Atlas Copco AB (OTC:ATLKY) Q4 2022 Earnings Call Transcript

Atlas Copco AB (OTC:ATLKY) Q4 2022 Earnings Call Transcript January 26, 2023

Atlas Copco AB misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.13.

Operator: Welcome to Atlas Copco Q4 Report for 2022. Now, I will hand the conference over to CFO, Peter Kinnart. Please go ahead.

Peter Kinnart: Thank you, operator. Good afternoon, ladies and gentlemen, to this quarterly earnings call for the fourth quarter 2022 for Atlas Copco; welcome to the call. Before we start with the official part in the presentation, I would already now like to remind you that when the Q&A session starts, we would like you to strictly stick to only 1 question at a time in order to make sure that all participants in the call will have an opportunity to raise at least 1 question. Should, of course, we have made full circle, of course, you can get back in line for other questions to ask afterwards. So thank you for that in advance. And with that, I would like now to hand over to Mats Rahmström, our CEO, who will guide you through the earnings presentation.

Mats Rahmström: Thank you, Peter. Hopefully, everyone can see a very nice picture. And if you read the report already, you will see that the Gas and Process division did really, really well. And this is 1 of their products. Yes, this is thick with natural gas application. So this is about to be shipped to 1 of our customers and this is what they look like when they say refer to bigger machines sometimes. So if we start on the Slide number 2. We said in the heading that we had a mix demand and orders received were SEK36 billion. After 8 consecutive quarters with growth, it was minus 7% organically. But if you look at the graph, you can see that this level SEK36 billion is still what we would refer to as fairly strong, even if this SEK currency should be down but it’s still a strong orders received compared to historical data from 2019 and forward.

CT to grow 3% organically. Industrial Technique driven by the electric vehicle transformation was very strong at 18%. Power Technique was down 6%. But if you recall, Q4 last year, they actually had the best quarter which is unusual for them which is normally in Q1. So this tough comparison, so they did very well. The down was the VT, Vacuum Technologies which was linked to the semiconductor industry. Breaking it down a little bit in vacuum. We can see that it’s memory that is the weaker part, more activity on logic. And at the same time, we can see that the Industrial division and the Scientific division is doing really well. On industrial compressors, we say flat. And here, we include the bigger oil-free machines and oil-injected machine and we can still see a positive trend on the bigger machine with a single digit and a declining trend on the smaller machine with a single digit as well.

As I mentioned in the beginning of the call, Gas and Process, it did really, really well. All in all, they represent approximately 10% of revenue for the year and this is mainly linked to different sustainable application, liquid natural gas, carbon capture and applications like that. And ITBA Industrial solutions, very closely linked to the EV transformation but also General Industry did quite okay. And pleased to see that we continue the journey, strong journey on service for all business areas. So OpEx was still strong among our customers. Sequentially, as expected, down, slightly down. And then we could also see that we had considering the number of issues we have in supply still, I was happy to see that we had record revenues at SEK40 billion and 16% organic growth.

CT, up 15%. Vacuum Technique also up 14%, Industrial, 16% and Power Technique, 24%. So that was really, really good. Then if we change to next slide and the confirmation of the numbers but you can also see the operating margin. We did SEK7.8 billion and a margin of 19.5 and adjusted for the long-term incentive program, SEK8 billion and 20%. The SEK7.8 billion is the second best quarter we have ever done, of course. CT, very good at 23.6%. And Power Technique also very good at 18.2%. And then to some disappointment, I think, on VT for ourselves, we still have a lot of operational issues at 18.2 and Industrial Technique had some onetime cost this time, so they ended up at 18. If you then go to the full year which is on Slide number 4. Looking at the graph, of course, it was an exceptional year for us, helped by currency but also strong organic growth.

So record orders at SEK158 billion, 8% organic growth and revenues at 141, plus 12 and the operating profit also at a record SEK30 billion and a margin of SEK21.4 billion. And you can see equipment order growth in all our business areas with the exception then of Vacuum Technique and that is still linked to divisions in the semi. Continued strong growth for service which is beneficial, strong presence and success in all regions. And this year — last year, as you say now, we did 30 acquisitions. For those that were at the Capital Markets Day, the 17 of them that are the character more of a roll-up, distributor getting access to markets and segments and there were 13 of those were new technology platforms that we buy into widening our scoop of supply.

