Ladies and gentlemen, welcome to the Atlas Copco Q3 2020 Report. Today, I'm pleased to present the CFO, Hans Ole 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. And let me repeat also a warm welcome to everybody participating on this conference call related to our release of the Q3 results for 2020. I will quickly pass the word to Matt Stromstrom, our CEO, and it will as was also explained be followed after his comments will be followed by a Q and A section. So without further ado, please, Mats? Thank you, Hans Ulla.
And I will start with Slide number 2. You 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. So 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 above 20%, it's something we see as a strong recognition for the resilient business model that we have. The proposed dividend by the board is 3.50. And then the extraordinary general meeting on November 26.
We don't have a specific slide on corona, but maybe I should at least mention capital 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 we're 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 investment we have done in connected products for our service organization. And 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. So a lot of strength in the organization that has helped us to deliver the quarter as is. If you go to Slide number 3 then, and then I go to the margin then on 20.2% and the reported 19.2%. The gap in between is principally the restructuring in Industrial Technique, mainly linked to the weak demand in the auto sector and then the reevaluation of the long term incentive program, which is the options. And on top of this, we continue to invest in R and 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.
So happy to see that we delivered this result during this time. Go to slide number 4, the geographicals. And starting in North America, you can see 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 positive TC and MPC. 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 is down 30% also, right?
In Brazil, yes, correct.
Europe, of course, linked to the open and open societies, We can see positive development, mainly driven by CT and DT. And then 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. We take the next slide to slide number 5. 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, but still the bar is negative.
But I think we decide to read that as a positive that the recovery has been so quick. Slide number 6. 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.
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 to continue to deliver good numbers, very resilient model with the split they have in segments, yogurty and the strong service business. And of course, throughout this last few quarters, vacuum with the tailwind business from digitalization of the supply have gained ground within
the group. And of course,
I don't mind if vacuum and compressor is increasing. 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 8.
Compressor Technique, yes, you can see that the orders were down 2%. We have had capital of many quarters in the past. I would say that we have seen a strong business for the large compressors. And this Q1, we have seen somewhat weaker. You can also see on the graph that it's quite a significant improvement sequentially and continued growth for service.
On the positive note here, then we have seen the industrial compressors also being positive, Elon positive year on year. And 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, but very, very strong for comprehensive equipment. Vacuum, Slide number 9. I think maybe it's 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, I think 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, year on year. And 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, But 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. So orders is down 15%, but it's not all negative. The projects that we are lacking versus previous years is mainly the one linked to combustion engines 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 for those applications. 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 at 15.9%. So I think they are okay with that one actually. Power, sequentially, was there an improvement? I think the most positive one, this is how quick they have been to adjust to these new levels. Operating margin to 14% with the main segment being construction.
I think they've 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 of orders from that yet. And we don't really expect that to happen in Q4 either and one with the season for that is Q1. But I think they handled the situation in a good way.
That's
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 around the main part for that for us is in China, Germany and Belgium. And this quarter, the impact would be approximately 0.5% on bottom line.
So it's not more than that. Hans Ulla? Yes. Let me continue then a little bit before the
Q and 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, it's 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 Q4 as we did in the Q3. 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%.
That 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 option program or the provisions, change in provisions for the MTI 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 €500,000,000 on revenue side. So 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 can move back one slide, perhaps we could also say that if we look at the negative currency impact this quarter of about SEK660 1,000,000 for the next quarter and I'll just repeat what I always say is remember that it's comparing Q4 with Q3 with Q3 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, etcetera, 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, thanks, 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 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 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 1st 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.
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's also very positive that it's the inventory reduction that really has helped us in the Q3.
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 proposed that an extraordinary general meeting be held on the 26th November to decide on another portion of dividend on 2019 results of 3.50. Euros And as you recall, this is in line with the indications before COVID that NOK7 trillion total was the expected level for the dividend of 2019. And if this is approved on the 26th November, that is also what will be the case 7 krona for the full year. With that, I think I hand it back to you, Mats,
for the final slide. So, like near term outlook then, as we say, we believe it 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.
And on the positive note that you have heard already, Dan, 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. So that gives a little bit of uncertainty. And in some cases, also the tech or trade wars between U.
S. And China would have an impact in terms of uncertainty for 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 mainly see that the investment goes to EV and battery. We don't expect any movement on the aero side either in the coming quarters.
So we said that if it can stay on this level, I think we are quite positive.
