ATLAS COPCO Interim report at June 30, 2001 (unaudited)

19 jul 2001

Profits up, order volumes remained at good level

Near-term demand outlook  In North America, demand for our products and services is not expected to improve in the near-term. Demand for equipment rental is affected by the general economic situation, and we now expect flat to moderate growth. In Europe, we expect demand to weaken somewhat from recent good levels. In Asia, we expect growth to continue, primarily due to continued strong growth in China.  In summary, overall demand for Atlas Copco's products and services is expected to be somewhat lower or at best unchanged. Summary of half-year results  Atlas Copco Group  Orders received by the Atlas Copco Group in the first six months of 2001 increased 13 percent, to MSEK 25,688 (22,708), corresponding to volume growth of 2 percent for comparable units. The positive translation effect from foreign exchange rate fluctuations was approximately 11 percentage points. Revenues increased 14 percent, to MSEK 24,981 (21,891), also corresponding to volume growth of 2 percent.  The Group's operating profit increased to MSEK 3,155 (2,869), up 10 percent, corresponding to a profit margin of 12.6 percent (13.1). Profit after financial items amounted to MSEK 2,359 (2,073), up 14 percent, corresponding to a margin of 9.4 percent (9.5). Total currency impact was approximately MSEK +300.  Operating cash flow before acquisitions and dividends equaled MSEK 2,478 (8), a sharp improvement from the preceding year due to less need for investment in the rental fleet. Review of second-quarter  Atlas Copco Group Market development  Overall demand in North America continued to decrease in the quarter and most sectors of manufacturing demanded less equipment. The construction industry in the United States also demanded less equipment. However, demand for investment-related machinery from some customer segments, including the motor vehicle industry, remained favorable. Demand for rental equipment continued to grow but at a slower rate than in previous quarters.  Thanks to strong growth in Brazil, the South American region was up in the second quarter. An electric power shortage in Brazil boosted demand for certain equipment.  In Europe, overall demand remained at a relatively high level. Demand for investment-related goods and after-market products and services enjoyed continued growth. Among the major markets, only Germany recorded healthy growth in the quarter, while southern Europe weakened after a long period of strong growth. Some small markets in eastern and in northern Europe recorded substantially higher order volumes than in the second quarter of 2000.  Demand continued to increase in Africa and the Middle East.  Overall positive development in Asia continued in the second quarter with particularly strong growth in China. However, demand in two other major markets, India and Japan, was flat to somewhat lower. Orders and revenues  Orders received totaled MSEK 13,200 (11,620), up 14 percent from the second quarter of 2000. Order volumes were flat, though, as the increase was almost entirely due to positive foreign exchange effects of about MSEK 1,500. Volume gains, primarily in industrial compressors, industrial tools, and rock-drilling equipment, were offset by weak order intake for professional electric tools and large process compressors. Geographically, sales growth in Asia, South America, and Africa managed to offset the negative impact of a slowing U.S. economy.  Revenues increased 13 percent, to MSEK 12,880 (11,374), corresponding to flat volumes for comparable units. Earnings and profitability  In the second quarter, operating profit rose MSEK 151, or 10 percent, to MSEK 1,692 (1,541). This corresponds to a margin of 13.1 percent (13.5). The margin was negatively affected by notably weaker profitability in businesses reliant on the U.S. market, primarily Rental Service, while the favorable foreign exchange situation of a weak Swedish krona and a strong U.S. dollar had a positive effect. The currency impact on operating profit was approximately MSEK 250. The net effect on operating margin was approximately half a percentage point.  Net interest expense equaled MSEK -382 (-394). Foreign exchange gains/losses on financial items were neutral in the quarter (loss MSEK 17). For the first time since 1997, interest expense for the quarter was down year on year. The reasons were strong positive cash flow in the preceding 12 months and lower short-term interest rates in the United States. These factors more than offset the negative translation effect of the dollar-denominated interest expense.  Profit after financial items advanced 16 percent, to MSEK 1,310 (1,130), corresponding to a margin of 10.2 percent (9.9). Total currency impact was approximately MSEK +200.  Net profit for the quarter totaled MSEK 836 (696), or SEK 3.99 per share (3.32).  The return on capital employed during the 12 months to June 30, 2001, was 14 percent (15), and the return on shareholders' equity 13 percent (14). The Group's weighted average cost of capital (WACC) was approximately 7.5 percent (8), corresponding to a pretax cost of capital of approximately 11.5 percent. Cash flow and net indebtedness  The operating cash surplus after tax for the second quarter reached MSEK 1,762 (1,435), corresponding to 14 percent (13) of Group revenues.  Working capital decreased MSEK 84 (increase of 204) during the quarter.  Cash flow from operations before investing activities increased to MSEK 1,846 (1,231).  Net investment in tangible fixed assets was MSEK 518 (2,309) for the quarter. The sharp decrease reflected less need for investment in the rental fleet as a consequence of slower revenue growth and a somewhat higher fleet-utilization rate.  Operating cash flow before acquisitions and dividends equaled MSEK 1,280 (-1,079).  