Ladies and gentlemen, welcome to the Atlas Copco Q3 2020 report. Today, I'm pleased to present the CFO, Hans Ola Meyer. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Speaker, please begin.
Thank you very much. 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. It will, as was also explained, after his comments, will be followed by a Q&A session. Without further ado, please, Mats.
Thank you, Hans Ola. I will start with slide number two. We can see orders received for the quarter were down 6%, and we can see some more spend on industrial products and a little bit weaker than demand on project business, which is referred to as sometimes large compressors as well. Invoicing down 2%. 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. On the sequential demand, we can see an improvement from all business areas, which we see as very positive. 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 350. We did this extraordinary general meeting on November 26th. We don't have a specific slide on Corona, maybe I should at least mention a couple of words on that as well. When we look at the new normal or 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, our service offering, and I think that's equally valid now as it has been in the past. What has really been beneficial also as a lesson learned has been the investments we have done in connected products for our service organization.
The other thing that we learn is the 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 the speed throughout this difficult time to take decision and move on. A lot of strength in the organization that has helped us to deliver the quarter as is. If you go to slide number three then. I go to the margin then on 20.2% and the report is in 19.2%. The gap in between is in principle the restructuring in Industrial Technique, mainly linked to the weak demand in the auto sector. The reevaluation of the long term incentive program, which is the options. On top of this, we continue to invest in R&D, and we have heated up some of the digital solutions for our customers.
That could be digital product management or product introductions, for example. Happy to see that we believe it is a result during this time. Go to slide number four, the geographicals. Starting North America, you can see it's sequentially an improvement of course, but still in this region, we had a negative development for all business areas. In South America, you can see it's a positive. This is in local currency, and this is mainly driven by a very positive CT and PT. Still Industrial Technique is suffering from the weak demand from the auto industry in Brazil mainly. We have to have in mind then that the currency is down some 30% or so, right?
In Brazil, yes. Correct.
Europe, of course, linked to the opening up of societies, we can see positive development mainly driven by CT and VT. In Asia then, going up against the strong quarter last year, slightly negative, but I must say that we are still fairly positive about that development. Take the next slide number five. I guess if you read it sequentially, you can say it's a half full glass, and if you're negative, you can read that a half empty glass until the bar is negative. I think we decide to read that positive that the recovery have been so quick. Slide number six. I only wanted to highlight on this one is the currency impact for the quarter, which have been significant, mainly driven by the U.S. dollars.
You can see on the Vacuum results later on, I think that had a huge impact on the bottom line. Slide number seven. Quite impressed by Compressor Technique as we continue to deliver good numbers, very resilient model with the split they have in segments, geography, and a strong service business. Of course, throughout these last few quarters, Vacuum, with the tailwind business from digitalization of the site, have gained ground within the group. Of course, I don't mind if Vacuum and Compressor is increasing, it's strong. It's more difficult for Industrial, with Auto and Aerospace being key segments, and Power, of course, being from the construction market. We take the next slide. That's number eight. Compressor Technique, you can see that the orders were down 2%.
We have had a couple of many quarters in the past, I would say that we have seen a strong business for the large compressors. This first quarter, we have seen somewhat weaker. We can also see on the graph that it's quite a significant improvement sequentially, and continued growth for service. On the positive note here, we have seen the industrial compressors also being even positive year-over-year. Operating margin, 23%, of course, supported by volumes, and negative a little bit on mix for some of the bigger equipment that we have in the product portfolio. Very strong for Compressor Technique. Vacuum, slide number nine.
I think maybe it's 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, I think we have a very healthy business. Semi equipment down year-on-year, but sequentially also up. We can see, just like we saw on the industrial side, industrial vacuum also up year-on-year. They have had a fantastic development on the service business, specifically in Semi, throughout a number of quarters. The operating margin, you can see there's a big gap between this year and last year. It's mainly, I would say, the currency of the U.S. dollars that have made that impact. Okay. Industrial Technique. This is where we took down the restructuring cost.
The orders is down 16%. It's not all negative. The projects that they are lacking versus previous years is mainly the one linked to combustion engine and the powertrain applications. We see an increased demand for battery manufacturing, and EV. We see an increased level in Europe, of course. We are in a very good position for those applications. Also here we can see a sequential improvement. Of course, that's a huge drop they had in Q2, significantly better now. Adjusted operating margin 15.9%. I think we are okay with that one, actually. Take the Power. Sequentially also an improvement. I think the most positive one out of this is how quick they have been to adjust to these new levels. Operating margin 14%, with the main segment being construction. I think they've been quick to adjust to this.
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 of orders from that yet. We don't really expect that to happen in Q4 either. More with the season for that is Q1. I think they handle the situation in a good way. Last slide, number 12. 19.2%, as we said, the reported margin. I think it gives 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 it's around the main part for that for us is in China, Germany, and Belgium.
This quarter, the impact would be approximately half a percent on bottom line, so it's not more than that. Hans Ola?
Let me continue a little bit before the Q&A. Well, you have heard from the business area review that Mats made about the operating profit performance, if we add back the items affecting the decrease from last year is about 15%. Here, of course, reported it's 19%. 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 have proposed a dividend, 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. Anyway, it won't affect the net financial items very much in the next couple of quarters.
