Atlas Copco AB

Ronnie Leten - President and Chief Executive Officer Hans Ola - Senior Vice President, Controlling and Finance

Klas Bergelind - Citigroup Andreas Willi - JPMorgan Markus Almerud - Kepler Cheuvreux Ben Maslen - Morgan Stanley Sebastien Gruter - Exane Andreas Koski - Deutsche Bank Andre Kukhnin - Credit Suisse Peder Frölén - Handelsbanken James Moore - Redburn

Thank you very much and very welcome to all participants on this telephone conference. We are presently, Ronnie and myself in the centre of hard rock drilling technology, in the middle of Sweden, in Örebro.

So hence we don't have any onsite presentation this time. We will do it as a telephone conference-only.

And of course, after an introduction of Ronnie, we will come back to questions-and-answers session just as we normally do. So without further ado, I hand over to Ronnie to give his comments on the third quarter report that we just released earlier today.

So Ronnie?

Thank you. Thank you, Hans Ola, and welcome all of you.

I will do as usual, go quickly through the presentation, so we have time for questions. And I will immediately, to the Slide heading with Q3 in brief, which is number 2 of the presentation.

Like I say, the heading, it's a mixed demand. And actually, you will see also during the call, try more and more to understand what we mean with mixed, because it's not only mixed that we see some growth in service and low in equipment, but there is also in equipment we see also some mix, so a mixed development.

In other words, some good businesses and less good businesses. When it comes to the growth in service, more or less like Q2, we see almost everywhere some growth in service is up, even on the mining side keeps growing the service business.

It's a little bit hesitation you see that's always when one sector is adapting in the oil and gas, that people are recalibrating and people are sometimes a bit destocking. You see that when I did my investigation I consider this as a temporary softening of business.

When it comes to the equipment, the large unit, which I have been talking now, I don't know for how many, many quarters, it's still soft. So large CapEx is now there.

And then top of that we also had during the quarter also some cancellations, which is also seen in the write-up from the mining side. So stable industrial business, but still weak mining.

And I think it's not a surprise that I also say, weak in oil and gas part. Geographically, Europe, as we also mentioned that I think in Q2 keeps on, or almost all countries are developing positively.

But some of the BRIC countries, mainly that is China and Brazil is tough. We see also some tougher environment on the Middle East side.

But I am very pleased that I think the execution, even in a tough environment we have been executing very well. So I am very, very pleased to see that the Group's have done what they can do.

So we came out with a record profit. Of course, have differed some currency, but on the other hand out of all business is delivered, and also it is organizational.

So was able to come up with the right operating cash flow. So I am very pleased to see this happening.

Of course, what keeps us in this level, it's all about innovation. Because many of you have been asking me many times about pricing and how can you get market share.

There is only one big secret. It's driving and thriving for innovation.

And I'm now on Slide number 3. So here is a couple of examples on the vacuum side.

You remember two years ago, we acquired Edwards. We are heavily investing in new products to penetrate new markets and also strengthen the existing markets from Edwards, where they are.

This is one example, but I can also assure you we do this even on the mining side. We do the same drive to create at the end of the day productivity for our customers.

Now, I'm on Slide number 4, on the figure side. Not more to say than I think what you see here.

Good record operating profit of SEK5.3 billion and margin adjusted 20.4%. So finally we are back in the league, where I've always like to be, the 20%-plus and also the operating cash flow, which I already mentioned that before.

So we really are transforming our assets in cash where we can do that. If we then go to Slide number 5, where we look geographically, I have already elaborate a little bit on that, so a very solid Europe.

Asia, although you see a plus 2, but is a bit mixed. Solid India; and a couple, Singapore region, as an example, also solid; but on the other hand China is softer.

Middle East, Africa was weak this quarter. So of course hit by two sectors, which are weak, and that's the mining and the oil and gas.

So eventually I think its normal that to get a lower level there. Then we go to South America, we still see it at minus 17.

And the biggest country is really weak, and that's I'm meaning Brazil. Yes, it's very difficult to keep up at good level.

And we take measures were we feel we need to do also would like unfortunately in Brazil, we are adapting also our suit to the new level. Then, if I go to North America, I see a minus 7.

I will elaborate a bit later also when I'm talking about different business areas, but it's mainly here also from oil and gas. Those who are familiar with Texas will see that and understand that.

And of course, it's a big sector -- in total for us, our exposure is not so high, but the drop was significant, and that made it also, that you see it at an aggregate level. And then I think also here we had the semicon part where compared to the last year, where we had less orders from the semicon in terms of the slope.

So that was in quick, the overview, geographically. If I then go to Slide number 6 here to the organic growth, there you see we are always coming around to the zero, and of course, this time it's highly affected by the mining part, where we had cancellation and then the oil and gas.

