ATLAS COPCO Interim report at June 30, 2003 (unaudited)
July 17, 2003
Profits up in Q2
Near-term demand outlook The overall demand for the Group's products and services is expected to be unchanged or improve slightly. The construction business is expected to remain weak in most regions while the outlook for demand from industrial sectors is slightly positive. Demand from the mining industry is foreseen to be favorable and Asia is expected to continue its positive development. Summary of half-year results Atlas Copco Group Orders received by the Atlas Copco Group in the first six months of 2003 decreased 9%, to MSEK 22,401 (24,699), primarily reflecting a negative currency translation effect of 11%. Volume for comparable units decreased 1%, price increases added 1% and structural changes 2%. Revenues declined 9%, to MSEK 21,548 (23,740), corresponding to a 1% decline in volume. The Group's operating profit decreased 4% to MSEK 2,378 (2,470), corresponding to a margin of 11.0% (10.4). The negative impact of changes in exchange rates compared with the previous year was approximately MSEK 550 for the first half-year, affecting the margin negatively by about 1 percentage point. Profit after financial items amounted to MSEK 2,168 (1,986), up 9% and corresponding to a margin of 10.1% (8.4). The negative currency impact on profit after financial items was approximately MSEK 475 for the first six months. Net profit totaled MSEK 1,446 (1,261), or SEK 6.90 (6.02) per share. Operating cash flow before acquisitions and dividends equaled MSEK 2,615 (2,552). Review of second quarter Atlas Copco Group Market development The demand in North America stayed largely unchanged compared to the most recent quarters. The relatively quick ending of the war in Iraq did not produce any significant effects on business activity, even though some indications of improved business and consumer confidence were noted. Seasonally adjusted, the construction market activity deteriorated somewhat compared with the most recent quarters. Non-residential building was relatively flat, but still about 10% below previous year, while residential building and infrastructure decreased. This continued to affect the demand for rental equipment, light construction equipment and tools. Capacity utilization in the U.S. manufacturing sector remained low and no major trends in the demand for investment related equipment were noted in the quarter. Demand from the mining industry in the region continued at a favorable level. In South America, the market situation remained more or less unchanged with positive demand development for mining applications, depressed construction activity and relatively stable demand from industrial sectors. The demand development in Europe continued to be mixed. Clearly positive trends were seen from most customer segments in Eastern Europe and Great Britain while the business climate deteriorated in Southern Europe and in the Nordic region. In the EU the demand for new equipment from the construction industry remained on a low level, even deteriorating further in some important countries like Germany. Demand from the manufacturing and process industries stayed relatively favorable in the whole region, supported primarily by the increase in aftermarket business. In the Africa/Middle East region, the very strong development continued in South Africa while the demand in the Middle East was mixed. The positive demand development continued in Asia/Australia. Apart from China, where the strong growth continued, South Korea, Taiwan, South East Asia and Australia also recorded favorable demand trends. Earnings and profitability Operating profit increased to MSEK 1,306 (1,304) corresponding to an operating margin of 11.7% (10.8). Unfavorable changes in exchange rates, compared to previous year, affected the operating profit negatively by about MSEK 320, or 1.5 percentage points on the margin. Slightly higher revenue volumes, efficiency measures and price increases managed to offset the currency effect. The operating profit included a MSEK 43 positive effect from lower amortization expense as a result of the goodwill impairment charge in Q3 2002, and a MSEK 15 restructuring charge within Construction and Mining Technique. Previous year's profit included a restructuring cost of MSEK 48 in Industrial Technique. Net financial items amounted to MSEK -94 (-230), of which net interest items accounted for MSEK -97 (-199). Interest expense continued to decline year-on-year, a result of the strong cash flow in the last 12 month period, a weaker U.S. dollar and lower effective interest rates. Profit after financial items improved 13%, to MSEK 1,212 (1,074), to a margin of 10.9% (8.9). Net foreign exchange effects were about MSEK -275. Net profit totaled MSEK 810 (674), or SEK 3.87 (3.22) per share. The return on capital employed during the 12 months to