If we move further down, tax rate, we see that it sits at 23%. There was a temporary one-off positive item in Q2, which we commented at that time. 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. As you can see, it's all columns starting from the option program or the 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. Then we have a negative impact on the margin also from the currency situation.
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 SEK 500 million on the revenue side. You could say we lose about a third on profit, what we have lost on volume on revenue, which gives a reasonable flow-through, I would say, in this period of the development. On that, before, if we move back one slide, perhaps we could also say that if we look at the negative currency impact this quarter of about SEK 660 for the next quarter, as I will just repeat what I always say is, remember that it's comparing 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 U.S. dollar and the EUR and the Swedish krona rates, et cetera, are as of yesterday. Slightly less, but still a negative comparison in Q4 as well. That's what we expect. If we continue. Thanks, Mia. You can see what Mats basically have already in words commented, if we focus on this second from left column, the reason for the drop in profit margin for Compressor Technique, 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, 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. Finally, Power Technique. In spite of the good performance relatively to the previous quarter, there 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. We look at 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 a 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, it is also very positive that it is the inventory reduction that really has helped us in the third quarter. That has led to a better operating cash flow even than last year. We 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 350.
As you recall, this is in line with the indications before COVID, that SEK 7 in total was the expected level for the dividend of 2019. If this is approved on the 26th of November, that is also what will be the case, SEK 7 for the full year. With that, I think I hand it back to you, Mats.
Yeah.
For the final slide.
The near-term outlook, as we say, we believe it's with the uncertainty that we all experience right now to stay and remain at the current level, and it might be interpreted as a negative. We don't see it as a negative at all, actually. The fast recovery between Q2 and Q3, on the positive note that you have heard already, then we can see an improvement on the industrial business. We have positive development of service. At the same time, we can see that we have the COVID accelerating again. That gives a little bit of uncertainty. In some cases, also the tech or trade war between U.S. and China could have an impact in terms of uncertainty for some of the customers to take decisions. We have not seen a recovery on the auto business, even if car sales is up a little bit.
We mainly see that the investment goes to EV and battery, and we don't expect any movement on the aero side either, in the coming quarters. 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. Operator, will you repeat the instructions, please?
Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. Our first question comes from the line of Guillermo Peigneux of UBS. Please go ahead.
Good morning, Mats. Good morning, Hans Ola. Thank you for taking my question. I wanted to ask on Compressor Technique. For small, medium-sized compressors, year-on-year growth already in Q3 stage, but how would you characterize the momentum into Q4, and in which regions, or which regions do you think are at the moment growing more healthily as we speak? I have a follow-up on Gas and Process afterwards. Thank you.
It's specific on regions. Maybe I'll look at Hans Ola. What we have seen then on the smallest compressor might not be the biggest financial impact, but that is actually so that the handyman type of compressors, there is a big demand for that. More and more people staying home and then want more to be fixed at their home. There is a demand for that, and I don't expect that to change in Q4. 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, it opening up after the Corona effect, and probably you will see the same impact moving forward. Hopefully then we will not have a huge setback again on that.
I think you can link that to if we can visit customers, then hopefully that doesn't happen, but of course that's an option. That's specifically on geographies. It's something that recover quickly and don't know. Hans Ola, any comments on that?
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 take a big portion of those orders or that business. It's more that there are certain areas of applications that we continue to see good development in and others that might be a little bit more hesitant. It's difficult to give you more of insight on where you will find it in Q4, Guillermo.
Oh, okay. Thank you. Maybe on Large Gas and 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. I wonder was there hesitance on China as well in Large Gas and Process, or you see them back in the market?
Not more than the general comment that Mats referred to on what the hesitance can be, or the concerns can be for the future. 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. Stay back in line. Thank you.
Thank you.
Our next question comes from the line of Max Yates of Credit Suisse. Please go ahead.
Thank you. I just had a quick question on vacuums. 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. I just wanted to understand how this was affecting conversations with customers and investment plans.
From our perspective, we have not been too 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 U.S. content in our product. From that side, we are okay. Of course, we believe in free trade, and if they increase protectionist, 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. It's of course, a concern going forward, if that is the case. We should also say that when we run Atlas Copco, we say that we need to be more local for local. We have an operation set up in China that we can support customers with there.
Over time, even with this restriction, they will resource from another chip manufacturer, so it might be a bump in the road, but I think the demand for the product that they manufacture at the end of the day will continue. We see that as quite positive with 5G coming up and industrial automation, for example. It could be a temporary thing, but it has not impacted us in Q3.
Okay. Just a quick follow-up. 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 connected compressor service contracts, becoming more mindful of the efficiency of how their operations are running? Maybe is there any kind of quantifiable numbers around the uptake of connected compressors, how that compares to 12 months ago to maybe frame this better?
I don't have a number of that, but what we do see is that the question of following the UN intention then to limit gives a boost to our business and our arguments. We normally have the most efficient compressors or tools or vacuum pumps. In this case, normally we justify in the same pitch, of course, the financial upside of having this, but now we can double down a little bit also on environmental impact and to reduce the greenhouse gases or the CO2 levels. 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. We believe it's an ongoing discussion, that it's positive for us, and it's increasing.