But let me then go through the bridge Slide number 7, here you'll see still significant currency affect. And that is mainly, of course, for us, dollar, euro, and of course, then euro, Swedish krona.

What made the biggest effect, Hans Ola will elaborate a bit more when he talks about the different detail bridges. And then I think you see price volume is a minus 5 on orders received and a zero on revenue.

And I will elaborate a bit more when I'm talking to the different business area on volume, but anyhow it's significant, that part. I will skip the slide on the group side, because I will go immediately to compressor technique, which is Slide number 9.

Still keep growing in service, so that's good to see. Of course, some times it goes a bit more than other quarters.

This quarter was not so strong on the growth side of service, but still at a good level and explainable level. So I don't see in the foreseeable future, no reason to doubt that we continue to grow in this area.

I think we have very efficient machines working there, and on the other hand I'm sure also that our customers also appreciate our service here. But equipment was weak.

We should not try to find other ways there. But on the other hand, we will start to explain it geographically a strong Europe.

I was pleased to see that on the compressor side that on the other hand we got back a hit China and a very strong hit in Brazil, where we saw the market adapting. On the other hand, if you take United States, which was also affected, but if we dig a little bit deeper in that to see and trying to understand United States, we can say that it is the oil and gas part, which is weak.

And then I'm talking really weak, which was in the quarter, a real adaption compared to last year. And also we had a lower vacuum orders mainly from the semicon compared to last year, and that made the United States, so for compressor technique looking weak.

But if we take these things away, it's still an okay continent or country I can say that. And then I think the big ticket is still weak.

We had a very soft gas and process, so the largest compressors we have was weak. Was that a surprise for me?

No, but of course, it's part of our business and if it's weak, it's week on that side. Operating profit, there I'm very pleased to see that we are backing the league where we would like to be.

And if you look to the graph on that slide, you'll see it also that we have creeped up. The guys have really focused on the right spots, but kept investing, but on the other hand have adapted where there was some waste slipping in into the organization, so it was a good execution.

And we keep here for sure investing in research and development, as distressed that part, and that is mainly also on the vacuum side. We then go to Slide number 10, industrial technique.

Continuous good development, good order intake, strong demand for our motor vehicle. I'm sure some of you had questions for me on Volkswagen.

For the time being, we don't see a change. It still continues to be a good one and we also got good orders from aerospace and electronics sales.

So we have a very good value proposition for our customers and that also yield the good results. Growth in service, it continues to do that.

We had a small acquisition, which is in controlling line balancing, so that I think helped us to extend our offer, and also not to forget in the big record time, we also had record profit year in industrial technique. So it's always great for the guys that they keep doing that.

If I then go to mining and rock excavation, growth in service and parts, so that business continues. And that is now, I think, maybe four to five quarters in row that we had that.

And we see also that our bigger customers respecting really our offers, so that's good to see. On the equipment side, it gets thinner and thinner.

I think at the end of the day, our ratio from consumables and services becomes maybe 100% from [indiscernible], if we keep growing like that. But we had some order intake for sure, especially on the underground tree we had some, but on the other hand, we got1 last day of the month also couple of cancellation of machines, which was around SEK300 million, so nobody likes it, but if customers see that that's a something, which they don't need it, yes, okay, we'd deal with that.

Luckily, we had not reduced these machines yet, so from that point of view there is no big legacy of the sites on engineering work and a bit here and there that we had already invested at. Unfortunately, and that we are being doing now for several quarters, we have to further adapt to suit, so we take further efficiency measures in the different areas, not only in one area, but in all the different areas.

But on the other hand, and that I have said several times also, we keep investing in design and development, and that is done by design. We are fully committed into the future, because we believe still that mining and rock excavation has a future.

It's a cyclical business. We all know that reach here by innovation having the best offer for our customers and that is we are committed to.

The margin I'm sure that the guys are extremely happy that they come back to the 20% league, so I'm also pleased to see that, so that is good. Big congratulations to them.

Of course, help by currency, we should not deny that and mix, but on the other hand they have tremendous under absorption in different plants where they also in the mean time adapting here and there and also these cost are fully absorbed. Then I'm going to construction technique, which is Slide number 12, a very good development on specialty rental and service.

So the resilient part of our business, we're developing very well. We also have a small acquisition in specialty rental, which is special dryers, which we acquired during the quarter, and fits perfectly with our offer.

But on the other hand we had lower intake for full equipment. And again, all these countries are always coming back, Brazil and China, but on the other hand we had some green spots, and good to see also the countries there mentioned in United States and Europe, who showed some good development, and we keep pushing in this area.

And margin, of course, helped by the currency and also helped by favorable mix, because of the two businesses where we make most of the profit, specialty rental and service, of course, are growing more than the others. What can we wish more than, of course, that the margin is moving up.

