them. So I wanted to ask a couple of questions actually, or one regarding the Vacuum Technique backlog. Can you quantify the backlog as it stands now in terms of maybe size relative to sales, and also pipeline of projects going forward?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [7]

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Yes. First when it comes to luck, Guil, I think the more I train, the more luck I have. So luck is not in our business; it's hard work. And I'm sure also Mats thinks the same on that one. When it comes to -- I had to say this, Guil; this was an opening.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [8]

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No, that's fine. That's fine.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [9]

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Yes. On the vacuum, of course, there is still a good pipeline. And I know it's not always easy to read for all of us what's going on here. But when you come to the vacuum, when it comes to the logic and the memory, we still see a good pipeline in the market. So our visibility is not, say 12 months, but our visibility is a couple months and we still see a continuous good development in that market. I think on the industrial vacuum, there I think it's more or less the same behavior that we have seen on the small- to medium-size compressor. So we see a positive trend there, and that we also believe to continue. That goes together with the CapEx cycle that we see happening, seems to be in the [ world ]. Of course we have a couple of businesses which have sporadic demands that you can be on solar or it can be on flat screen. And that visibility, with all due respect for everybody, is very difficult. This time, we had some good orders for flat screens so that made it a very solid, even better quarter than I had expected. But on the other hand, the base business, industrial vacuum as well as logic and memory is doing well.

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Operator [10]

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Our next question comes from line of Peder Frolen from Handelsbank Capital Markets AB.

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Peder Frölén, Handelsbanken Capital Markets AB, Research Division - Head of Equity and Credit Research [11]

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So my question will also circle around the vacuum business and the impressive profitability. Now, as you mentioned, still dilution obviously from Leybold. Maybe you can help out here to understand the large margin improvement. Is Leybold also doing much better? How much is actually mix here helping? And how much is then the high drop-through as revenues come in before you add fixed cost? Please could you help us to understand the sustainability in the high margin here?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [12]

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Peter, yes, I think a question which we had all expected, of course, when we saw that. But one thing is, and we go back to our capital markets, what was it, in November in Antwerp, where we were guiding a bit and where we also where we just got Leybold and CSK under the belt. So we were still working on that. One thing we can say, that the acquisitions, these two acquisitions, do much better than I had expected. They do better in two ways. They do better on top line development. So that means also there is some positive flow through and utilization. And second, also the integration goes smoother than we had expected. So we were able already to do a couple of changes, which helped to improve the bottom line. So the leakage is still there, but it is less. So that's one. Then second, the margin, we see a very solid high development of sales in the logic and in the memory that leads that our factories are well utilized, so can say 24/7. You remember my statement last quarter, Friday, Friday, Friday; that's still happening. So we get an extremely high flow through. And you can, also, when you look back to the flow-through bridge that Hans Ola presented, you see that. And of course that comes through the bottom line. So we have less leakages from acquisition, high flow through due to high utilization, and then also in the right mix, meaning in the (inaudible), which is where we have, yes, today the high margin, leading to this type of profitability. But coming back to the other question from Guillermo that I think we see for the next coming quarter still a good utilization of our factories and so the output will still be at a good level. Or something must happen, whatever. You never know on the geopolitical thing, but let's take that away. So let's talk about the controllables and not about the non-controllable.

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Peder Frölén, Handelsbanken Capital Markets AB, Research Division - Head of Equity and Credit Research [13]

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Good luck also from me.

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Operator [14]

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Lars Brorson from Barclays PLC.

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Lars Brorson, Barclays PLC, Research Division - Director [15]

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Last day today, Ronnie. Good luck. It's been a job well done. I did want to just follow up quickly on the pricing trends, most are across the group and for mining specific. A little bit surprised to see flat pricing across, particularly the BAs that have been strong for a while and where the supply chain is tightening; not least, of course, in VT. Could you help us a little bit with how you see pricing trends through the rest of the year, more broadly across the group outside of mining? And maybe as a follow-up to that, the flow through in CT at currently 30%, really good to see margins up this quarter after a disappointing trend in '16, but do you think there's a leg up here in terms of incrementals as price increases come through and presumably mix improves?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [16]