Net cash flow equaled MSEK 96 (-2,236) after dividends paid totaling MSEK 1,121 (1,007).  The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to MSEK 23,200 (21,340), of which MSEK 1,676 (1,380) was attributable to pension provisions. The debt/equity ratio (defined as net indebtedness divided by shareholders' equity) was 87 percent (99). The pure translation effect from converting foreign-currency-denominated loans into Swedish krona was substantial. Net interest-bearing debt would have been approximately MSEK 19,000 and the debt/equity ratio 79 percent, at exchange rates prevailing on June 30, 2000. Investments  Gross investments in property and machinery totaled MSEK 275 (265). Gross investments in rental equipment reached MSEK 789 (2,510). Depreciation on these two asset groups was MSEK 237 (225) and MSEK 701 (558), respectively, while amortization of intangible assets equaled MSEK 181 (159). People  At June 30, 2001, the number of employees was 26,248 (26,349). For comparable units, the number of employees decreased by 562 compared to June 30, 2000, and by 806 compared to December 31, 2000. Distribution of shares  Share capital equaled MSEK 1,048 (1,048) at the end of the period, distributed as follows. Previous near-term demand outlook  (Published April 26, 2001)  In North America, the demand for equipment and consumables related to manufacturing and construction output is expected to remain weak. Demand for equipment rental is expected to continue at a higher level than the underlying markets, supported by the outsourcing trend. Overall, the demand in Europe is foreseen to prevail at the present good level. In Asia, the high level of demand is expected to continue, particularly in China.  In summary, overall demand for Atlas Copco's products and services is expected to remain unchanged, even though the degree of uncertainty in the outlook has increased. Accounting principles  This interim report has been prepared in accordance with the Swedish Financial Accounting Standards Council's recommendation RR20, Interim reports. A number of new accounting standards were implemented in Sweden at January 1, 2001. The application of these new standards did not have any material effect on the Group's financial statements. Compressor Technique Business Area  The Compressor Technique business area consists of five divisions in the following product areas: industrial compressors, portable compressors, generators, and gas and process compressors.  The order intake increased 10 percent, to MSEK 4,260 (3,879), in the second quarter, corresponding to flat volumes. The positive impact of currency translation was about 10 percent, and the net effect of structural changes and prices was neutral.  Order volumes for industrial compressors continued to grow, partly due to strong sales of recently introduced products. Large gas and process compressors recorded lower order volumes compared to the same quarter the preceding year. Large portable compressors enjoyed growth in most market segments, while small machines suffered from slow construction activity in many markets and a continued low level of investment by the rental industry in fleet. Generator sales were very strong in many markets, primarily in Brazil where an acute power shortage created spectacular demand. The positive development of after-market sales worldwide continued in the quarter.  In Europe, the pace of growth in order intake slowed from previous quarters. An exception to this was Germany, where order intake for the quarter was strong. Sales in North America declined. In the United States, negative trends prevailed in portable compressors and gas and process compressors. Canada recorded another good quarter. Overall development in Asia remained strong, primarily in China although some Southeast Asian markets also had a good quarter. Exceptional sales growth was achieved in Africa and the Middle East.  In May, Atlas Copco acquired the generator company Masons, of the U.K. The company reported revenues of about MSEK 140 for the preceding 12 months.  Revenues grew 16 percent in the quarter, to MSEK 4,189 (3,625), corresponding to a volume increase of 5 percent.  Operating profit improved 25 percent, to a record MSEK 831 (664), corresponding to an operating margin of 19.8 percent (18.3). The improvement over last year's already healthy margin was largely a result of the favorable USD/EUR exchange rate and higher invoicing volumes. The return on capital employed (past 12 months) was 67 percent (57). Construction and Mining Technique Business Area  The Construction and Mining Technique Business Area consists of five divisions in the following product areas: drilling rigs, rock-drilling tools, exploration equipment, construction tools, and loading equipment.  Orders received reached a record MSEK 1,986 (1,803), corresponding to an increase in volumes of 1 percent compared to the strong second quarter of 2000. There was a positive translation effect of 8 percent, and prices increased about 1 percent. The net effect of structural changes was +1 percent.  Machine sales to the mining industry were strong in some markets, particularly in Africa, including an important order for underground loaders and rock-drilling rigs in South Africa. Use of product revenues grew worldwide for this customer segment, evidenced primarily in the two rock-drilling divisions.  A relatively low level of orders from the construction industry for machines was partly offset by stronger sales of consumables, parts, accessories, and service to this customer segment. In some European markets, notably Italy, France, and Norway, major orders for construction applications were received. Several substantial orders for rock-drilling equipment were won in China for large railway and hydroelectric projects.  