Then I am going to Slide number 13, where we have the summary, and then you see also the graph there that we're creeping up again on the profitability and coming back to the league 20%-plus, where I believe this company with this mix and with this type of currency should be. So I hand it over to Hans Ola.

Thank you, Ronnie. Just taking a few comments further then, as you have seen from the report, if you look at the operating profit, of course, it's affected by quite big restructuring costs in last year.

So if you make a fair comparison without one-times, et cetera, this year's 20.4% would compare to 19.5% last year, but still a good improvement, primarily helped by the better currency situation, as Ronnie has already said. But still, again, back to about 20%.

If I look at the financial mix in the quarter, it was as you have seen, very similar to last year. The same were the interest net, which is the only thing that we can really estimate going forward.

And I think that we would expect to be in the range of about SEK200 million for the coming quarters from that than the exchange differences, et cetera, are much more difficult to predict. This quarter's negative effect on that, plus primarily some devaluations in many of the emerging market currencies around the world that was primarily the effect that was seen in this quarter.

If we go further down in income statement, the tax rate has been fairly stable now for a while, and we sit there somewhere between 24% and 25%. And I think that's also the best estimate I can give for the coming quarters ahead as far as we see it today.

And it's of course then at the end of this, the table here, you can see it's promising and it's good to see that the return on capital employed has now turned after having seen the negative effect of a number of relatively large acquisitions in the last two years. And now, the return on capital employed actually improved in this quarter.

If I move to Slide number 14, you are now more or less acquainted with this, so called, profit bridge. And I would just on this, which is the group summary, you can see it graphically at the bottom of the slide.

A few comments, perhaps, that you see the share-based long-term incentive program, which was negatively affecting last year was a bit positive this year. So that is an impact on the profitability.

One-time items, as I just said, there is of course a few acquisitions, but the main impact is last year's negative restructuring cost that did not repeat itself this year. So hence, we had a positive bridge effect.

And then on currency, you can see, if you make the numbers that of course it is supporting us, again, it's supporting us with roughly 1 percentage point in terms of net effect on the margin. And when you see them, the left column there, called volume, mix and price, et cetera, which is so to speak the organic development.

It's not a lot of big numbers compared to a revenue of SEK25 billion and SEK26 billion. So of course, you cannot over interpret this.

What I can say is that it includes also a cost for number of projects that we are doing, when it comes to ERP programs, we are doing quite a lot on IT infrastructure, and this is something that is weighing down on the profit now more than last year, I would say. But it's also our way of not making these type of cost, big, enormous programs.

We take them as they come, so to speak, and that is some times giving a negative effect, some times a positive effect in the bridges. So if we then turn to the next page, you can see the different business areas.

Again, when it comes to compressor technique and construction technique, this organic flow-through was not very readable, because it is also letting around pretty small deviations in construction techniques. I would only call it that in spite of negative revenue development in volume, we increased profit and that's because of the mix that we are doing very good on rental and service in the quarter, so that does help.

When it comes to industrial technique, it's what we should expect. They are doing fine.

They are growing. And in mining the only comment perhaps is that, taking out currency and one-time items, yes, it signals of course that we are still doing a lot of measures as we go on in order to adjust and be able to defend the profitability also going forward, whatever.

How long this situation of relatively low equipment demand ever continues, we don't know. But this is also to a certain extent in the numbers.

When it comes to balance sheet, yes, the only effect since December really, apart from making more money is that we have taken out of course the redemption, which was almost a full extra -- well, it was a full extra dividend, and then we have paid already also the half annual dividend. Otherwise, as you can see, the numbers are pretty similar to December at least.

If we go to number 17, Slide 17, finalizing the cash flow, yes, it was good. It was not record quarter, but it was very strong and it's backed of course by the high operating profit and a reduction of working capital as the primary takeout on that.

Those were a couple of comments. If I look ahead, perhaps I could also -- as I did on the interest net and tax, I could also give already that on the currency side.

You saw that in absolute numbers, we still have a positive impact of some SEK670 million on EBIT compared to third quarter last year. When we compare, and when we estimate that similar impact between Q4 last year, and what we expect this year, it's actually a quite big of a change.

And I think we will be almost close to a neutral bridge, when it comes to currency Q4 to Q4. Because the dollar strengthened quite a lot at the end of last year, and we have a lot of emerging currencies weighing negatively this year.

So that is a little bit of the hint for the future on that part. Then finally, for my part on Slide number 18, I just want to remind everybody that we have the Capital Markets Day coming up in a few weeks time, on November 17, in Stockholm.

And I think we will have a very interesting close look at one of our business areas apart from an general update.

Are you meaning mining?

That was not the one. And I was thinking about that this time it will be industrial technique.