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Yes. On the pricing, like I said in the beginning when Klas from Citi was asking the question, I believe this will finally come to a more positive part, because the market is flipping as you can see. And you also have seen other businesses, because we are not the only one who have got the better or the received part. You hear that also, I see our suppliers talking about pricing. So that topic is coming back on the agenda. You can say, okay, why is it not there yet? I'm sure we also are spreading the [ gossip ] in price increases. That is always a bit of a lagging on that, but it's definitely moving to a positive price development. Which maybe, if you remember if we take it two years ago, I think maybe we could say the trend was going downwards; now I see the trend going up. That is one. Then on the flow-through bridge from CT and the 30%, I'm pleased. I'm not so worried about CT. And I hinted out so that there is a bit of a dilution on acquisitions and a bit here and there. We are [ cruising ] around 23-plus part on that, because we take a bit here and there what we need to do. But there is a good development going on. So that I think is not something to worry about, that it's still rock solid, and we're -- of course, we, and you know we still have the gas end process part where that drags it down a bit. As long as that is not yet there you have a bit of dilution. But on the other hand, you get a positive one on the small- to medium-size on the oil-frees. We see service coming up. So one is compensating a little bit on that one. But you know I always put the magic 23 there for CT, which is, if we do a bit of adaption for an acquisition, it's definitely there.

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Operator [17]

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

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Markus A. Almerud, Kepler Cheuvreux, Research Division - Senior Research Analyst [18]

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Quick question about mining and rock. So SEK 7.9 billion in orders is actually the fourth highest quarter you've had in terms of order intake in absolute terms, even including '10, '11, and '12. And can you talk a little bit about if the current metal prices sustain do you see a lot of pent-up demand out there? And do you expect the current levels to kind of be sustainable if metal prices stay where they are and that replacement investment will continue? And also if you can talk a little bit about which metals are primarily driving right now?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [19]

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Yes. Which metals I think is rather obvious. I think it is the copper, the zinc, and maybe bit of lead here and there, which is coming on the replacement. Yes, Hans Ola says yes, some bit of gold there. But that, I think that is where we are main there. It's not the iron ore area which is bringing -- and of course one should know this is mainly for underground, because we don't see really the surface business coming up. That is still at a very low level. This is replacement underground. And mid-2012, it really dropped. So we are now, what is it, 5 years. So that brings it, yes, I think at certain moment they have to come to make a concession to replace these machines. The metal prices, I think what I see on the zinc and copper, they're good. I think that is not the problem. I think the mine is making profit. So that is not I think the major issue. So I believe also when you look to our orders received, which is still the biggest part is service and consumables, which I still believe we can do better there, especially on the service part, we still don't service all our equipment. And I'm not talking about competition, but even our own equipment. So we still have a long way to go there to harvest that. Also on the consumables there is still a lot where we can do work on that. And on top of that, then we get automation and all that part. So I'm looking for the time being or if nothing is happening, I still see a reasonable development on the mining side. So I'm less conservative, and you know me on that one, don't trust all the time the mining (inaudible). But what I see now and hear, I am reasonable positive here.

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Operator [20]

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Our next question comes from the line of Ben Maslen from Morgan Stanley.

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Benjamin Gulliver Maslen, Morgan Stanley, Research Division - Executive Director and Co-Head of European Capital Goods Equity Research [21]

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Can you talk a bit about the separation of NewCo and how that's progressing? What's customer feedback been since you announced it? And are you incurring any extra costs related to the split at the moment? Then, Hans Ola, at what point, I can't remember, will you give us an update on tax and balance sheet implications of it? Thank you.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [22]

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Maybe I take it quick first on the customers and our people. Of course in the beginning, especially internally as there were no rumors leaking, no gossip going on, of course, then, yes, it was a thunderstorm with, yes, with blue sky. So but that was a couple days. I'm going to say today all the organization is back in town focusing on the customer, winning orders and focusing on the future. So from that point of view, I don't see any detraction from the separation and the business development. And now by this, I will hand over to Hans Ola, of course, as you were the project leader for this.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [23]

