Atlas Copco AB

Thank you very much and let me repeat also a warm welcome to everybody participating on this conference call related to our release of the third quarter results for 2020. I will quickly pass the word to Mats Rahmström, our CEO, and it will, as was also explained, be followed -- after his comments will be followed by a Q&A session.

So without further ado, please, Mats?

Thank you, Hans Ola and I will start with slide number two. You can see orders received for the quarter were down 6% and you can see some more spend on the industrial products and a little bit weaker than demand on project business, which is referred to as sometimes large contractors as well.

And invoicing, down 2%. And if you look at these two numbers, they're of course negative, but I would say that we are still quite pleased with the development and I think it's been a quicker development than we expected.

And on the sequential demand we can see an improvement from all business areas, which we see as very positive. And during these market conditions to deliver an adjusted margin on just about 20% is something we see as a strong recognition for the resilient business model that we have.

The proposed dividend by the Board is SEK 3.50 and then this Extraordinary General Meeting on November 26. We don't have a specific slide on corona, but maybe I should at least mention a couple of words on that as well.

When we look at the new normal over the old normal, we still see that we have a true benefit of the -- trying to have an extreme focus on customer value in our product offering and service offering. And I think that's equally valid now as it has been in the past.

And what has really been beneficial also as a lesson learned, has been the investments we have done in connected products for our service organization. And the other thing that we learned is that decentralized model where we give clear authority to people to act and we follow it in a very transparent way, but that has given us some speed throughout this difficult time to take decision and move on.

So a lot of strength in the organization that has helped to deliver the quarter as is. If you go to slide number three then, when I go to the margin then of 20.2% and the reported 19.2%, then the gap in between is intrinsic to the restructuring in Industrial Technique, mainly linked to the weak demand in the auto sector.

And then the revaluation of the long-term incentive program, which is the options. And on top of this, we continue to invest in R&D.

And we have speeded up some of the digital solutions for our customers. That could be digital product management or in product introductions, for example.

So I'm happy to see that we delivered this result during this time. Go to slide number four, the geographicals and talking North America.

You can see sequentially an improvement, of course, but still in this region we had a negative development for our business area. In South America, you can see a positive.

This is in local currency and this is mainly driven by very positive CT and VT. Steel Industrial Technique is suffering from the weak demand from the auto industry in Brazil mainly.

But then we have to have in mind then that the currency comes from 30% of the growth in Brazilian product. Europe, of course, linked to the opening up of society.

We can see positive development, mainly driven by CT and VT. And then in Asia then, going up against a strong quarter last year, slightly negative, but I must say that we are still fairly positive about that development.

We take the next slide, slide number five. I guess, if you read it sequentially you can say it's a half full glass and negative you can read this one as half empty glass, but still the bar is negative.

I think we're trying to leave that one positive to recover, having full filled. Slide number 6.

I only wanted to highlight on this one is the currency impact for the quarter, which had been significant mainly driven by the U.S. dollars.

And you can see on the vacuum result later on that it has had a huge impact on the bottom line. Slide number 7.

Quite impressive by Compressor Technique, we continue to deliver good numbers, very resilient model with the clip having segment geographic and a strong service business. And of course, throughout these last few quarters, Vacuum with a tailwind business from digitalization despite have gained ground within the group.

And of course, I don't mind if Vacuum and Compressor is increasing a strong. It's more difficult for Industrial without in aerospace being a key segment; and Power, of course, being from the construction market.

We’ll take the next slide, that's number 8. Compressor Technique, where you can see that orders were down 2%.

Again, it had capital of many quarters in the past, I would say that we have seen a strong business for the large compressors, and this first quarter has been somewhat weaker. You can also see on the graph that this is quite a significant improvement sequentially and continued growth for service.

On the positive note, here then we have seen the industrial compressors has also been positive -- even positive year-on-year. And operating margin, 23%, of course supported by volumes, and negative a little bit on mix, so some of the big recruitment that we have in the product portfolio, but very, very strong for Compressor Technique.

Vacuum, slide number 9. I think it would be a good start to look at the bars, because we can see then that even though that we can see year-on-year it's down.

And that is of course with very strong comparisons with the last years and the quarters. Still on this level, seems we have a very healthy business.