I think it would be good for all of us to see what is the transformation, what has taken place over the last five years, that this shows, now look that we are growing in that area. And it will be good that the guys can really do that presentation.

But on top of that, we also will elaborate on our service with different business area. So that will also give you a better insight what type of services are we delivering, so that you understand the really driver behind this growth.

And then we had the outlook on Slide 19 that as usual I think very condensed. We expect to remain at current level.

You'll know that this is an outlook, a sequential outlook on the demand, where we believe that service still continues to grow, as I already elaborated during the talk. On the other hand, on the equipment side, yes, it's tough, not an easy area, but we believe we'll let that this adaption, which we got during Q3, that we got that, and if we look on the sequential that it will remain more or less at the same level, when it comes to the equipment side and of course the positive side on service.

So that made us putting down, remain at current levels.

So Hans Ola, I think --

Yes, we are done with that. It perhaps took a few minutes longer than last time, but hopefully then we have cleared out a few questions instead.

But any way, we do have time for questions. It will be strictly from the telephone conference.

I would ask you to stick to your main question and possibly a follow-up on that one to allow more people to have a chance to hear some comments from Ronnie. So please, operator, can you just kick-off the Q&A session then please.

It's Klas from Citi. I have two questions please, I'll be brief.

Just on Edwards, I think part of the strategy was to increase the aftermarket business, it was lagging CT. You have also reduced the cost base.

When you look at Edwards today and compare to previous down-cycles, how much more cushion do you think you have in the business right now from the aftermarket improved cost structure? I'm trying to think of the operation gearing here at this time around?

That is a good question, and of course, these things, these changing and developing type of business would still take time. We are not there yet, when it comes to the aftermarket penetration level as we are on the CT level.

So that is one what you should really keep in mind. I think it's going in the right direction, but not there where we believe it could be.

We also on that same note, we are heavily investing in Edwards when it comes to, we'll call it, the utility vacuum. You maybe remember, if you go back when we announced it that has been the market, which was not developed by Edwards, but where we believe Atlas competence plus Edwards competence could work on that, and we do it for the time being organic.

So that's also money, which we pick over the P&L. We don't put it in the balance sheet, so that drags it down.

On the other hand, we have worked from day one on the agility, so that is where we kept on it, and I think that is definitely in the organization, it's there, and we are adapting constantly. But on the other hand -- and that is again, by design, and that's the reason my answer is a little bit longer than you maybe expected.

We keep investing in that market, because in that business, we are really believing that is an area where we have growth potential, but we need to invest in that. And I mean, technically investment, and of course, presence investment, both by feet and street.

We have not been talking so much lately on that, but we're putting really new people in that business, we do that. On the other hand, one should also know that we get a little bit headwind in that segment on currency.

And maybe Hans Ola you can elaborate on that part, but that we also get that part, and of course, that is embedded today in compressor techniques, so you don't see it, because you will think of compressor technique, a stronger dollar, that's great for compressor technique, yes, but now there is another big entity, which came in place, which has a bit of another dynamic. But in summary, I believe, and that is the simulation we have done, when we will get a dip, which some of you expect would be.

We are better off than that were, whenever its' three or four to five years ago.

And then sort of a follow-up on the, but switching to mining and thinking about service, on consumables we're seeing sequential weakness now in most markets. Have you seen any weakness in copper as of yet?

I mean, I'm thinking Glencore forecasting production, or is that something that is yet to come through, if you could develop a little bit, Ronnie, on the commodities here?

I must say, on that one in detail, I don't have it in front of me. But I think, we still, on the copper side, on one end maybe there is Glencore who is adapting, but there are other guys who were investing.

So from that point of view, I think on the consumables, it's a little bit of plus/minus. It's not a big growth that we see there, but still normal levels.

So sequential normal, I would say that. But I think, Klas, I have to skip the detail questions on the consumables, because I have not looked into that before this call.

My first question is on cancellations, and what the risk is if you're going for, do you actively screen project that has been kind of or orders that has been in your portfolio, but they're not moving forward. And cancelling them kind of actively out of your backlog or where the cancellations you received in Q3, just purely in response to customers?

And have you revisited your backlog in terms of orders that are addressed and whether we should see more cancellations coming forward. And also, when a customer cancels, do you get any compensation like what we have seen in Q3 now?

Of course, at one end, it would take it when we got this cancellation the last day of the quarter. I think for the guys who are handling this project, because they are in constant compact with these guys who are handling the parcel, they knew there were debates going on and that is also the reason before we start working on these thing that, yes, we need to have a firm confirmation that we don't do silly things on that front.

I think we do a scanning. But sometimes even customers, the ones who talk, they assume also that they get still the continuation of their budget, but then there are CEOs who suddenly take decisions, and they say, okay, we need to cut in all those 5 % to 10% and then the project is postponed or cancelled.