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Yes. It's, as we have said before, it's a project that is not about splitting operations, really, it's about splitting legal entities and the information systems. And of course that sounds easy in a way. It's not. I can tell you it's a million details that have to be planned and that have to be executed in the right order. But it's good of course that it doesn't affect directly those that are concerned with the customers, as Ronnie said. We haven't worked up a lot of costs as of yet related to the transaction. So it's not meaningful even to talk about it in Q1. As we move forward, Q2, Q3, Q4, we might indicate or even give some indication of how the cost is developing. We have said all along that don't expect it to be a hugely costly exercise, even though the size of the 2 companies is rather substantial. But still we will keep you posted on that. But it's not something to take into consideration right now. On that, we can also say that we still expect that the majority of the transaction cost will happen in the tax area where you can't avoid certain tax leakages when you cut out businesses in different parts of the world. But we will come back and when it's meaningful, we will give you some numbers on that. When it comes to the capitalization and the balance sheet going forward of the 2 companies, we don't want to preempt too much what the world will look like at that time and how the different developments have happened during 2017. What we know is that when we come to the fourth quarter and where you know we will always have our Capital Markets Day, we will be much more specific about what we intend and what the ambitions for these type of ratios will be. That's where we are. I could say right away that the project as such is progressing well. I already commented that there's a hundred million things; perhaps one million is too short. But it's progressing and we will be in time to do it as planned and be able to present the dividend proposal of new quote to the AGM in exactly one year's time from now.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [24]

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So if I ask now, Ben, I will ask an extra question for you. Do you see a difference between what we expected in January and now already?

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [25]

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He is asking me, Ben, just so that you know. No, I don't see it very different than we had in January. So there you got some help, Ben, without asking a second question. That's good.

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Benjamin Gulliver Maslen, Morgan Stanley, Research Division - Executive Director and Co-Head of European Capital Goods Equity Research [26]

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Congratulations, Ronnie.

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Operator [27]

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

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [28]

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Just a quick one, Ronnie. I wondered if you might talk a little bit about the demand outlook. I think you gave the same overall demand outlook with Q4 results, and obviously Q1 was a lot stronger than expected. So what can we read into or how would you characterize, perhaps, some of the underlying demand that's captured within your near-term demand outlook? Is it a reflection of catch up in replacement? Is it a fact of restocking that you expect perhaps to be less of an impact? Or any color around that would be really helpful. Thank you.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [29]

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Yes. First, I think, of course, when it comes to the Q1 outlook, you can say, Ronnie, you were wrong. I think maybe to improve somewhat, maybe the somewhat was definitely wrong, because it was more than I expected. And that was mainly coming from the mining part and also the vacuum part. But also the other businesses were, yes, stronger than I had expected. You can say is a little bit longer quarter; we have two working days more in here and that of course plays in service. But still if you make the correction for that, I think I must say I was wrong on the right side, so to make a confession here. I think now I believe still in Q2 that when we listen to the market and see that the whole climate, the business climate to use another word for the demand, I still see developing in a positive way. I see a very, very solid Europe. Of course you never know what happens with France now we got the first tour of the election. But, okay, what can happen next? Is that the negative part; okay hallelujah, I don't know. But still if I exclude that, I think I see a solid development going on in Europe. I see the same in North America; I see that. I see still a good development in semicon when it comes to logic and memory, because the Internet of Things is at the beginning, I would say, in the world that developed. China is doing what it needs to do. India is developing. This may be one country, and we talked a little bit about, is Brazil, where it's still okay here and there. And maybe you can then take another smaller one from the volume point of South Africa. These are maybe the two ones where we can say it's difficult. When it comes to the oil and gas, we see some traction coming that we get here and there orders. And that might, let's say, okay, yes, the demand, sequential demand is solid and we believe in that part. So of course again there are segments which already on the high level. Yes, I can be wrong. So it's not that I'm here predicting another 20% increase sequentially. That is not, but I have a positive outlook in the next quarter. I hope that gives you a bit better view on what we saw, because it's not easy in this to predict. But I'm reasonable positive. And it's not that I'm leaving now that I say, okay, Mats, here, it's your thing. We debate this. Before we put this on paper we debate this internally. So it's not a vision from Ronnie on his own, so.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [30]

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Very helpful, Ronnie. Thanks very much and all the best for the future.

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Operator [31]

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Next question comes from the line of Andreas Willi from JP Morgan Chase & Co.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [32]

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I'm not going to say good luck given your earlier comments that it's all about hard work, but wish you good training on your bicycle. To understand mining a little bit better, maybe you could help us there. Where are we in current equipment sales, equipment orders, which were up 100%? Where are we in the current level there? What do you think is a normalized replacement level? So that we are going to get a number of quarters where it's running ahead of that given the pent-up demand. But how do you assess the normalized level for equipment relative to where orders are currently. So we get a better idea where activity levels will be longer term when the pent-up demand has materialized. And also do you see early discussions for bigger CapEx project that could come in when maybe that replacement demand starts to fade a little bit?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [33]