Semi equipment went down year-on-year, but sequentially also up. And we can see then just like we saw on the industrial side industrial vacuum also up -- also up year-on-year.

And they have had fantastic development on the service business, specifically in semi throughout a number of quarters. The operating margin, you can see there is a big gap between this year and last year.

But mainly, I would say, the currency, the U.S. dollars that have made that impact.

Okay. Industrial Technique, this is where we took down the restructuring costs.

So, orders is down 15%, but it's not all negative. The project that we are lacking versus previous years is mainly the one linked to combustion engine and the powertrain applications.

But we see an increased demand for battery manufacturing and EV. And we see an increased level in Europe, of course.

And we are in a very good position to boost application. But also here we can see a sequential improvement.

And of course, that's a huge drop they had in Q2 and significantly better now then. And then adjusted operating margin, 15.9%, so I think we are okay with that one actually.

Power, sequentially was an improvement. I think the most positive one.

This is how quickly they have been to adjust to these new levels. Operating margin 14%, with the main segment being construction, which has been quick to adjust to this.

And you know that we have mentioned before that one of the channels to the market is the rental companies and we have not seen an increased level in the overall orders from that yet. And we don't really expect that to happen in Q4 either.

Remember the season for that is Q1. I think we handled the situation in a good way.

And last slide number 12. 19.2%, as we said and reported on margin.

I'd like to give credit to the people and the business model that we managed to adjust to this new scenario as quick as we have. There is also a question always about the furlough impact on this, and we can say around the main part for that trough is in China, Germany and Belgium.

And this quarter the impact would be approximately 0.5% on bottom line, but it's not more than that. Hans Ola?

Now let me continue then a little bit before the Q&A. Well you can -- you have heard from the business area review that Mats made about the operating profit performance and if we add back the items affecting the decrease from last year is about 15%.

Here of course reported it's 19%. If we go further down very uneventful in terms of net financial items impact almost exactly the same as a year ago.

We don't have any reason to believe that it will be very different going forward in the next couple of quarters either. As you know we will have proposed a dividend.

So that will of course mean that we will not generate as much net cash in the fourth quarter as we did in the third quarter. But anyway it won't affect the net financial items very much in the next couple of quarters.

If we move further down tax rate and we see that it sits at 23%. There was a temporary one-off positive item in Q2 which we commented at that time.

But otherwise I think before and after going forward we think that this level of around 23% is pretty good number to expect for the future. If we then move to the next slide, this is the different components of the change in operating profit and revenue.

And as you can see, it's all columns starting from the auction program or the provisions -- change in provisions for the LTI program which is more negative this year than last year. We have the big restructuring in Industrial Technique primarily in terms of items affecting comparability.

And then we have a negative impact on the margin also from the currency situation. And then last, but not least the column which is volume price and mix which gives a negative effect of course on the profit as we lose about more than SEK500 million on revenue side.

So you could say, we lose about 1/3 on profit what we have lost on volume on revenue which gives a reasonable closure, I would say in this period of the development. On that -- before if we can move back one slide perhaps we could also say that, if we look at the negative currency impact this quarter of about SEK660 million for the next quarter.

And as I will just repeat what I always say is remember that it's comparing fourth quarter with third quarter with third quarter last year and the same going for next quarter we expect it to be a little bit less negative than this -- if we judge how the dollar and the euro and the Swedish krona rates et cetera are as of yesterday. So slightly less, but still a negative comparison in Q4 as well that's what we expect.

If we then continue margin, you can see what Mats basically have already in words commented. And if we focus on this second from left column, the reason for the drop in profit margin for competitive needs in spite of a positive revenue volume development is really the mix as is also commented in the report as such.

We have from an invoicing point of view a very strong quarter on large compressors and even outweighing the positive impact of the service this time from a mix point of view. We look at Vacuum Technique I don't need to repeat what Mats already said.

Currency is the big factor for the margin drop there and you can appreciate that from the slide. If we go to Industrial Technique of course there is some negative impact on currency, but primarily the big impact from going from 22% to 12% is of course the volume the restructuring and also the recently acquired entities that bring down the margin in the first couple of years which is very normal what we have seen before.

And then finally Power Technique. In spite of the good performance relatively to the previous quarter it still is compared to last year a little bit of a negative mix in terms of not having the high profit margin businesses growing as some other equipment categories.