So these things happen like that. And this time, okay, it were a couple of bigger machines for ADS, which we would have cancelled and that may took this amount of money.

Do you get compensation -- and in all the contracts, we have this type of description of compensation, but you should think about, if you go and talk to the Rios and BSPs and the Anglos of this world, even if its in, they will definitely also sit together and start to negotiate with you. Of course, if we had done some costs, we get compensation.

So in this cancellation, it's not that we made the loss, its not that we had took out the scraps on inventory or we took more inventory on the balance sheet, its not the case in this case, but normally its not easy to get paid for the cancellation sum, although its in the contract, but its always negotiated.

And a follow-up on construction, you talked about the margin improvement there and the mix that helps, but is the road paving business also moving up or is that still difficult?

Next question. Andreas, it's still difficult.

You should see on the road where are we strong, Australia, Brazil, Russia. And I think they're tough markets.

So it's a tough market for them, but they do great job, but these markets were very strong markets for our road construction division and they're all three down. But on the other hand, we see good development in U.S., we see good development in Europe, but then it will be a day, I hope that for the guys because they're really working hard, that there is one day that all these markets are really on the positive side.

But it's a tough market. We are not there yet, where normally we should be.

Hi, Markus Almerud here. So my first question is on geographic trends, so you clear deceleration in the U.S., and you say it's both the vacuum equipment orders, but also oil and gas and petrochem.

But how is the oil and gas and petrochem -- do you see the sharp acceleration in September or its just bad all throughout the quarter. So hence in other words, there's a big delta that we're seeing here in semis, so just on the sequential trends please?

Yes, I think on the oil and gas part, because on the petrochem, I think that's an older part. But I think in the oil and gas what we are seeing during the time in the quarter that, especially on Texas, and for those who are following Atlas more in detail and see if you take, we have one of our brands there, Quincy, which has good insight in the oil and gas.

Really these guys have hit, because there you saw during the quarter that the orders were not coming. As an example, maybe 30%, 40% of the rigs in Texas or in other areas there are standing idle.

If they need some replacement of their compressor, of course, for those the drillers are there, they really take them from the ones who are standing idle, so you don't get orders then. And that means that you get really a minus maybe 20, minus 30, during the quarter.

And that is what we are faced with in the oil and gas, especially in U.S. And is this a one-time?

Can this happen again? I think sequentially, I don't think so, because we already dropped more.

Of course, you can always go to zero, but that I think don't expect. But I think we got a drop during the Q3.

Semicon is something, it's a bit of a different part, because we all, the ones who are following the semicon has seen also that memory prices are a little bit below. But on the other hand, you still see that Intel and Samsung, the big guys are still having good investment plans and also looking to the change of technology, so there is a bit of wait and see moment now taking place, which maybe goes another quarter or another two quarters.

But from our intelligence, we assume and we think that demand will still stay at a good level.

And then very quickly on mining aftermarket. If I read you right, do you see profitability fairly stable and pricing very stable?

And also is it possible at all to say how much of the margin improvement was mix and now it's coming from internal measures?

I think on the aftermarket, you should see on the mining, and that is also what we try to explain all of you, also when we go to the Capital Markets Day, what type of services we do. This is not grease monkey service, this is proprietary service.

And there's also dedicated proprietary jackpot. So I think from a pricing point of view, because we always get pressure, because people always asking do we do different.

But on the other hand, and that is what we have been working on constantly is to make our offer more efficient and also creating more value for the customer. I think you cannot see the customer in this area.

But again, it is proprietary service. It is some dedicated software, dedicated inspection, special step-outs, that is where you make the money and then copout on very good logistics, and that is execution and that is keeping this margin where we are.

It is no secret in this.

And on the profitability; on the profit, first of all, of course, that was a comparison last year, which included the one-time item. So if you take that away the resulting extra profit margin improvement comes from currency primarily, then of course the mix is also helping obviously, but it's also through that with a deterioration of volumes, it's very difficult for the equipment divisions to improve by short-term efficiency measures.

If you see what I mean, it's something that goes on all the time, but it doesn't really give any positive impact until you get some volume back right. So it's currency and mix that is primarily doing the improvement.

And then you talk the business area.

Then I talk the business area on mining, of course, yes.

I think, you see now -- I have not calculated, I don't have it here in front of me, but I think the ratio equipment --

Sits around 70%.

Yes, I think it's not the secret that we make more profit on service than on equipment, especially now with the low volume on equipment side.

First question, just coming back to the vacuum, can you give us a sense maybe on how much orders were down year-on-year in the quarter, so we can think about the development of the rest of the group? And then relating to that, we've also seen CapEx cuts in recent weeks from the names like Intel, TSMC as you say.

Has that already been reflected you think in your Q3 order intake or is that yet to come from Q?