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First there, I think we should bear in mind that Q1 2016 was weak. And just to calibrate ourself because we get drifted away with the percentages because this is comparing quarter 1 last year with quarter 1 this year. So that's one thing. So that was the weakest one, more or less, what we have done on equipment. But I still see good development, as I said in previous questions. And I see projects coming. People are talking different projects, replacement projects. And that was also taking place in '15, '16. The only difference between '15, '16, nothing landed. It was a lot of talks, but nothing came. Now we see definitely that the orders are released. On the other hand you see also on the exploration part, thing that we believe still need to come. So if you ask me, do you expect something to come and the level where we are to continue where there's a peak and then finito, I hope I'm right. But I believe we are not on say one peak and then dropping again. I think we still continue at the good steady, solid level on the equipment side. But bear in mind this is the figures you see. Also has service, has consumables. And there we see also a good development there. Also we got double-digit growth, which is fantastic to see that. So that also get traction. And there are still some projects going on in the talk. So that develops at a good level. So now also (inaudible) then let go automation. That is another part where you have midlife upgrades on automation. You get also replacement from equipment due to the fact that the new equipment has full automation and mines wants to go one step further, that is also helping the replacement cycle.

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Operator [34]

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

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Graham Phillips, Jefferies LLC, Research Division - SVP Industrials, Capital Goods Research [35]

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All the best, Ronnie. My question is on gas and process inside CT. Can you talk a little bit about how big that business is, what the drag is? And clearly your market share is not as great in that as it is in air compressors. And what can you do when it seems to be dominated by GE and Siemens?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [36]

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Yes. First, I think where Siemens and GE is, we are even hardly competing with them because they start where we stop on the gas and process.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [37]

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In terms of size.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [38]

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In terms of size, yes. So that is a very niche. We are a very niche player in that area. Of course it used to be, what was it, 15%, 16% of our total revenue of the business, which is now lower because, yes, the orders are not there. So from that point, yes, it's a smaller part of our business but still significant. We cannot say that 10%, 15% is not a big part of our business, it's part. And that is definitely not from a profitability point of view not on the level where it used to be. Do I see some changes here? Yes, you get one order here and a bit orders here, there, but not much. I think you see where we were strong and still are strong but we don't see orders is in the air separation. But air separation you need for making steel plants. And today who is building more steel plant? No one. That was also, we got a very good ride for many, many years in China because we had a very good offer for air separation in China. Yes, that business is gone. Another business where we were strong and still strong is in fuel gas boosters, yes. But there's not many orders going on for fuel gas boosters. There is another one on LNG ships, yes, that is an area, segment which is not there; yes, there is an order here and there. So we have certain sectors where we were strong, which are today, yes, not active. And that is what, yes, we base the sale. We live from the service in this area.

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Operator [39]

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Our next question comes from the line of Klas Bergelind from Citigroup, Inc.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [40]

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Just a quick follow-up. On demand on the industrial side and also in construction in Europe and in China, can we get a sense if China is still improving quarter-on-quarter? I think Sandvik said that they were flat in China sequentially. And then Europe obviously working days helped in the growth there. But would you say that underlying demand has improved for you as the quarter progressed in Europe? So if you could answer that. Thank you.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [41]

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Yes. I think when it comes to Europe it has developed positively and the same on China. I'm very pleased to see the development in China. Yes, there are still, and you just heard me talking when I was giving the answer in gas and process, there are certain segments in China which are dead, but we see also very good development in China and then also in certain areas we gained some share. If you look to automotive, our Industrial Technique business is doing great in China. If you look to the oil-free compressors is doing great in China. We got some good orders on the mining, Mining and Rock Excavation business there in China. So there are sectors or segments in China who are doing well. If you are of course exposed to steel or to the marine business like shipyards, yes, then it's a [ dull ] business part. But the businesses which we have been exploring and moving (inaudible), so we are looking to areas which are doing fine then. And I was pleased with the quarter this time. And you see even service, which is always also good indicator to see in China, because if utilization goes down, invoicing in services also going down, but you saw a good utilization in China. So, yes, it was a good quarter in China.