June 30, 2003, was 13% (12), and the return on shareholders' equity 12% (11), excluding the goodwill impairment charge in Q3 2002. The Group's weighted average cost of capital (WACC) is calculated at 7.8%, corresponding to a pretax cost of capital of approximately 12%. Cash flow and net indebtedness The operating cash surplus after tax reached MSEK 1,664 (1,605), corresponding to 15% (13) of Group revenues. Working capital decreased by MSEK 626 (increase of 19), as accounts payables increased almost in line with rental fleet investments made in the quarter. Net investment in tangible fixed assets, including sales of used equipment, was MSEK 777 (436). Operating cash flow before acquisitions and dividends equaled MSEK 1,424 (1,029). The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to MSEK 11,506 (17,184), of which MSEK 1,819 (1,798) was attributable to pension provisions. The debt/equity ratio (defined as net indebtedness divided by shareholders' equity) was reduced to 58% (67), in spite of the goodwill impairment charge of MSEK 6,950 in Q3 2002. Investments, depreciation and amortization Gross investments in property and machinery totaled MSEK 174 (253). Gross investments in rental equipment amounted to MSEK 987 (629). Depreciation on these two asset groups was MSEK 204 (237) and MSEK 485 (595), respectively, while amortization of intangible assets equaled MSEK 134 (180). Asbestos cases in the United States As of June 30, 2003, Atlas Copco has a total number of 169 asbestos cases filed with a total of 25,724 individual claimants. It is important to note that none of these cases identifies a specific Atlas Copco product. In each case there are several defendants, on average 162 companies per case. During the second quarter 2003, 5 cases were dropped, as there was no evidence of an Atlas Copco product being involved. The Group has not deemed it necessary to book any provisions related to these pending cases. People At June 30, 2003, the number of employees was 25,633 (26,222). For comparable units, the number of employees decreased by 760 from June 30, 2002. Employee benefits As of January 1, 2004 the Group will implement the new Swedish accounting standards RR29 Employee benefits, which is based on the International Accounting Standard IAS19. The one-time-effect of this change will be charged directly to shareholders' equity in accordance with RR5 Accounting for changes in accounting principles, and has no cash flow or income statement effect. The one-time effect on equity has been preliminarily estimated to MSEK 700. The preliminary amount is calculated on the situation as per December 31, 2002. The amount to be booked on January 1, 2004 will of course be affected by changes during 2003 in key parameters, e.g. interest rates and valuations of pension funds. This is purely an accounting change and the Group's obligations related to pension benefits and other employee benefits will consequently not be affected by the change. Equity and distribution of shares A provision is booked against shareholder's equity as the Atlas Copco share price is lower than those of the Atlas Copco employee option plan contracts. As of June 30, 2003, the provision amounted to MSEK 63 (138 at Dec 31, 2002). Share capital equaled MSEK 1,048 (1,048) at the end of the period, distributed as follows: Orders received amounted to MSEK 4,105 (4,300), down 5% but corresponding to an increase in volume of 2%. The negative translation effect into SEK was approximately 8%, prices were up 1% and acquisitions added less than 1%. Revenues decreased 2%, to MSEK 3,972 (4,039), corresponding to a healthy volume increase of 5%. Order volume for industrial compressors continued to grow, primarily driven by large oil-free units. Development for small and medium-sized industrial compressors was also positive but less pronounced. The industrial aftermarket business continued to develop favorably. Asia was the strongest region with growth recorded in most countries, including Japan, where business has gradually picked up from a low level. In Europe, orders were marginally up, with different trends between regions. Orders increased in Great Britain and Eastern Europe while the Nordic region, France and Italy were weak. Order intake for industrial compressors in North America was somewhat below previous year's level. Gas and process compressor orders improved, primarily in Europe, but dropped compared to the same quarter previous year, which included a large bulk order in the Middle East. Portable compressors and generators, primarily serving construction-related customers through rental companies and distributors, suffered from the unfavorable market conditions in Europe and North America. Sales to the Rental Service business area picked up in the quarter as their replacement investments increased. The specialty rental business and the after market