If we look at the balance sheet, not much to say. We are generating cash.

But as I alluded to, we will look later on that we will also have our second proposed installment of the dividend for 2019 coming up. I don't think there is much more to say on that one.

Cash flow next is also pretty understandable I think. The change in working capital is not only very positive from this slide point of view, but it's also very positive that it's the inventory reduction that really has helped us in the third quarter.

And that has led to a better operating cash flow even than last year. We then take this -- there is a proposal as you have seen that the Board of Directors propose that an Extraordinary General Meeting be held on the 26th of November to decide on another portion of dividend on 2019 results of SEK 3.50.

And as you recall this is in line with the indications before COVID that seven to nine total was the expected level for the dividend of 2019. And if this is approved on the 26th of November that is also what will be the case setting for the full year.

With that I think I hand it back to you Mats for the final slide and near-term outlook then.

As we said we believe it with the uncertainty that we all experience right now to remain at the current level and it might be interpreted as a negative. We don't see that's negative at all actually the fast recovery between Q2 and Q3.

And on the positive note that you have heard already then we can see an improvement on the industrial business with a positive development of service. At the same time, we can see that we have COVID accelerating again so that gives a little bit of uncertainty.

And in some cases also the trade war between U.S. and China would have an impact in terms of uncertainty before some of the customers to take decision.

And we have not seen a recovery on the auto business. Even if car sales is up a little bit, we may see that the investments for EV and battery.

And we don't expect any movement on the Arab side either in the coming quarters. So we said that if we can stay on this level I think we are quite positive.

Thank you, Mats. Please then I think we're ready for the Q&A session.

So operator will you repeat the instructions, please?

Good morning, Mats. Good morning, Hans Ola.

Thank you for taking my question. I wanted to ask on compressor technique.

And for small- medium-sized compressors year-on-year growth already in Q3 stage. But how would you characterize the momentum into Q4?

I mean which regions or which regions do you think are at the moment growing more healthily as we speak? And I have a follow up on that one process afterwards.

Thank you.

Yes, specific on region. I will pass on to Hans Ola, but what we have seen then on the smaller compressor might not be the biggest financial impact, but that is actually so that the hand demand type of compressors, there's a big demand for that.

More and more people are staying home and then there's more to be fixed at their home. So there is a demand for that and I don't expect that to change in Q4.

So I still see that as a positive. On the industrial compressors, I'm quite happy that it's opening up again.

And I think here you can correlate it to Europe for example as being up of the corona effect. And probably you will see the same impact going forward.

And hopefully then we will not have a huge step back again on that. But I think you can link that to if we can visit customers and if there is some -- hopefully that doesn't happen.

But of course that's an option. But specifically on geographies it's something that recovered quickly.

Hans Ola, do you want to make comments on this?

No, no. I don't think that we see it very much on the large compressors as a regional phenomena.

We all know that the Eastern part of the world paid a big portion of that of those orders or that business. But it's more that there are certain areas of applications that we continue to see good development and others that might be a little bit more hesitant.

So it's difficult to give you more of insight on how where you will find it in Q4, Guillermo.

Okay. And maybe one last question on process following up on your answer.

China was one of the growth engines I think back in 2019. China is one of the leading regions in terms of growth at the moment.

So I wonder whether there's hesitance from China as well in large compressor process or you see them back in the market.

Not more than the general comment that Mats referred to and what the hesitance can be or the concerns can be for the future, but nothing more specific than that. It's not that Q3 is weak because of China on large compressors it's more again, it was a very high comparison period and that goes for the whole segment there I would say.

Thank you. I’ll get back in line.

Thank you.

Thank you.

Thank you. I just had a quick question on vacuum.

So there's obviously a bit of disruption in the semiconductor market from some restrictions from the U.S. government on Chinese players.

I just wanted to understand from your conversations with customers is this having an impact on their decision making? Or would you maybe put the softer orders year-over-year just down to large accounts as we've typically seen which can be volatile quarter-to-quarter?

So I just wanted to understand kind of how this was affecting conversations with customers and investment plans?

From our perspective, we have not been so impacted in the quarter from any regulations or new things that we need to follow. You should also know that we don't have so much American content in our products.