The number of compressor connected, I think it's just that we have seen it extremely positive during the crisis that we can actually help our customers. We get more and more service contracts, which is possible.
Yeah. We don't have numbers per quarter, but as you know, in the capital market stage, we normally give an update on how many, roughly there are. It's not the number that we follow on a quarter-by-quarter basis. I have never seen any period where it has gone down yet, at least.
Okay. Understood. Thank you.
Thank you.
Our next question comes from the line of Gael de Bray of Deutsche Bank. Please go ahead.
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. 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 in relation to Vacuum Technique, where we have seen pretty large margin swings related to currency moves in the past few quarters. 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 with ISRA, we can see that we are entering into a new platform for growth long-term. It gives us the opportunity to be part of industrial automation and Surface Vision, and also now, possibly with metrology as well. We believe that it's a trend that will continue for many years. Of course, we took the 92% ownership in the middle of the COVID crisis. We don't read too much into the 14%, but you are absolutely correct, it's less than they had as a standalone 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 are people, for example, in Detroit, have already moved into our facilities, and are working together.
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. You're absolutely right that we took ownership of this in the middle of the crisis.
On the second question, no, as we have said, I think many times, not only related to Vacuum Technique, but generally in Atlas Copco, we know where the customers are, where the business is, and we take all different factors into consideration where we manufacture and where we source from. 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. It is not something that we feel is very productive in the long term. I can understand that it would make it easier for projecting specific quarters, but we look beyond that, at what is the right way to do it.
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.
Our next question comes from the line of Manvinder Singh of Bank of America. Please go ahead.
Yes. Hi, thanks for the call. 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 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 de-stocking, and is that one of the drivers behind softer growth in Vacuum Technique as well? Secondly, just looking at the regional performance, Asia seems to have been negative for most divisions, especially on the equipment side. Which markets were behind that? Can you comment how were 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. We view this as a key account market. For example, when we are in South Korea, we only work with four accounts, on a global scale, we might be following 20, 25 accounts that makes a financial impact. It can be a little bit up and down depending on who is investing. We don't read much into that one quarter could be a little bit swings up and down. The demand for products and demand in society for that type of product is continuing to increase. That could be memory chips, or it could be logic. I think that will continue to accelerate throughout many more years. From one quarter to another, it could be if we have a strong market share, or if we don't have a strong market share. That hasn't changed.
We know that, of course, the trade restrictions then between U.S. and China, as we debated a little bit earlier, could have an impact. We haven't seen it in this quarter. As we said, also that we continue then to manufacture locally as well to avoid that. On Asia, there was a question on demand. Yes, compared to still positive for the year, I think it was up 1%, but a little bit negative then. I think I flagged a little bit for this, that the recovery we saw when they open up, if that was sustainable or not. At the time, I said that if we don't see European markets and American markets opening up, that this investment level could be a little bit beyond what we could see as sustainable over time.
I must say that we are still very happy with the level we see in Asia and particularly then in China. We think it's a solid level. It flattened out, but we don't see it as a negative. 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. That, of course, then impacts the numbers here in Asia. A strong quarter last year. 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.
Our next question comes from the line of Guillermo Peigneux of UBS. Please go ahead.
Welcome back.
Thank you. I have a follow-up actually on IT, and probably looking a little bit beyond current quarter and 2020. For Perceptron and from an ISRA perspective, you combined the both of them. What is your ambition three years, maybe five years from now, or three years maybe, to keep it a little bit medium term when it comes to growth and potentially margins? Thank you.
Of course, it's a segment that we believe will grow faster than GDP. We have higher expectations. In our case, it must be over a business cycle, at least double-digit growth. With the offer that we could bring to a customer now, I think it should be extremely attractive for the number of application if they bring business either home on the type of on-shoring to make sure that they are competitive. We see it as a growth platform, of course. As you understand, I'm not going to give you any specific numbers. Of course, it needs to grow faster than that of proper business in general. From a strategic perspective, it looks extremely interesting to have this online measurement opportunity instead of taking products on the side to really run active time and measurement.
I don't see a reason why it wouldn't go that way, I must say.
Of course, we are even more reluctant to give you more meat on the bone on the profitability level going forward, perhaps. 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 above 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 a COVID impact and everything of ISRA, and it really came with hardly any profit in that quarter. In that respect, I think third quarter for us is actually perfectly good in that respect. Long-term, obviously, we want it to come back to previous levels. For the three, five years, the amortization of intangibles will, of course, weigh on that profitability.
If we succeed in the growth, we also expect that to become less and less over time. Definitely we expect it to come back to those levels.
Thank you so much.
Thank you.
Thank you.
I think that we have exhausted the number of questions on the line. Am I right in that, operator?
We have no further questions at this time.
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. Further down the road, of course, in May, hopefully you have received the save-the-date invitation for Capital Markets Day 2021 in Antwerp. More details will, of course, follow later on that one. For today, thank you very much, everybody, for participating.
Thank you.
Bye-bye.