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Klas Henrik Bergelind, Citigroup Inc, Research Division - Director [42]

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And a very quick follow-up on mining and rock in the drop-through. Given Mining 4.0 (inaudible) do you feel you need to make investments in R&D and in the front end going forward, which might lower the drop-through? Obviously the drop-through will naturally flow as costs go back in. But will you have extra cost going forward here to ramp in automation?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [43]

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I will never, never going to give in on that. I think when it comes to a business when you develop the business and you open the door that you can invest forever and you don't need to deliver, that is thin ice. So, yes, do we need to invest for 4.0 on automations? I think you remember maybe the Capital Markets Day where [Yuwan] at that time did the presentation, I think, yes, and we, as we speak, we do investments in this and we will definitely keep doing that investment. Do we need to do more? Yes, for sure if we can do more. But to use that really as an alibi to justify lower margins, I would have difficulties to swallow that part on that. I think that's not the case yet and I hope never.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [44]

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But of course as you link it to the flow-through, Klas, of course there will be quarters when you won't see 50% flow-through, not because of what Ronnie's commenting now, but generally speaking. But investments will continue.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [45]

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Yes. But the 50% is not --

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [46]

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No, no, no. It's absolutely not sustainable. No, of course not. I do know that.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [47]

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But I think it should -- normally what we see as automation in mining is a profitable business.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [48]

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Perhaps a few more follow ups from the early questions. Do you have more questions, Operator?

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Operator [49]

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The next one comes from Guillermo Peigneux from UBS Investment Bank.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [50]

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Just regarding to your commentary actually on Mining and Rock Excavation and coming back to the questions on the mine sustainability. I went back actually on your quarterly statements and services and consumables, which were improving since the first quarter 2016, and probably leading the way to the equipment recovery, now seem to be losing some of the growth or the steam in Q1. On a sequential basis I'm talking about. Is there any seasonal commentary around that softness? I'm not saying a decline. But it grows slightly versus growth in the fourth quarter and the third quarter. Is this just basically a normalization of the growth rate towards protection at the mining sites? Or is there any trend that you want to highlight here?

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [51]

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No. No. No. And you really take us by sophistication now, because I looked at utilization and of course you always have maybe more invoicing at a certain moment, especially for consumables. In certain regions it goes on. But there is nothing really as, I'm thinking as I'm speaking. On the consumables definitely not; it continues to grow slightly up on that one. So that's one. I think also on the service because there I see utilization of people and hiring enough people, which is also positive. So it's still in the positive part. So on that one, I am definitely not concerned or worried, no.

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Operator [52]

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Our next question comes from the line of Rizk Maidi from Berenberg.

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Rizk Maidi, Berenberg, Research Division - Analyst [53]

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Can you please give us the current splits between after market and new equipment in your mining business? And then similar question for CT compressors. What is the proportion of small- and medium-size compressors versus large ones now versus 2012 levels, please?

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [54]

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I will take on the service side on mining and rock. We're still in that area of close to 70%, represented by consumables and service. And then I'm talking revenues really. When it comes to orders, of course, when you have a very strong quarter compared to the previous year, then it might move a little bit. And over time it will probably moderate a little bit from those high levels of service and consumables as equipment picks up. When it comes to the other we don't disclose these numbers between large and small. What we know if you go back 5 years as you did, is that we have made further acquisitions in the small range. So you asked about how much of the small compared to the big ones changed. And I think that it's difficult, and I certainly don't have it in my head about some organic comparison in that and of the split either. But we have made some acquisitions on the smaller and medium-size compressors as you know. So in that respect, the weight has shifted a little bit towards that without impairing the high profitability level, as you have seen.

So with that, I'm sorry to cut you a little bit on that last question. But I hope you got some answer back.

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Rizk Maidi, Berenberg, Research Division - Analyst [55]

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Yes. Thank you.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [56]

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Good. And then let me just finish off by thanking everybody for participation and the active interaction. And finally, also, even though I have other opportunities, thank you, Ronnie.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [57]

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Thank you.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [58]

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Did well on this call, but on many, many, many other calls as well. So thanks. I won't say good luck.

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Ronnie Leten, Atlas Copco AB - CEO, President and Director [59]

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Yes. Thank you. Yes, no good luck. Yes. So thank you, guys all over there. And just to give you a bit of comfort, I stay shareholder. So I wish you all the best and also wish Mats all the best in years to come.

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Hans Ola Meyer, Atlas Copco AB - CFO and SVP of Controlling & Finance [60]

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So with that, thanks a lot. Now we head towards the Annual General Meeting. Hope to speak to you again, if not before, in July when we release the second quarter results. Thank you.