I think on the orders, the down is say, around, don't have it in front of me, but is around 10%. And some of them are already in, because it goes very quick there and that makes it sometimes difficult for us, because the decision cycles are extremely short there.

And that is also the reason why we need to have as a factory response time, it needs to be also very quick, and that is Edward is geared up for doing that. But there is some of them are already in, because like ASML -- you have seen the result of ASML, what is it last week or the week before?

You saw that, so they have not order to us either, so we don't add it. So they are buried.

And then a follow-up if I can on currency for Hans Ola. The SEK670 million year-on-year benefit in Q3 seemed a little bit higher than expected given some of the moves we saw in emerging market FX over the summer.

Did you get any benefit from hedges or option corridors in the quarter, because it seems quite a big step down to being flat in Q4?

No. So when it comes to the dollar and the euro, it didn't deteriorate at all, and it actually increased a little bit sequentially, so that of course is an important thought when it comes to profit in the group.

We don't have exactly the same distribution of in what currencies we earned the money and where we sell, so to speak. And that explains why you might have seen that it was a little bit more an absolute value than what you expected.

A question on pricing. You have innovations which should drive a higher price for equipment.

You have a level of inflation that should drive higher price for aftermarket, and yet pricing is flat in orders. So I just would like to have your view on the competitive landscape, what do you see over the last few quarters in your main businesses?

And then you mean, mainly on pricing there?

Yes, on pricing. Do you see any change from your competitors, as you are not able anymore to price your innovations?

I think if I listen to my sales people, there was mentioned that competition is dropping prices here and there, but I think this is a game what always will go on for that part. And I think if you look today on low pricing, why is it.

On the mining side, you get pressure on, let's say, on the consumables side, because there is, in certain markets it's not easy to differentiate. So you get a little bit pressure there.

But on the other hand, when you say the new variable speed compressors, there we get possibilities to get a better reward from our customers. So you get pluses and minus in this part.

What you miss in this market really is, and we should not underestimate that, and you mentioned that, so it's a good observation, I think inflation. inflation has before on the service side, if you take it, it is a fantastic way to talk to your customers, because everybody accept that.

But the inflation is rather low, it's what can I come and tell you, so I need to have a different story. And you can only have a different story, when you come up with a new offer.

So that is where we see that it is more difficult than when it was two years ago, three years ago, when you had some inflation. And that is the reason why in turn, if you would hear me talking internally, like I'm brutal, and I use the word deliberately on the execution in the service side, because we need to beat -- yes, because that is always slipping in cost inflation, and that we need to really to make sure what we can compensate.

I mean perhaps, you know it's about done already, very clearly. But just to make it clear that, when we talk about the price bridge and 0% as you alluded to, we are comparing the same offer last year with this year.

So if we innovate with new models, et cetera, that is not included in the pricing bridge, it come as part of a higher price for a new product. But that goes in volume, if you see what I mean.

A follow-up on the marketing expenses, they have come down as a percentage of service in Q3. I mean are you skipping down your marketing efforts or it's just a temporary phenomenon?

No, of course, we -- like if you take it on the mining side, of course, we have adapted in this field here and there. But it's not that we have started to go crazy, cost cutting exercise, we have not done that.

But of course, like I said, when I used to work on the service side, of course, we really try to be executers, some of them are adapting here then, but I don't there is any significant. You should not read anything on that that they are doing some project here and there.

The feet and street tradeshow is still at a good high level.

On your outlook that you are changing this quarter on the near-term demand outlook, now you are looking for the demonstration on about the same level as in previous quarter basically. I just want to understand what has changed there, because as I can understand that you have been talking about frac demand situation for equipment for a long time now and expectation of service growth.

So is it your view on the growth potential in the service business that has changed or in the equipment side?

Not on the service side. And you remember, when I started, in beginning of our presentation here is that is the mix development and mixed in different circumstances.

But what make those changing is it's not on the service side, it's more on the equipment side. You see the mining -- you know, before, I have been talking all this time about the big tickets, like I said it is already four, five quarters, but also now you have the oil and gas part.

You have also a bit of Brazil. You have a bit more China, and that we cannot compensate fully with a stronger Europe, a reasonable U.S.

So that made us really to be a bit more, yes, you can say, cautious, but, okay, it is what it is. Because if you take China now as an example, because we didn't elaborate so much on that.

If you are in shipyard, it's tough. If you are in steel production, it's tough.

If you are in coal, it's tough. But if you are in medical, oh, it's hallelujah.

If you are in the flex screen, it's hallelujah. Even if you're in agriculture in China, it's good.

And then you have to see, where is the weight of all this past and that makes it actually rather difficult to make a good straightforward analysis and that's what we came to the title of mix development, because it's not straightforward. And if you listen to my explanation, what in hell is he seeing now, it's down here, it's up there.