revenues continued to develop positively. Operating profit amounted to MSEK 735 (771), corresponding to an operating margin of 18.5% (19.1). The negative currency impact, resulting from the deterioration of the U.S. dollar versus the Euro, affected the margin negatively by about 1.5 percentage points. As a result of higher revenue volumes, a continued favorable sales mix, including a higher share of aftermarket revenues, a large portion of the currency effect was offset. Return on capital employed (past 12 months), increased to 69% (67). Seasonally adjusted, the U.S. construction market continued to deteriorate somewhat and the normal seasonal pick up in activity did not materialize until late in the period. Non-residential building was about 10% below same quarter previous year and residential building fell from its peak in the first quarter. Demand from the industrial market remained unchanged as capacity utilization continued at low levels. Total revenues decreased 22%, to MSEK 2,607 (3,357), primarily due to a negative currency translation effect of 17%. Rental revenues, accounting for 75% of total revenues, dropped 4% in local currency, consisting of an increase in rental rates of 3% and a decline in volume of 7%. Part of the drop in volume was due to the lower number of stores compared to the second quarter 2002. At the end of the period the total number of stores was 496 (525). Sales of merchandise, spare parts, and new equipment, representing 14% of total revenues, were down 27% with the bulk of the drop coming from lower sales of new equipment. Sales of used equipment increased 27% compared to previous year. For the first half year, however, sales of used equipment were down by 5%. Operating profit (EBIT) increased to MSEK 212 (169), corresponding to a margin of 8.1% (5.0). The higher margin was achieved in spite of the revenue drop and thanks to significant improvements in efficiency, both in operations and in capital employed, and the successful management of rental rates. Lower goodwill amortization improved the margin by 1.6 percentage points or MSEK 43. Profit margin before non-cash items such as depreciation and amortization (EBITDA) improved to 28% (26). Return on capital employed (last 12 months and excluding goodwill impairment charge) was 3% (3). Rental fleet at original cost was 6% lower than in Q2 2002 and the average age was about 3.6 years. Replacement investments in the fleet increased compared to the most recent quarters. This reflects seasonal variations and the ambition to keep the average age of the fleet stable. The operating cash flow increased further in the quarter. Rental fleet utilization continued to improve, both sequentially and year-on-year. There was a further reduction of the non-available fleet (fleet in workshop, under transport etc.) which ended the quarter at an all-time-low, below 17%. Total number of employees was 5,325, down by 83 in the quarter and by 884 compared to previous year. Order intake amounted to MSEK 2,681 (2,935), down 9% as a consequence of the negative translation effect of 11%. Volume for comparable units was flat while acquisitions added 2%. Prices were unchanged overall. Revenues were MSEK 2,631 (2,827), corresponding to a 2% gain in volume. The positive order development for industrial tools and their aftermarket continued. Order volume grew in most regions, both for the motor vehicle industry and for the general industry. In North America, however, the quarter was somewhat negative in spite of some large orders for fastening tools and assembly systems to the motor vehicle industry. Sales to the motor vehicle industry in Brazil, South Africa and China achieved healthy growth. Orders for professional electric tools for construction and installation work continued to suffer from low market demand in most regions. The poor development in North America in the first quarter was not repeated as the effects of inventory reductions in the sales channels disappeared. In Europe, the heavy-duty products, branded Milwaukee, performed relatively better than the average and indications of improved market share were noted. Industrial Technique is currently running several manufacturing restructuring projects. The projects are progressing according to plan and will be concluded before the end of the year. Some positive result effects have already been realized. Operating profit improved to MSEK 262 (188), corresponding to a margin of 10.0% (6.7). Q2 2002 included a restructuring provision of MSEK 48, without which the margin would have been 8.3%. The unfavorable development of the U.S. dollar had a negative effect of around 1 percentage point on the operating margin. This was more than offset by higher revenue volume, product cost reductions, favorable sales mix and contribution from recently acquired businesses. Return on capital employed (past 12 months) improved