Thank you, Mats. Please then, I think we're ready for the Q and A session. So operator, will you repeat the instructions, please?
And our first question is from the line of Guillermo Peigneux of UBS. Please go ahead.
Good morning, Mats, good morning, and Gonzalo. 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 gas and process afterwards.
It's specific on regions. We have a look at Santoula, but what we have seen then on the smallest compressor might not be the biggest financial impact, but that is actually true that the hand demand type of compressors, there is a big demand for that, more and more people staying home and then wants 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, opening up after the corona effect. And probably, you will see the same impact going forward. And hopefully, then we will not have a huge setback again on that. But I think you can link that to if we can visit customers and if they're open.
And hopefully, that doesn't happen. But of course, that's an option. But specifically on geographies, if something would recover quickly and those not possible any comments on it.
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 take 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 in and others that might be a little bit more hesitant. So it's difficult to give you more of insight on where you will find it in Q4, Guillermo.
Okay. And maybe on last year, I'm 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 in at the moment. So I wonder whether it's hesitant from China as well in launches 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, But nothing more specific than that. It's not that Q3 is weak because of China on large compresses. It's more again, it was a very high comparison period. And that goes for the whole segment there, I would say.
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 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 could be volatile quarter to quarter? So I just want to understand kind of how this was affecting conversations with customers and investment plans?
From our perspective, 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 too much American content in our product. So from that side, we are okay. Of course, we believe in free trade. And if they increase protectionists, 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 there.
And over time, even with these restrictions, they will resource from another ship 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. And we see that as quite positive with 5 gs coming up and 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 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. And in this case then, normally, we justify in the sales pitch, of course, the financial upside of having this. And now we can double down a little bit also on environmental impact down to reduce the greenhouse gases or the CO2 levels.
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 it's just that we have seen it extremely positive during the crisis, but we can actually help our customers. So we get more and more service contracts, which is possible.
Positive. Yes, we don't have numbers per quarter. But as you know, in the Capital Markets Day, 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 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 2 questions, please? The first one relates to industrial technique, Well, 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 techniques. So how does this compare to your own expectations?
And are you still very happy about what you found at IsraVision? That's question number 1. 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.
But on the industrial technique with Israden, 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 is a trend that will continue over many, many years. Of course, we took the 92% ownership in the middle of the COVID crisis. So we don't see 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 that already moved into our facilities and are 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 that crisis.
Then on the second question, no, we have 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 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, etcetera, rather than relying on financial hedges that might make life simple to understand 1 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 at 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.
Our next question comes from the line of mavenda 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 semiconductors 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 with since let's say Q4 of last year to Q2 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, 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 positive growth year on year or it has also turned negative?
Okay. I will start with the semiconductor question. And we view this as the key account market. For example, then when we are in South Korea, we only work with 4 accounts. And on the global scale, we might be following 2025 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 1 quarter could be a little bit swings up and down. Demand for products and demand in society for that type of product is continuing to increase. That could be memory shift or it could be logic.
And I think that will continued to accelerate throughout many, many more years. But 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. So that hasn't changed. And we know that, of course, the trade restrictions done between U. S.
And China, as we did break it a little bit earlier, could have an impact, but we haven't seen it in this quarter. And 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.
I think I flagged a little bit for this, but the recovery we saw when they open up, if that was sustainable or not. And at the time, I said that if we don't see routine markets and American market opening up, that this investment level could be a 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 Q2, but it's significantly below last year.
Okay. Thank you.
Thank you. Our
next question comes from the line of Guillermo Peigneurs of UBS. Please go ahead.
Thank you. I have a follow-up actually on IT. I'm probably looking a little bit beyond current quarter and 2020. For Perceptron and from an Israel perspective, you combined the both of them. What is your ambition, 3 years, maybe 5 years from now or 3 years maybe to keep 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 higher expectation. And in our case, it must be over business cycle at least double digit growth. And 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 non shoring to make sure that they are competitive. So that's we see that's 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 grow faster than that of copper business in general. But from a strategic perspective, it looks extremely interesting. To have this online measurement opportunities instead of taking products on the side. It's really around the tax and time and measurements.
So I don't see a reason why it wouldn't do that by Emerson.
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 Istra 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 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 Q3 for us is actually perfectly good in that respect.
But long term, obviously, we wanted to come back to previous levels. For the 3, 5 years, the amortization of intangibles will, 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. 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.
Then thank 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 will of course follow later on that one. But for today, thank you very much everybody for participating. Thank you. Bye bye.