It's really swinging from left right to center.

But until, so you don't expect equipment to be down sequentially?

Yes, I think maybe. We have a positive -- if you read the outlook straight, I have been talking of positive service and the service is 45%, then equipment must be a little bit down, because otherwise my math [multiple speakers].

But I think you need some degree of error here [multiple speakers].

And that could really, I'd tell you, if I could really make this reaction for now sitting here into three months, I will not do this job. I would maybe sit somewhere else and make [multiple speakers].

But you need to take a little bit into consideration its weighting.

May I follow-up with a question on mining and the cancellation or the cancellations, because as I understood they were quite a few. So are all of the cancellations coming from one single customer or are you seeing this more broadly among many customers?

And what you think the risk is for further cancellations in Q4?

The reason I say cancellations is from two customers and that's a couple of machines. And when I say that, and I said it in plural than I had to say, okay, Ronnie, why you say it like that, that this is several machines, big machines.

And it's from two customers in two countries.

And then, lastly, shall we expect any cash outflow from the acquisition of Henrob in Q4 or will that come in 2016?

You mean the deferred purchase amount. Well, to be perfectly honest, I don't have it in my head.

It's continuous, but I think it goes into next year. But if there is anything --

If I recall, I think it will be next year.

Yes, I think so too.

But I hope we can think.

I hope we do, because that means that the business is striving and going forward.

And the business is -- I'll elaborate a bit on that as this is not so small. I think it's still going on in the right direction.

So that's going to be get good deliveries. So that's one thing, so with output.

And second, also the attraction we get, this is good.

Can I ask on automotive CapEx? You did say that you don't expect a substantial impact, but could you talk to us about how much visibility you have on that and your kind of thinking behind it in customer conversations that keep you positive on that segment?

If I listen, and you got the occasion, as you come to the Capital Markets Day to us to guide straight and do that, there's no problem. The projects on the different models is still good.

I think also our CSA business, our adhesives, our dental business is still getting good attraction. So from that point of view, I have not heard them immediately to say it goes down.

Now, how far if the ability, I think they discussed the project. But again, and we know the case now in Volkswagen, if there is certain measures going to be taken in whatever next Board meeting and they cut whatever, yes, of course, then we will also be affected.

But on the other hand, I see still good projects coming on from the older players, even from the Korean players, from the Chinese players, from the Japanese players, because we're also expanding, we're extending our offer. Now, we just talked with Andre is about Henrob, I think we get more attraction.

So that was also the reason why we did this type of expansion over product range.

And a quick follow-up on FX for Edwards. I think at the beginning of the year you said that Edwards was hedged for this year, so wasn't getting any of the benefit and you then stopped hedging, so if mix rates didn't move then you would get it next year.

Can you just update us on that, if we should expect anything next year?

We have stopped, but it doesn't mean that there were not still remaining hedges live, if I put it that way. So that's true.

But it's sort of tailing off, if I put it that way. The situation is, of course, different when you are in pounds and if you're in Korean won, et cetera, compared to the normal Atlas Copco structure of exposure.

So hence, that is the reason why they have been negatively affected, while the rest of the group has had a profit margin improvement, if you see what I mean. But I don't want to go into details exactly on how big impact that is.

It's, of course, diluted a little bit within the big compressor technique, so we shouldn't make it a big impact point. But on the business as such it has affected, of course, to a certain extent.

But can I elaborate on that part. Edwards profitability is still at the good [multiple speakers] slightly negative, but still --

Compared to the Q3 last year, it is not as high as it was, but its still at a very good level.

Yes, where we had the negative FX.

And the negative FX effect is part of that.

My first question relates to the compressor business. Could you please help us to understand the different growth components for service, for the large compressors, and the small-medium compressors to get to the flat organic growth year-on-year?

Service plus?

Yes, I heard that, but is it four or is it eight?

I think, Peder, we never -- I think you can ask my peers on this, but I never give that type of percentages. But I can say it it's still at the good level.

And this isn't this type of magnitude what you just mentioned. Large is down.

I think you can maybe, I think almost made a close to, not double-digit, but coming close. And then you have the small-to-medium size and the small-to-medium size asked a little bit explanation, because that is the yellow canaries, if you remind me.

You heard me talking about Quincy during one of the calls here of your question, that's oil and gas, that this down significant. And then also we have in certain segments also in China where I was talking about, like shipyards, steel production, coal, where also small-to-medium size compressors also had exposure, where it got down.

If you take excluding this, you have a still a slight positives on the small-to-medium size. So if you take the small-to-medium size and don't in total, you will also have a small minus.

If you take away, this oil and gas Quincy and you take some statements away in China, you will have plus.

Could I just ask on the guidance? I mean, last guidance was slightly up.