So from that side, we are okay. Of course, we believe in free trade and if they increase protection that could also impact the business long-term for us in China or in the U.S.

that we have not seen in the quarter. But it's of course a concern going forward, if that is the case.

We should also say that we -- when we run our scenarios we say that we need to be more local for local. So we have an operational setup in China that we can support customers with them.

And over time, even with these restrictions, they will resource on another ship manufacturers, so it might be a bump in the road, but I think the demand for the products that they manufacture at the end of the day will continue. And we see that as quite positive with 5G coming up on industrial automation for example.

So no it could be a temporary thing, but it has not impacted us in Q3.

Okay. And just a quick follow up.

So obviously, we're hearing a lot about the focus on energy efficiency in Europe. And I just wanted to understand has that in any way actually changed the way that customers are using any of your equipment or a willingness to take up sort of connected compressor service contracts becoming more mindful of the efficiency of how their operations are running?

And maybe is there any kind of quantifiable numbers around sort of the uptake of connected compressors? How that compares to 12 months ago to maybe frame this better?

I don't have a number on that. What we do see is that the question of following the UN intention then to limit and gives a boost to our business and our argument.

We normally have the most efficient contractors or tools or vacuum pump. And in this case then normally justified in the sales picture of course the financial upside of having this.

And now we can double down a little bit also on environmental impact down to reduce greenhouse gas or the CO2 level. So, we believe regulations or anything like that will support us delivering the most efficient products to the market and it will be more difficult for smaller competitors to follow.

So we believe it's an ongoing discussion that it's positive for us and it's increasing. And the number of compressor connected, I think has picked up and we are seeing extremely positive during the crisis that we can actually help our customers.

So we get more and more service contracts which we thought was impossible.

No. Yes, we don't have numbers per quarter.

But as you know in the Capital Markets days, we normally give an update on how many roughly there are, but it's not the number that we follow on a quarter-by-quarter basis. But it's -- I've never seen any period where it has gone down yet at least.

Okay. Understood.

Thank you.

Thank you.

Thanks very much. Good morning everybody, Can I ask two questions please?

The first one relates to Industrial Technique where it seems that ISRA VISION has had a tough quarter with an underlying margin of about 14% since the date of control at least which looks to be down obviously quite significantly from a year ago and now below the performance of Industrial Technique. So how does this compare to your own expectations?

And are you still very happy about what you found at ISRA VISION? That's question number one.

The second question is on is in relation to Vacuum Technique, where we have seen pretty large margin swings related to currency moves in the past few quarters. So, would it make sense to at least consider changing the currency hedging policy perhaps to better smooth the currency trends in this division in particular?

Just asking. Thank you.

On the Industrial Technique it's driven, you can see that we are entering into a new platform for growth long-term and gives us the opportunity to be part of industrial automation and digitalization and also now possible in metrology as well. We believe that it is -- and that will continue over many, many years.

Of course, we took 92% ownership in the middle of the COVID crisis. So we don't read too much into the 14%, but you're absolutely correct.

It's less than they have as a stand-alone before. On the positive note, I must say that, the cultures between the companies is really good.

The integration projects are working really well. I know that, some of these people for example in Detroit have already moved in to our facilities by working together.

So it doesn't change anything of the view we have on the application on the segment or the strong expectations we have for the future on that. But you're absolutely right that we took ownership of this in the middle of the crisis.

And on the second question, no, we have -- as we have said, I think many times not only related to Vacuum Technique generally in Atlas Copco, we know where the customers are where the business is and then we take all different factors into consideration where we manufacture and where we source from. And that is basically, how we try to mitigate the impact of the currency swings by adjusting the cost base in terms of sourcing et cetera rather than relying on financial hedges that might make life simple to understand one quarter to another, but it's not something that we feel is very productive in the long term.

And I can understand that, it would make it easier for projecting specific quarters, but we look beyond that as what is the right way to do it. So no, we don't have any plans to increase the currency hedges or anything for that reason.

Okay. Very good.

Thanks very much.

Thank you.

Yes. Hi.

Thanks for the call. A couple of questions.

Firstly on, Vacuum Technique division especially looking at the semiconductor market, where would you think the market is currently in terms of demand/supply situation? Do you think there is a short-term overcapacity built-in in the industry which since let's say fourth quarter of last year to second quarter of this year and it may just take a few quarters to see a bit of destocking?