The exploration drilling and ground reinforcement division recorded a relatively stable order volume, although far short of the second quarter of 2000 in which an order worth MSEK 100 was received from the Middle East.  Revenues were MSEK 1,828 (1,809), up 1 percent overall thanks to positive currency translation but down 9 percent in volume.  Operating profit for the quarter rose 5 percent, to MSEK 182 (173), corresponding to a margin of 10.0 percent (9.6). Changes in exchange rates compared to 2000 and further efficiency improvements had a positive impact on the margin and offset the negative effect of lower invoicing volumes. The return on capital employed (past 12 months) was 22 percent (17). Industrial Technique Business Area  The Industrial Technique business area consists of four divisions in the following product areas: industrial power tools, professional electric tools, and assembly systems.  Orders received increased 8 percent in the quarter, to MSEK 3,115 (2,894), corresponding to a drop in volumes of 4 percent. The positive translation effect was 13 percent, and the average price level increased 1 percent. An additional negative effect of 2 percent came from structural changes in India.  Orders for industrial tools continued to grow in the main markets, the United States and Europe, even if at a somewhat slower pace than in the preceding quarters. The motor vehicle industry continued to invest in modern equipment for higher productivity and improved safety. Clear market share gains were noted in this segment.  Sales of professional electric tools were lower than in the preceding year. The negative trend in the United States flattened out. Sales through traditional distribution channels continued to be weak partly compensated by an increase in product offering through the home centers. In Europe, deterioration of demand was noted, particularly Germany.  Volumes outside Europe and North America (less than 10 percent of sales) were positive, mainly owing to sales growth in some Asian markets.  Revenues were MSEK 3,054 (2,805), up 9 percent from the second quarter of 2000, corresponding to a drop in volumes of 3 percent.  Operating profit rose 1 percent, to MSEK 303 (299), for a profit margin of 9.9 percent (10.7). The margin suffered from the effect of lower invoicing volumes and the cost of intensified sales and marketing efforts for industrial tools. On the other hand, the weak Swedish krona and strong U.S. dollar had a positive impact on the operating margin. Return on capital employed (past 12 months) was 15 percent (15). Rental Service Business Area  Since January 1, 2001, the Rental Service business area has consisted of a single division in the equipment rental industry in North America, providing services to construction and industrial markets.  During the second quarter of 2001, revenues expanded 18 percent, to MSEK 3,940  (3,332), including a large positive currency translation effect of 18 percent. Rental revenues (74 percent of total revenues) recorded volume growth of about 3 percent. On average, rental rates were on the same level as in the second quarter of 2000. Total sales volumes were marginally negative, as a result of lower sales of new equipment, parts, and merchandise (18 percent of total revenues) as well as of used equipment (8 percent of total revenues).  Equipment rental revenues kept growing during the quarter despite the sluggish US economy. The usual seasonal pick-up in construction activity was moderate and slow this spring. Rentals in the industrial sector recorded slight growth in the second quarter.  Growth in rental revenue in the United States varied between geographic regions, with the Midwest showing the strongest growth and the Southeast reporting a decline. The rental operations in Canada and Mexico continued to grow in the second quarter.  During the quarter, management focused largely on internal operational structure and efficiency-enhancing projects. As a result, no rental stores were acquired in the quarter. However, seven greenfield start-ups were launched, and eight stores were consolidated as part of ongoing rationalizations. The need for investments in the rental fleet decreased compared to the preceding year, as a consequence of slower revenue growth and a somewhat higher fleet-utilization rate. This contributed to a substantial positive cash flow for the quarter.  Operating profit, which includes all related goodwill amortization, was MSEK 430 (464), corresponding to a margin of 10.9 percent (13.9). Lower profit was mainly the result of a drop in sales volumes for merchandise and used equipment, an unfavorable fleet mix, and remaining operational cost-inefficiency. During the quarter, the total number of employees decreased by 252. The return on capital employed, including acquisition goodwill (past 12 months), was 5 percent (6).  Stockholm, July 19, 2001  Giulio Mazzalupi  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 annual revenue growth of 8 percent,  · to have an average operating margin of 15 percent, and  · to continuously challenge the operating capital efficiency in terms of stock, receivables, and rental fleet utilization.  Overall, achievement of these targets will ensure that shareholder value is created and continuously increased. The strategy for reaching these objectives will adhere to the Group's proven development process for all operational units, focusing on 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:  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]  Overhead presentations from Atlas Copco  For your convenience, an overhead presentation of Atlas Copco's second quarter results will be published on Atlas Copco's Internet site. Please go to > Investor > Presentations  Internet site for the Atlas Copco Group  More information is available at  Interim report as per September 30, 2001  The third-quarter report will be published on October 23.