We talk about sequential demand. Now it's flattish.

Just to be very clear here, are we talking about invoice sales or are we talking about organic orders, it's starting to be quite different stuff here?

The outlook. He asked the outlook.

Maybe you can explain what the outlook, what's he needs to understand behind the -- what do we mean with demand?

Yes, well, demand is what we try to do all the time is we say, what is our customer intelligence setting us, what are the sales companies feeling and what is the report from each of the divisions in terms of what is the activity level? What do we see?

Of course, it translates normally into a similar picture, when you look at our order development, but really what we are not wanting and what we are not willing to do, which makes an order projection, so to speak, for the next three months, just as little as we make a profit projection for the next three months. So it is to try at least to help understand how we asses the customer demand compared to what we have seen in the last quarter.

That's what we really mean. And in that, we, of course, know that a positive development on service demand will normally not suddenly turn into a negative one, et cetera, et cetera.

So the trends are, of course, one guidance for us to say this and to change the outlook, but it's not really an order projection. It's really trying to feel all the companies that we serve, the segments that we serve, going to stay roughly at the same level or is there an indication that is going down somewhere or up somewhere.

And to elaborate on this, because I don't like to be wrong; of course, we like to be, because how come we are off, because that's another one, because that irritates me. I think first, of course, you can say the cancellation that I had never expected that we got that.

I think the more reaction of oil and gas, although it's not big exposure for us, maybe 5%, 6%, so we have it like, but I think the drop is significant. And that then, if the drop a significant, yes, you see it, even if it's small.

And the other one is that we had lower than I expected semicon and the vacuum. And if you take these three together, then you got there, then you compare.

It's not more complicated.

A question on your cost base. I see your headcount was down 2% year-on-year in the quarter, which I think the biggest drop since '09, '10.

And I wondered, if you could elaborate, firstly, on which regions or divisions are seeing the biggest decline? And secondly, when you look forward at your headcount plans into the fourth quarter, into the next year, should we expect that rate of headcount decline to increase or decrease?

James, we were waiting for your question, because it's already over 4, but I knew you were hanging in so that was a special service to you. But I think it's a good question actually.

And where do you see the downturn in the headcount, and that is first, we even have compared to the sales volume and service, we had slightly changed in headcount and service. And why it's coming on, because we have been working hard the last year on efficiency and service, mainly in mining and rock excavation, but also a little bit in the CT area, and that also has yielded in a better profitability.

Whereas the biggest change is in mining and rock, and then you have a bit in CT and a bit in CR that is where we have now. Where you can expect most of it to come, still to come, is on the larger units from the different businesses.

And then I'm hinting to gas and process and I'm hinting to the larger units for mining and rock excavation, there you should expect most things to come. Of course, we're adapting also on the vacuum side, but there we do with stamps, where we have a built-in agility and that will not cost us any -- of course, it is always not fun to do it, but it will not be any guess out that we have.

Where if you really want to make a sensitivity analysis on the headcount, you would see that these guys are maybe not going down as much as they want to or they have to. And this is mainly coming from the R&D, where we have by design kept the people and then second also, in the feet and the street, where by design, by agreement also, the Board, we say we hang in.

Of course, we make sure that the people are efficient, that we get efficient R&D in all those product, but there you will see that this flexibility, which we should normally could apply, by design, we have kept these people.

And if we think forward to next year, do you think that pace of decline might get bigger. Is this a start of something more material or this is sort of run rate that we could expect and what you see in the current order trends?

Of course, I think, on the other hand the most of our people, if you look, are not sitting in the manufacturing. Now, we have more service people than we have manufacturing people.

And in service, we are still growing. So therefore, of course, we have to be brutal on that, like I used to work again on the service side, but there we have many more people than we have in manufacturing.

And maybe we have 12,000, 13,000 service people, and we have maybe 9,000 to a little bit maybe bit less than 10,000 manufacturing people. But on the manufacturing people, which is equal to equipment, yes, if the volume is not there, we have to adapt that.

And that we do. But on the other hand, again, and I am repeating myself, and by design I keep my design about even in mining and rock excavation.

We keep investing in design and development. And actually yesterday, we had the board meeting, we discussed that we set, we keep; we keep committed to the automation, we keep committed to the mine of the future, because step is where -- yes, when the upturn comes that is where we will live from.

End of Q&A

Thanks a lot. I see here that there might be some more questions on the line.

We took a little bit longer than an hour, but it was the fault of me and Ronnie, taking a little bit too long time in the beginning. But I hope that you feel that you are very welcome to come back to any of us, including Mattias, and Karin Linnea, the Investor Relations office for follow-up questions of course.

But for now, thank you very much for participating. And hope to see many of you at the Capital Markets Day in Stockholm, the November 17.

So thanks for today. Bye, bye.