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April 20, 1999
Weak start of the year
The Atlas Copco Group's revenues for the first three months of 1999 decreased 4 percent, to SEK 7,751 m. (8,108). Orders received decreased 3 percent, to SEK 8,156 m. (8,404). Foreign exchange fluctuations had a positive translation effect of 1 percentage point. The Atlas Copco Group's profit after financial items decreased, to SEK 557 m. (881). The profit margin was 7.2 percent (10.9). Outlook The outlook for Europe is still somewhat weak, mainly owing to continued low business confidence in Germany, although some sectors such as the automotive industry are expected to remain strong. Demand in North America is expected to remain at a healthy level. For the Asian region, growth in some markets, from a low level, is expected to compensate for the negative trend in demand in Japan. In South America, the extremely poor business conditions are expected to continue, mainly as a result of high interest rates and low metal prices. The latter is also expected to cause lower demand in southern Africa, while northern Africa and the Middle East should benefit from recent increases in oil prices. The overall demand for Atlas Copco's products is expected to remain at the present level in the near term. Operating profit margins are expected to benefit from the improvements in the cost structure made in the first quarter. Market development Demand in Europe weakened with some exceptions, notably southern Europe. In Great Britain, the manufacturing industry remained at a low level of activity. In the United States, demand for electric power tools and equipment rental continued to expand, while orders related to investments in the process industries were weak. Construction activity remained at a healthy level. Demand in Latin America fell dramatically during the period. High interest rates and general financial instability, mainly in Brazil, and low metal and oil prices affected investments in the region very negatively. Asian markets remained weak, and Japan continued trending down. Demand in Africa and the Middle East was also weak, as a result of low commodity prices. Demand from the mining industry for investment goods decreased further worldwide. Sales development Orders received were SEK 8,156 m., 3 percent less than in the same period the preceding year owing to particularly poor sales in January and February. The performance of the four business areas varied widely, from satisfactory growth to a substantial decrease. Prices were on average unchanged, while changes in foreign exchange rates had a positive effect of 1 percentage point. Revenues decreased by 4 percent to SEK 7,751 m. Earnings Operating profit decreased by SEK 318 m., to SEK 725 m. (1,043), or 30 percent compared to the strong first quarter of 1998. Profit dropped steeply mainly owing to the volume decrease and an unfavorable shift in the overall composition of volumes, with declines concentrated in some of the most profitable businesses. Adjustments in the operating units to adapt to a lower level of activity, also having a negative impact in the first quarter. The costs of these adjustments were similar in size to those included in the third and fourth quarters of 1998. The recent favorable changes in exchange rates, that is, the U.S. dollar strengthening against the euro and Swedish krona, had only marginal effects in the first quarter as a result of normal hedging of foreign currency flows. Operating margins dropped, to 9.4 percent (12.9). Net financial items amounted to SEK -168 m. (-162), of which net interest items accounted for SEK -165 m. (-160). Net interest from exchange rate hedging on foreign net assets was negative, at SEK -6 m., compared to a positive SEK 2 m. in the preceding year. Profit after financial items decreased 37 percent, to SEK 557 m. (881). The profit margin was 7.2 percent (10.9). Net profit for the quarter totaled SEK 358 m. (561), or SEK 1.95 per share (3.06). The return on capital employed during the 12 months to March 31, 1999, was 16 percent (20), and return on shareholders' equity 14 percent (18). Cash flow and net indebtedness The operating cash surplus after tax for the first three months of 1999 reached SEK 748 m. (750), corresponding to 10 percent (9) of Group revenues. Working capital decreased SEK 350 m. (increased 263) during the period affecting positively the cash flow from operations, which increased to SEK 1,098 m. (487). Investment in tangible fixed assets was SEK 526 m. (483). Net cash flow equaled SEK 632 m. (162). The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to SEK 9,767 m. (10,093), of which SEK 1,351 m. (1,940) was attributable to pension provisions. The decrease in pension provisions reflected the creation in the first quarter of 1999 of a pension trust in Sweden that is not consolidated in the Group's accounts. The amount, SEK 522 m., simultaneously reduced liquid assets and thus did not affect reported net indebtedness. The debt/equity ratio, defined as net indebtedness divided by shareholders' equity, was 62 percent (71). Liquid assets at the end of the period totaled SEK 1,678 m. (1,781). Including minority interests, the Atlas Copco Group's shareholders' equity totaled SEK 15,730 m. (14,176), or SEK 86 per share (77). The equity/assets ratio was 42 percent (40). Investments Investments in property and machinery totaled SEK 207 m. (160). Investments in rental equipment reached SEK 319 m. (323). During the period, total depreciation on these two asset groups was SEK 373 m. (354). Distribution of shares Share capital amounted to SEK 918 m. at the end of the period, distributed as follows. Personnel At March 31, 1999, the number of employees was 23,028 (23,970). For comparable units, the number of employees decreased by 500 in the first quarter of 1999. Year 2000 readiness In March 1996, Atlas Copco initiated a Group-wide survey of computer systems in use. Every site reported on the present status of its systems and its action plans to handle the year-2000 issue for those systems that were not judged year-2000 compliant. Year-2000 follow-up is on the agenda of the Business Board at each division and site, and status reports are mandatory items at Board Meetings. All costs for modifications to comply with the year 2000 are charged as operational costs. Group Management believes that, based on the Group-wide survey and actions already taken and now under way, the remaining costs to the Group to become year-2000 compliant will not have a material effect on the Group's financial position or the results of operations. Management further believes that modifications to existing software and conversions to new systems will avoid any significant problems being caused in its computer systems by the year 2000. However, the operations of Atlas Copco's computer systems are vulnerable to third