So quite pleased with the development there. And then, the Board of Directors proposed a dividend for the year which is an increase of 21% . Change to Slide 5. And then you have the confirmation of the numbers I just mentioned. We go to Slide 6. So this is all received in local currency. Starting with Europe in the light blue, we can see 3% up and this is helped by the acquisition in Europe but CT was flat, VT down, Industrial Technique was positive and also Power Technique was positive. So quite okay for Europe. Then you can see the only bigger red number is then Asia, where we were down 10%. But actually, it was only Vacuum Technology where we have the main part of our semiconductor sales that was down. All the other business as was up to double digits.

So quite successful quarter for most of our business areas. More activity in Africa and Middle East, strong compressor development in the rig and also strong for Power Technique. And South America, up 3%. We had strong compressor technique mainly. And in Americas which is flat, CT very strong. Semi, down and Industrial Technique, up and also PT down, they had all these strong orders last year for rental companies. So they were down as well. So a little bit of a mixed picture. Slide 7 then confirms the 8 consecutive quarters and now minus 7% for this quarter. We go to Slide 8. And there, you have the bridge still helped by the currency on orders received 10% and revenues at 14%. But of course, with the changes we have seen in currency, it’s still revaluations in the result.

Page 9 gives the pie of the development. Of course, the declining part here is Vacuum Technologies that was growing over the last 2 years, a strong development for Power Technique with the acquisitions they have done and also for Industrial Technique. And of course, bigger piece is still Compressor Technique with 44%. Then we are at Slide number 10 which is the Compressor Technique business. If you look at the graph, we have had 4 quarters with very strong development on orders received, although this growth was 3% then versus last year, sequentially down but still on a very, very strong level. And as I said earlier, the project business with the bigger machine is still positive development and a smaller business is down single digits and very, very strong business for gas and process and it looks like that trend has continued throughout a number of quarters now.

Continue with a very good development of service and its growth in all regions. Record revenues and an operating margin at SEK23.6 million. I was happy with the acquisitions in the quarter. We talk a lot about being more local for local. And — was an on-site gas for industrial application, happy with that. And Shandong on medical gases as well. So being present locally to our customers that gives us an advantage. We as well which is called the H2 Power or Hydrogen to Power. It’s a modular system that you can use for pipelines, for hydrogen, for example. So strengthening the portfolio of products for the hydrogen market. We switch to Vacuum Technique. Same thing here, although orders were down 33%. If you look at the graph, we can still see that we have a good level, significantly above 2019, 2020.

And — but we cannot keep up. And we know this is a partly cyclical business. And if we look at the semi outlook a little bit, we also look at different parameters. And of course, you see that the expectation for CapEx is down for 2023, although that level that is indicated by our customers is still probably the third biggest year in CapEx investment. So it’s not that it’s completely dry out. I think there is a lot of orders to fight for this year as well. And we have seen memory and some other projects being moved further in time even into the 2024 and therefore, we’ve also seen some cancellations. Pleased to see that our journey to strengthen the Industrial business and the Scientific business continues and it’s mainly driven by innovative products that we bring to the market.

And a solid growth for service that also helps us out. Record revenues, the still, as you can see in the result, a number of problems with specifically electronics. And also the service level that we give to customers time to work on the orders on hand that we have that we run double shift, we run weekends. And then we are running out of components. So it’s a very inefficient way of running operations. And you can see either as a service to our customers to make sure that we get products to them on time. But I think we are reaching a level now that we can make this a little bit more efficient in the coming quarter. We have a positive price development in Vacuum. It doesn’t compensate for the inefficiencies that we have in our operations, as you can see, with an operating margin of 18.5%.

