ATLAS COPCO Interim report at March 31, 2003 (unaudited)
28 apr 2003
Profit increased in spite of weaker demand
Near-term demand outlook 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. Review of first quarter Atlas Copco Group Market development Demand in North America remained weak, primarily reflecting weak market conditions in the United States. In addition to already sluggish US manufacturing and construction activity, the war in Iraq depressed both business and consumer confidence. Seasonally adjusted, non-residential building activity in the United States remained about 15% below previous year and almost 30% off its peak of Q1 2001. The previously healthy residential building activity showed signs of deterioration. Demand for industrial equipment was better than for construction equipment but still negatively affected by the low manufacturing output and low capacity utilization. Mining industry demand, primarily for consumables and after-market products, continued on a good level. In South America, the demand situation improved from a low level and after several quarters of deterioration. The mining industry was the main contributor to this improvement. Despite worsening economic climate in the European Union, demand for the Group's products and services in Europe as a whole stayed on a relatively good level. This was primarily due to the steady growth in Eastern Europe, which offset the weak development in many Western European countries, particularly in France. In Russia and other parts of Eastern Europe, most customer segments showed a positive development, while the situation in the rest of Europe varied between different industries. Construction activity continued to be depressed, affecting demand for light construction equipment, portable compressors and electric tools. Demand from manufacturing and process industry, especially for after-market products, held up well considering the generally weak business environment in the region. The level of demand was favorable in northern Africa and the Middle East, in spite of the war in Iraq, and demand from the mining industry in southern Africa continued to be very strong. In Asia, the positive demand development continued, primarily driven by another quarter of strong growth in China. Demand from the construction and manufacturing industries in Australia continued to improve. Earnings and profitability Operating profit reached MSEK 1,072 (1,166) corresponding to an operating margin of 10.3% (10.0). Unfavorable changes in exchange rates, compared to previous year, affected the operating profit negatively by about MSEK 220. Cost reductions and price increases offset the negative effect of lower revenues. This year's operating profit included a MSEK 45 positive effect from lower amortization expense as a result of the goodwill impairment charge in Q3 2002, and MSEK 12 in restructuring cost in the Construction and Mining Technique business area. Net financial items amounted to MSEK -116 (-254), of which net interest items accounted for MSEK -107 (-235). Interest expense continued to decline year-on-year, a result of the strong cash flow in the last 12 month period, a weaker USD and successful interest-rate management. Profit after financial items improved 5%, to MSEK 956 (912), to a margin of 9.2% (7.8). Net foreign exchange effects were about MSEK -200. Net profit totaled MSEK 636 (587), or SEK 3.03 (2.80) per share. The return on capital employed during the 12 months to March 31, 2003, was 13% (12), and the return on shareholders' equity 11% (11), excluding the goodwill impairment charge in the third quarter 2002. The Group currently uses a weighted average cost of capital (WACC) of 7.8%, corresponding to a pre-tax cost of capital of approximately 12%. Cash flow and net indebtedness The operating cash surplus after tax reached MSEK 1,425 (1,553), corresponding to 14% (13) of Group revenues. Working capital increased slightly by MSEK 36, in contrast with last year's substantial decrease of 668. Consequently the total cash flow from operations reached MSEK 1,389 (2,221). Net investment in tangible fixed assets, including proceeds from sales of used equipment, was down to MSEK 154 (672), due primarily to lower investments in rental fleet. Operating cash flow before acquisitions and dividends equaled MSEK 1,191 (1,523). The Group's net indebtedness (defined as the difference between interest-bearing liabilities and liquid assets) amounted to MSEK 12,233 (18,196), of which MSEK 1,818 (1,720) was attributable to pension provisions. The debt/equity ratio (defined as net indebtedness divided by shareholders' equity) improved to 59% (65), in spite of the goodwill impairment charge of MSEK 6,950 in Q3 2002. Investments, depreciation and amortization Investments in property and machinery totaled MSEK 138 (284), while gross investments in rental equipment amounted to MSEK 358 (890). The lower investments in rental equipment reflected the weak market demand and an improved fleet efficiency. Depreciation on these two asset groups was MSEK 204 (237) and MSEK 502 (634), respectively, while amortization of intangible assets equaled MSEK 131 (186). Asbestos cases in the United States As of March 31, 2003, Atlas Copco has a total number of 140 asbestos cases filed with a total of 22,474 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 167 companies per case. During the first quarter 2003, two 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 On March 31, 2003, the number of employees was 25,516 (25,543). For comparable units, the number of employees decreased by 719 from March 31, 2002. 