parties', principally suppliers', possible failure to remedy their own year-2000 issues. To the extent that systems by third parties on which Atlas Copco's systems rely are not converted in time, there can be no assurance that such third parties' non-compliance would not have a material effect upon the Group's systems. Structural changes affecting the reporting period As of January 1, 1999, Rental Service is the fourth business area, and Prime Service is its only division. Prime Service constituted a separate division in the Compressor Technique business area throughout 1998. Effective January 1, 1999, Rand-Air Ltd., South Africa, was acquired by Atlas Copco. Rand-Air is a compressor rental company. The company has about 200 employees and annual sales of roughly SEK 90 m. and is part of the Portable Air division. Effective November 1998, Atlas Copco acquired JKS Boyles, a Canadian manufacturer of exploration drilling rigs. The company has 79 employees and annual sales of about SEK 115 m. JKS Boyles is part of the Atlas Copco Craelius division. Effective October 1, 1998, Atlas Copco combined the operations of its U.S. subsidiaries Atlas Copco Rental, Inc., and Prime Service, Inc., to better meet the needs of industrial companies for rental equipment. During 1998, the Prime Service division acquired three equipment rental companies in the U.S. and Mexico, with aggregate annual revenues of roughly SEK 340 m. Business areas Starting in 1999, reported orders and revenues by business area also include intercompany sales to other business areas. Figures for 1998 have been adjusted accordingly. Compressor Technique The Compressor Technique business area consists of five divisions in the following product areas: Industrial compressors, Portable compressors, and Gas and process compressors. Orders received during the period declined 9 percent, to SEK 3,171 m. (3,484). Sales in Europe slowed in many markets, and Latin America, particularly Brazil, performed very poorly. Orders received for large compressors decreased more than the average. A significant part of this decrease was related to the U.S. The industrial compressor range that was launched in the latter part of 1998 continued to sell well. Portable compressors enjoyed healthy demand from the equipment rental industry, while other segments declined. Revenues decreased 12 percent, to SEK 2,971 m. (3,384). Invoicing from the main compressor facility in Belgium, mainly of spare parts, was negatively affected by start-up problems for a new logistics system. Operating profit fell 36 percent, to SEK 390 m. (607), resulting in an operating margin of 13.1 percent (17.9). The profit and margin weakened mainly as a result of lower volumes, changes in the product and market mix, and the start-up problems. Construction and Mining Technique The Construction and Mining Technique business area consists of five divisions in the following product areas: Drilling rigs, Rock drilling tools, Construction tools, and Loading equipment. Orders received during the period were SEK 1,445 m. (1,620), down 11 percent. The divestment of the tunnel-boring business accounted for 5 percentage points of the decline. The low level of investment in the mining industry, affecting sales of drill rigs and loaders was only partly mitigated by some large orders, mainly in Canada. Construction activity remained low in Europe, while robust construction activity boosted sales in the U.S. market. Revenues amounted to SEK 1,353 m. (1,479). Operating profit decreased SEK 20 m., to SEK 84 m., corresponding to a margin of 6.2 percent (7.0). Less volume and costs for recently introduced products reduced operating profit. Industrial Technique The Industrial Technique business area consists of four divisions in the following product areas: Electric and pneumatic power tools, Assembly systems, and Motion control products. Orders received during the period increased 5 percent, to SEK 2,610 m. (2,497). Orders from the automotive industry, particularly for assembly systems, were strong, while a slight slowdown was noted in production tools. In Japan and Brazil, however, demand from automakers was very weak. In the U.S., sales of electric power tools remained strong, while sales of industrial tools to general manufacturing were weak. Orders for electric power tools in Europe were slightly less than in the same period the preceding year. Revenues were basically unchanged from the preceding year, at SEK 2,448 m. (2,445), but included a positive foreign exchange effect of 2 percentage points. Operating profit decreased, to SEK 216 m. (260), as a result of changes in the product mix and an unsatisfactory cost structure in some units. The profit resulted in a margin of 8.8 percent (10.6). Rental Service The Rental Service business area consists of one division in the equipment rental industry, providing services to the construction and industrial market. Revenues during the period increased 23 percent, to SEK 1,082 m. (878). Acquired units and the industrial rental business in the U.S., transferred from Compressor Technique, accounted for about 15 percentage points of the increase. Demand from most customer and market segments remained favorable considering the seasonal nature of the business. The South was particularly strong, while activity in regions with adverse weather was lower. Operating profit, which includes all related goodwill amortization, was SEK 83 m. (97), corresponding to a margin of 7.7 percent (11.0). Weaker earnings resulted from a low utilization rate for the period, because of seasonally low rentals and continued investment in rental equipment. The latter applied particularly to new locations and was concentrated in the first two months of the year. Pressure on rental rates in some areas also had a negative effect on earnings. Stockholm, April 20, 1999 Giulio Mazzalupi President and Chief Executive Officer The interim report on the Atlas Copco Group's operations during the second quarter of 1999 will be published on August 12, 1999. For further information, please contact Annika Berglund, Vice President, Corporate Communications (media), phone +46 8 743 8070, mobile +46 70 322 8070, [email protected] Hans Ola Meyer, Senior Vice President, Group Treasurer (analysts), phone +46 8 743 8292, mobile +46 70 588 8292,[email protected] Overhead presentations from Atlas Copco For your convenience, an overhead presentation of Atlas Copco's first quarter 1999 results will be published on Atlas Copco's Internet site. Please go to www.atlascopco.com > Investor Relations > Presentations > Investor Presentations Financial information from Atlas Copco during 1999 Atlas Copco will publish the following financial reports in 1999: Interim Reports: - on the first six months of operations August 12, 1999 - on the first nine months of operations October 26, 1999 More information is available at www.atlascopco.com