And we are at Slide number 12, Industrial Technique. They came in very strong with 18% growth. It’s actually growth in all divisions. It’s not only out of but also in General Industry. If we look at the CapEx spend in the auto industry, it’s driven by the transformation to EV and hybrids. Solid group for service that continues also all those same here, difficulties will mix, 16% up on revenues. And with some onetime effects, spot market, I might to is more operational but you can see the margin at 18% . Power Technique. If you look at the graph, it doesn’t look like they had a sequential down but is that we had the LEWA only 2 months in Q3 and now Q4, so they are down slightly. And this is also if you look at Q4 in 2021, you can see that they had the best quarter there which is now benchmarked and that’s why we say it’s down but it’s actually quite a strong number for orders received.

You see big demand in Europe, maybe not surprisingly to generators that we help out in many areas and also specialty rental which is good for the mix, continue with the success and broadening the portfolio of what they do. And also, we’re getting better traction for our service business in Power Technique and record revenues, 24% up. We have also here secured a second supplier for Engine which has been 1 of the problems earlier for the smaller machines. We are internally quite pleased about that and a very strong margin for them at 18.2% . And the recent acquisition LEWA is doing quite well as well. Return on capital was 25% . Then we come to the process profit and loss. We give you the EBITDA at 20.7% and you see the operating margin then at 19.5% .

And now, I think I hand over to you, Peter.

Peter Kinnart: Thank you, Mats. Starting then from the operating profit of SEK7.8 billion , we had somewhat higher financial — net financial items. This was basically related to financial exchange rate differences on revaluation of mostly cash positions across our different subsidiaries in the world, mostly dollar related. Then we ended up with a profit before tax of SEK7.6 billion, 19% of revenues and a tax expense of SEK1.6 billion of that which is then an effective tax rate of 20.5%. And that was actually a rather low tax rate, one might say but that was mainly driven by partly, let’s say, onetime effects that occurred but also a very positive contribution from the innovation income reduction plan, et cetera, that we are making use of with all the R&D efforts that we are doing across the globe, of course.

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When it comes to the effective tax rate, I would also give you, let’s say, a little bit of a heads up when it comes to 2023 that based on the change of the nominal tax rate across the globe, et cetera, that you would expect this tax rate to go up rather than down. And we believe that the tax rate will be somewhere in the lines of 22.5% to 23% approximately depending, of course, also of the business across different tax territories. The profit for the period after tax is then SEK6.1 billion compared to SEK4.9 billion a year ago with basic earnings per share of SEK1.24 compared to SEK1 in last year which is, of course, corrected for the redemption and the share split. The return on capital employed reached 29% compared to 27% last year. Admittedly, the change from 27% to 29% was mostly attributed to currency-related improvements and the return on equity landed at 32% compared to 30% a year ago.

If I then move on to Slide number 15, where we will take a closer look at the profit bridge for the fourth quarter, explaining a little bit how we moved from 21.2% a year ago for the same quarter to 9.5% this year. Then you can see, of course, that currency had a slightly positive effect, much less positive than it had been prior — I will come back to that in a second. The acquisitions were also dilutive. As you can see, based on the profit margin on the acquisition revenues. But then the biggest impact came then from the drop through related to volume, price mix and other. And that was mainly resulting from the continued stress in the supply chain that we are experiencing. I think we have also mentioned that in previous communications that we did not see really any improvement in the supply chain.

This is very much related to electronic components, particularly also other components in different business areas, some different ones but the main problem that we are still facing are the electronic components. We also — we have seen continued strengthening of our pricing efforts. And that has been very helpful. But unfortunately, it has not — it has been strong enough, at least, to compensate for what we refer to as structural cost increases. We have seen whether it is material prices, labor costs that, of course, have also gone up as well as energy costs that were quite a lot under stress lately. But then the supply chain constraints caused a number of effects, including, for example, spot market buying that we continue to do in order to secure certain components for our electronics but also quite a significant impact on efficiency in our operations, both for the manufacturing part as well as for the service operations.

Of course, in December, there was also some impact from COVID, for example, due to the fact that particularly in China, then quite a lot of absenteeism have to be noted. And then last but not least, maybe in this list, there’s also an impact from our very focused efforts in product development which we, of course, continue to consider a very important investment in the future. It is not only the R&D we do in our existing platforms that we have been for many, many decades but also all these new initiatives that we have shown in the Capital Markets Day that will, of course, also require product development in order to make sure that we have the portfolio to be able to be competitive. And then maybe a last point on currency. If I compare the current quarter to the third quarter this year and you would look at the same bridge for that period, then you will notice that the currency in the third quarter was quite positive.