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 March 31, 2003, the provision amounted to MSEK 144 (138 at Dec 31, 2002). Share capital equaled MSEK 1,048 (1,048) at the end of the period, distributed as follows. 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. Orders received decreased 5%, at MSEK 4,048 (4,242), due to a negative translation effect of approximately 7%. The volume for comparable units increased 1%, while acquisitions added 1%. Revenues decreased 2% to MSEK 3,721 (3,785), corresponding to an increase of 4% in volume. The positive order trend for the industrial compressor business continued with volume growth recorded both for machines and the aftermarket. The best growth was achieved in Asia, with China now being the business area's largest single market. Parts of Europe and Australia also recorded positive developments. The aftermarket business continued to expand at a significantly higher pace than the average. Oil-injected compressors, used in a wide variety of applications in all types of industry, noted the best growth. Product range completions in recently introduced products and successful territory management in high-potential markets supported the sales development and a further strengthening of the market position. The unfavorable market conditions for construction, particularly in North America and Western Europe, continued to negatively affect the sales of portable compressors and generators. In contrast, the development of the specialty rental business for these product groups remained positive. Operating profit increased 4% to MSEK 681 (657), corresponding to an operating margin of 18.3% (17.4). The margin improvement, which was achieved in spite of negative currency developments, was a result of higher volumes, a favorable equipment sales mix and a higher share of aftermarket revenues. Cash flow, supported by active asset management, remained strong and contributed to an even higher return on capital employed (past 12 months), which increased to 69% (67). Rental Service business area The Rental Service business area consists of one division in the equipment rental industry in North America, providing services to construction and industrial markets. The underlying market remained weak as the non-residential building activity continued to be almost 15% below the previous year's level. Demand for maintenance and energy-related rental from industrial customers was good, in spite of low capacity utilization levels in the manufacturing industry. Total revenues decreased 27%, to MSEK 2,495 (3,397) primarily due to a very large negative translation effect from USD to SEK of 17%. Rental revenues, which accounted for 75% of total revenues, dropped 3% in local currency, but same store rental revenue was flat. The continuous adjustment of the number of rental stores resulted, however, in a volume drop of 5%. Thanks to active price management, the average rental rates increased 2% compared to previous year and stayed flat in relation to Q4 2002. Sales of new equipment, parts and merchandise, representing 15% of total revenues, dropped 23%, reflecting poor demand, reduced number of stores and reduced focus on sales of new equipment. Sales of used equipment decreased 28% from a relatively high level in 2002. Operating profit (EBIT) was unchanged in local currency but decreased to MSEK 104 (121) entirely due to currency translation. The margin was 4.2% (3.6). The effect of the significant revenue drop was compensated for by MSEK 45 lower goodwill amortization, lower operating costs, active price management as well as a more efficient use of the fleet. Lower payroll expense was partly offset by rising health-care and insurance costs as well as costs associated with the reduction of rental locations and the number of employees. The profit margin before non-cash items such as depreciation and amortization (EBITDA) was unchanged at 26%. Return on capital employed, past 12 months excluding the impairment charge, was 3% (3). The rental fleet at original cost was 7% lower than in Q1 2002 and the average age was 3.6 years. It is expected that the average age will stay close to the present level in the near-term future. Subject to material changes in market demand, this indicates somewhat higher used equipment sales as well as somewhat higher replacement investments in the next couple of quarters. Fleet utilization remained well above previous year at the same time as average rental rates improved. Improved fleet efficiency and continued successful inventory and receivables management contributed to another quarter of strong cash flow. During the quarter, 11 rental locations were closed, giving a total number of locations at the end of the period of 495 (530). Total number of employees