And is that one of the drivers behind softer growth in Vacuum Technique as well? Secondly, on -- just looking at the regional performance, Asia seems to have been negative for most divisions especially on the equipment side.

So which markets were behind that? And can you comment how China orders overall was it a positive growth year-on-year?

Or it has also turned negative?

Okay. We'll start with the semiconductor question, and we view this as a key account market.

For example, when we are in South Korea, we work with four accounts. And on the global scale, we might be following 20 to 25 accounts that makes a financial impact.

So it can be a little bit up and down, depending on who is investing. And so we don't read much into that.

That one quarter could be a little bit swings up and down. Demand for products and demand in society, so that type of product is continuing to increase.

That would be membership or it could be logic. And I think that will continue to accelerate throughout many, many more years.

But from one quarter to another it could be if we have a strong market share rate, we don't have a strong market share. So that hasn't changed.

And we know that of course, the trade restrictions done between U.S. and China it's gradually a little bit earlier, could have an impact, but we haven't seen it in this quarter.

As we said also that we continue then to manufacture nuclear as well to avoid that. On Asia there was a question on demand.

Yes, compared to a still positive for the year and it was up 1%, but a little bit negative then. I think, I flagged a little bit for this but the recovery we saw when they opened up if that was sustainable or not.

And at the time, I said that if we don't see routine markets and the American market opening up that this investment level could be little bit beyond what we could see as sustainable over time. But I must say that we are still very happy with the level we see in Asia and particularly then in China.

So we think it's a solid level. It's flattened out, but we don't see it as a negative.

But I think if you go back and look it is also comparing with -- specifically on Vacuum Technique. One can see it clearly and we commented in the report last year and again this year that last year was a very strong quarter in the region, particularly for the Vacuum Technique.

And that of course, then impacts the numbers here in Asia. So, a strong quarter last year.

And then of course, countries like India are not insignificant and they have struggled. They are recovering from the very lows of the second quarter, but it's significantly below last year.

Okay. Thank you.

Thank you.

Welcome back.

Thank you. I have a follow-up actually.

Thank you. I have a follow-up actually on our IT and probably looking a little bit beyond the current quarter and 2020.

For Perceptron and from an Asia perspective you combined the both of them. What is your ambition three years maybe five years from now or three years maybe to take it a little bit medium-term when it comes to growth and potentially margins?

Thank you.

First, of course, it's a segment that we believe will grow faster than GDP. So we have high expectation.

And in our case it must be over business cycle at least double-digit growth. And with an offer that we could bring to a customer I think it should be extremely attractive for the number of application if they bring business either home on the type of onshoring to make sure that they are competitive.

So that's -- this is as a growth platform of course. And as you understand I'm not going to give you any specific numbers.

But of course it needs to be faster than that of Atlas Copco business in general. But from a strategic perspective, it makes it interesting to have these online measurement opportunities instead of taking products on the side.

And it's really around captive time and measurements. I don't see a reason why it would improve that prior or so.

Of course, we are even more reluctant to give you more meat on the bone on the profitability level going forward perhaps. But as a little bit an add-on to a previous question as well the stated level and what you can see from the public reports of ISRA before, we certainly expect that the profit level about 20% will continue to be what we aim for.

As some of you recall the quarter, let's say, April to June was a very difficult one from the COVID impact and everything of ISRA and from that and it really came with hardly any profit in that quarter. So in that respect I think third quarter for us is actually perfectly good in that respect.

But long-term obviously we wanted to come back to previous levels. For the three five years, the amortization of intangibles we'll of course weigh on that profitability.

But if we succeed in the growth we also expect that to become less and less over time. So definitely we expect it to come back to those levels.

Thank you so much.

Thank you, Guillermo.

I think that we have exhausted the number of questions on the line. Am I right in that operator?

Then thanks. We will thank everybody on the call then and hope that at least in this strange COVID year that we will hear back from you in January when we talk about the quarter four report and then further down the road, of course, in May when we have -- hopefully you have received the Save the Date invitation for Capital Markets Day 2021 in Antwerp and more details, of course, follow later on that one.

But for today, thank you very much everybody for participating.

Thank you. Bye-bye.