And that in this quarter, it is close to 0 almost. And that is mainly related, if not exclusively to the revaluation of balance sheet items, particularly receivables as well as trade liabilities. And that had quite a significant impact, as you can see in the financial statements in the quarterly report as well. And that, of course, didn’t give us the same kind of support in the margin as it has done in the third quarter, for example. When it comes to that currency, what is the outlook for our currency development. We do believe that even in the first quarter, it is likely to continue to be positive but even less so than it has been this quarter. So we expect, based on the current exchange rates, that the currency impact will continue to diminish steadily over time but most likely still be positive at the end of Q1.

If I then move to Page number 16, then there’s a little bit more detail of all the different business areas. I would say in — you can see currency support that is still positive. The acquisitions are dilutive as well. And we have there also a small negative drop-through or, let’s say, a margin that is positive but then affecting the operating margin negatively from one quarter to the other slightly. In Vacuum Technique, we see, of course, quite big impact, both currency as well as acquisitions, are here slightly negative. But the biggest impact here is again from the volume price mix and others. And here, when we talk about pricing efforts, we have been more successful than before in implementing price increases but not to the same level as we see in some of the other business areas which is a little bit typical of the segment with very few customers and rather long-term contracts with strict clauses in those contracts, allowing very little room to change the prices also particularly because of this — copy exact concept that they tend to implement.

Then on Industrial Technique, we see basically no impact from the acquisitions very small negative impact from the currency and then a bigger negative impact also here on volume, price, mix and others. In Industrial Technique, also here, the supply chain constraints have been — continue to be challenging. Also here, spot market buying is used quite actively in order to secure the electronic components, for example, is leading them to the drop-through as we see it here. And then finally, Power Technique with, I would say, nothing less than a fantastic performance from 16.3 to 18.2, with a small positive currency effect here, slight dilution from the acquisitions, of course, especially considering the size of these acquisitions. This is maybe more important for Power Technique in the total margin but then a very strong performance from organic revenue volumes.

And with that, I think that summarizes the comments on the detailed profit which is on Page 16. Then I go to the balance sheet on Page 17. I think if we compare to the last quarter, then there are no dramatic changes comparing year-on-year. A big impact that we see in the movement is, of course, the currency impact here as well by about SEK14 billion. That was a bit higher even in the third quarter. So that has come down over the last quarter by about SEK3 billion. And that SEK14 billion is predominantly almost half linked to the intangible assets. And then the rest is, you could say, largely linked to inventories and receivables in relatively equal terms. Of course, the balance sheet is also affected by the fact that we did a number of acquisitions over the years.

So if you compare December 31 last year with this year, there’s quite a significant impact there. Then if we go to the liability side, on the equity, there is, of course, an increase which is related to our profit that we have generated over the year but then also a translation difference on our holdings in subsidiaries that is quite substantial as you can see in the details of the quarterly report. The interest-bearing liabilities went up due to some increase in short-term funding and the noninterest-bearing liabilities are predominantly almost exclusively linked to the increase of trade payables which when we look at the third — fourth quarter, you could say that the increase in working capital in the fourth quarter has mainly been on the receivable side related to the high level of invoicing while the inventories increase has been fully compensated by an equal increase roughly in the payables.

Then I move to Page number 18 to give you a few insights on the cash flow. A few important points maybe to comment upon here or to start with the high operating cash surplus generated to the operations of SEK10.3 billion compared to SEK7.6 billion the same quarter last year, quite a substantial difference. We also see that the taxes paid are a little bit higher than what we saw last year. That is mostly related to timing difference, I would say, in how these payments are executed. And then the change in working capital which was SEK1.4 billion compared to a positive of SEK0.5 billion a year ago. On the working capital, I think it’s important to compare also to the SEK7.4 billion for the full year. So there is still an increase in our working capital, as I said, mostly linked in the last quarter to the receivables but the pace of the increase is much, much lower than it was at the early stages of 2022, where we saw much to see more significant amounts.