was 5,408, down by 277 in the quarter and by 861 compared to previous year. Industrial Technique business area The Industrial Technique business area consists of four divisions in the following product areas: professional electric tools, industrial power tools, and assembly systems. Order intake was MSEK 2,536 (2,867), a decrease of 12% as a consequence of a negative translation effect of 11% and a 1% effect from divested businesses. Volume for comparable units was flat. Revenues amounted to MSEK 2,422 (2,823), down 14%, and corresponding to a volume decrease of 2% for comparable units. The positive volume development for industrial tools continued. Investments from the motor vehicle industry in fastening tools and assembly systems grew at the same time as the service business increased. The only exception among the major markets was Japan. Orders for tools to the automotive aftermarket increased, supported by the introduction of new products. Demand for professional electric tools in North America weakened. This affected order intake from all distribution channels, such as, home improvement centers, industrial distributors and hardware stores. The market share was estimated to be unchanged. Demand in Europe continued to be relatively weak as the activity in building and construction markets deteriorated further. In spite of the business climate, some growth in order volume was achieved in Europe in the period. Operating profit fell to MSEK 184 (248), corresponding to a margin of 7.6% (8.8). The main portion of the shortfall compared to previous year was due to negative currency effects, both in translation and transaction. Lower revenues and somewhat higher operating costs explained the remaining part of the profit drop. Return on capital employed (past 12 months) was 13% (12). April 4, 2003, Atlas Copco concluded the acquisition of the German company DreBo Werkzeugfabrik GmbH, a leading manufacturer of carbide tipped masonry drilling products used together with professional electric tools. The company has annual revenues of approximately MSEK 230 and 160 employees. The acquisition is in line with the strategy of Atlas Copco Industrial Technique, to expand the accessory business related to professional electric tools. 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 amounted to MSEK 1,873 (1,793), corresponding to an increase in volumes for comparable units of 3%. There was a negative translation effect of 8%, while acquisitions made during 2002 added 9%. Prices were on average 1% higher than previous year. Revenues were up 2% to MSEK 1,811 (1,784), corresponding to a flat volume development for comparable units. Investments in underground mines continued to increase, which supported a positive order trend for drill rigs, loaders as well as consumables and service. Good order levels for underground mines were recorded in South America, Mexico, Russia, Africa and China. A slight improvement, compared to the most recent quarters, was also noted for exploration drilling equipment. The demand for drill rigs and consumables for underground construction applications, like tunneling projects, remained at a favorable level. The number of active projects in the Middle East is still high, but realization and consequently order intake decreased due to concerns caused by the war in Iraq. The healthy growth for surface drilling equipment used in infrastructure projects and quarries continued, in spite of the weak business climate for general construction in North America and Europe. The weak demand situation was, however, clearly reflected in orders for most types of light construction tools, like breakers. The use-of-products revenues, such as accessories, consumables, service, and spare parts continued to grow at a somewhat higher rate than the average of the business area. The transfer and integration of the loader business from Oregon, USA, to Örebro in Sweden, continued according to plan. A restructuring cost of MSEK 12 was booked in Q1, compared with MSEK 68 in Q4 2002 and a total project size of MSEK 150. The remaining part will be charged to the results in the coming three to four quarters. Operating profit was MSEK 151 (186), including restructuring charges of MSEK 12. Excluding restructuring, the profit margin was 9.0% (10.4). The profit margin was again negatively affected by the weaker US dollar. Return on capital employed (past 12 months) was 19% (22). Previous near-term demand outlook (Published February 3, 2003) Overall, the demand for Atlas Copco's products and services is expected to remain unchanged during the coming quarter, but the political situation in the Middle East has increased the uncertainty. Demand for rental equipment in the United States is expected to stay at the present level, adjusted for seasonal weakness in the first quarter. 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, April 28, 2003 Gunnar Brock President and Chief Executive Officer 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] Internet site for the Atlas Copco Group www.atlascopco-group.com 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 June 30, 2003 The second quarter report will be published July 17, 2003.