to 15% (12). Orders received increased 7% to MSEK 2,184 (2,041), corresponding to an increase in volume for comparable units of 11%. The negative translation effect was 9%, price increases were on average 1% and acquisitions added 4%. Revenues amounted to MSEK 2,003 (1,952), up 3%, corresponding to a volume increase of 6%. Orders from the mining industry continued to develop favorably. Sales of loading equipment and the aftermarket business grew significantly and orders for underground drill rigs remained on a relatively high level. The anticipated increase in demand for exploration drill rigs to underground mines did, however, not materialize. Geographically, orders from the mining industry showed the best development in North America, Eastern Europe, and South Africa. Demand for crawler rigs for surface applications, such as building-stone production in quarries and rock excavation for road and railroad projects, and underground drilling rigs for tunneling projects was again good. In tunneling projects, the trend towards renting equipment rather than buying, continued. Light construction equipment, primarily breakers and drills, had another negative quarter in line with the weak market conditions for general construction activity in North America and Europe. In June, the acquisition of two South African companies within the exploration drilling business was announced. Professional Diamond Drilling Equipment and Mining Drilling Services combined had annual sales of about MSEK 90 in 2002 and 60 employees. The transfer of the loading equipment business from Oregon, the United States, to Örebro, Sweden, progressed according to plan. Delivery efficiency of spare parts has improved and increased orders for machines signal confidence from customers. Operating profit was MSEK 151 (203), including restructuring charges of MSEK 15. The negative currency impact increased even further and affected the operating margin by more than 3 percentage points. Return on capital employed (past 12 months) was 16% (23), and 19% excluding restructuring costs. Previous near-term demand outlook (Published April 28, 2003) Demand in the Group's two main regions, North America and Europe, is not expected to show any material change in the near term. Key business indicators such as capacity utilization, industrial production and building and construction activity in these regions are still weak. Demand from the mining industry and the overall demand in Asia is expected to remain favorable. Accounting principles The interim report has been prepared using the same accounting principles as disclosed in the Annual Report 2002 and in accordance with the new accounting recommendations that were implemented January 1, 2003. The new recommendations did not change the Group's reporting. Stockholm, July 17, 2003 Gunnar Brock President and Chief Executive Officer Financial targets The overall objective for the Atlas Copco Group is to achieve a return on capital employed that will always exceed the Group's total cost of capital. The targets for the next business cycle are: · to have an average annual revenue growth of 8%, · to have an average operating margin of 15%, and · to challenge continuously the operating capital efficiency in terms of stock, receivables, and rental fleet utilization. This will lead to that shareholder value is created and continuously increased. The strategy used for reaching these objectives will follow the Group's proven development process for all operational units in the Group: stability first, then profitability, and finally growth. Forward-looking statements Some statements in this report are forward-looking, and the actual outcomes could be materially different. In addition to the factors explicitly discussed, other factors could have a material effect on the actual outcomes. Such factors include, but are not limited to, general business conditions, fluctuations in exchange rates and interest rates, political developments, the impact of competing products and their pricing, product development, commercialization and technological difficulties, interruptions in supply, and major customer credit losses. For further information Atlas Copco AB (publ) SE-105 23 Stockholm, Sweden Phone: +46-8-743 8000, Fax: +46-8-644 9045 Internet: www.atlascopco-group.com Corp. id. no: 556014-2720 Media Annika Berglund, Senior Vice President Group Communications Phone: +46 8 743 8070, Mobile: +46 70 322 8070, [email protected] Analysts Mattias Olsson, Investor Relations Manager Phone: +46 8 743 8291, Mobile: +46 70 518 8291, [email protected] Presentations from Atlas Copco For your convenience, a PowerPoint presentation of Atlas Copco's quarterly results will be published on www.atlascopco-group.com > Investor Relations > Presentations Interim report at September 30, 2003 The third quarter report will be published on October 23, 2003.