That gives us a cash flow from operating activities of SEK6.8 billion compared to SEK8 billion. And then we also see, as we have in the previous quarters, the increased expenditures on the investments in property, plant and equipment related to the many initiatives that have been initiated around building additional production capacity mostly on the Vacuum Technique side but also in Compressor Technique and other smaller initiatives across the other business areas. In total, I would say that the expenditures on investments have doubled this year compared to the previous year looking at the full year numbers. And that then gives us, in the end, total cash flow — operating cash flow of close to SEK6 billion compared to SEK6.7 billion last year.

And then we have spent, let’s say, roughly SEK1 billion of that operating cash flow into acquisitions throughout the fourth quarter, bringing the total acquisition expenditures for 2022 to SEK11 billion almost. On Slide 19, just a few highlights on the earnings dividend and redemption, historically. Earnings are at SEK4.82 per share as you can see here and the dividend that will be proposed to the Annual General Meeting for approval will be SEK2.30 per share. That dividend will be paid out in 2 installments as has been the case over the last number of years. Equal installments of SEK1.15 per share each time. The record day of those payments will be May 2 and October 20, 2023. And that would give us a total amount of SEK11.2 billion that would be paid out to the shareholders in 2 installments of SEK5.6 billion each.

And with that, I conclude the cash flow and the dividends and I would like to give the word back to Mats Rahmström for the near-term outlook.

Mats Rahmström: When we look at the near-term outlook, then we are trying to qualify then the activity level between Q4 and Q1 among our key segments in the market. And as you can see then that we said that the activity level will remain at current level. This is, of course, an uncertain environment that we operate in right now. With the pandemic in China, we see the inflation and the energy prices. And of course, some of the new regulation that has not helped full impact and like the . But based on what we see in the activity level right now and the quotes we have out, this is support this statement and the forward-looking statements. And then, I think we can open up for questions.

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Q&A Session

Operator: The next question comes from Klas Bergelind from Citi.

Klas Bergelind: Mats, Peter, Klas from Citi. So if I had to ask one, I’m going to focus a bit on Vacuum Technique in the backlog. When we met you at the recent CMD in November. I think are said that he felt the backlog was supported, that there hadn’t been any cancellations. Now I think you alluded to, Mats on the memory side, that there has been some cancellation. To what extent is this widespread across several customers? Do you have any indication whether these cancellations will intensify? Or was this more of a one-off?

Mats Rahmström: It is right that we have seen cancellations. And it’s in the area of SEK1 billion for the group. And the lion’s share of that is within semi. And the first one, of course, to move production days have been with customers that are focused on memory. And I don’t want to speculate but I think we have seen a number of — a handful of customers that have delayed into 2024. And then, of course, they cancel that project with us. And it’s not lost business, you would expect to get that back when they reactivate those programs again.

Operator: The next question comes from Andrew Wilson from JPMorgan.

Andrew Wilson: I just wanted to try and, I guess, pick up on the VT and the IT margins. You’ve obviously provided some kind of detail around some of the challenges and some one-off effects in IT. But I just wanted to pick up on VT, I think sort of — on your comments on the margin. I think you talked about now getting to a position where you felt that some of those challenges would be behind us. And therefore, I guess, should we expect the Q1 to already be moving back to, I guess, the sort of levels of margin that we’ve seen in Vacuum more than maybe the last sort of 12 to 24 months? And then I guess, similarly, on IT, you alluded to some onetime effects and I appreciate some of that is probably supply chain. But again, should we again in the Q1, expect IT to sort of move back to, again, the sort of trajectory that, that was on prior to the Q4?

Mats Rahmström: If we start with Vacuum, then. There are a number of issues with electronics. And since you are aware, we have quite a lot on orders on hand still to be delivered to our customers. And to gain those and win those orders, of course, we have committed to delivery dates. And we have and have done our utmost to deliver on those states to customers they are running. That means that we are running evening shift, double shifts, weekend shifts. And then we utilize our staff, of course, in an inefficient way because suddenly we don’t have components. And that is actually what happens physically on the floor. And then we have the option then to say, okay, should we not take this cost to support our customers or should we — actually I’d say that we would do back to more normalized shifts.