Q1 2013 Earnings Call

April 29, 2013 7:30 AM ET

Executives

Hans-Ola Meyer – SVP, Controlling and Finance

Ronnie Leten – President and CEO

Analysts

James Moore – Redburn

Aaron Ibbotson – Goldman Sachs

Ben Maslen – Bank of America

Andreas Willi – JP Morgan

Martin Prozesky – Bernstein

Andreas Koski – Nordea

Presentation

Operator

Ladies and gentlemen, welcome to the Atlas Copco Q1 Report 2013. Today I’m pleased to present CEO Ronnie Leten and 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.

Speakers, please begin.

Hans-Ola Meyer

Thank you and very welcome to all of you participating in this telephone conference call. My name is Hans-Ola Meyer. I am the CFO of the Group. And with me here is also Ronnie Leten, our CEO, whom I will hand

The history of the global mining industry in every form is shaped by the economics and market opportunity of restricting underground mining.

The effect this has on:

1. The market, over decades, is that it increases the global costs along with associated prices and profits on all metals uniformly. Therefore, it is not noticeable unless you are aware of the evolution intention over a long time span.

2. The evolution of mining machinery, systems and procedures has been tightly restricted if you understand the motivations behind them. Mining Machinery Manufactures [MMMs] understand this market dynamic and shape their businesses around it. In doing so, the MMMs have tended to prevent step changes in the methods used for underground mining as an entire system. They do this because a restricted global underground mining industry produces 10 times as many surface mining machinery sales as what could be sold underground. The MMMs

The mining equipment industry is in a cyclical rough patch. This is not news; we've heard similar information from Caterpillar (CAT) and Atlas Copco (ATLKY.PK) among others, and the signs of a slowdown at Joy Global (JOY) have been apparent for some time. With the magnitude and timing of a significant recovery both key unknowns, one of the critical factors for Joy Global in the interim will be solid operating performance. News has been encouraging on that front, but investors have to be pretty bullish on the long-term outlook for the mining sector to see major value in Joy Global shares today.

Although Not Strong, Joy Global's Results Were Good Where It Mattered

With revenue up only 1% from last year and down 30% from the fiscal fourth quarter, this was not a banner quarter for Joy Global. Those results were better than expected, though, as very strong results in

I'll give credit where it's due - the involvement of Nelson Peltz and his Trian Fund Management, and the willingness of Ingersoll Rand's (IR) management to embrace that involvement, has definitely delivered substantial near-term benefits to shareholders. These shares are up more than 40% over the past year as management has committed itself to a greater return of capital, improved operating efficiency, and the spin-off of its security business.

Things may even get better from here. There are actual signs of progress in margins, even though the company remains heavily exposed to end-markets (residential and commercial construction) that are not yet out of their trough. Even so, it looks like investors have already given management ample benefit of the doubt and fiddling with the balance sheet really doesn't seem likely to produce long-term value.

A Messy Q4 Does Include A Small Operational Beat

Ingersoll Rand's fourth quarter wasn't quite as

Reading Caterpillar's (CAT) release and listening to the call, I get the sense of management basically shrugging its shoulders and saying "heck if we know" when it comes to the year ahead. I can't blame them in the least, as listening to all manner of conference calls this earnings season has turned up a wide array of feelings, impressions and outlooks for the economy both now and for the rest of 2013. For better or worse, the near-term outlook for Caterpillar is likely to be dominated by commodity price trends, while the long-term value seems only so-so right now.

A Messy Quarter, But Not So Bad On Balance

Caterpillar reported that revenue fell about 7% this quarter, with machinery revenue down a similar amount. While resource equipment revenue rose 14% (and 16% on an organic basis), power revenue fell 6% (down 9% organic), and construction revenue plunged 25% as

Underground mining consists of three major machinery suppliers, namely: Sandvik (SDVKF.PK), Atlas Copco (ATLKY.PK) and Caterpillar (CAT). We will collectively call them SACC.

The historical evolution of predominantly these three companies has been of great interest to me, especially concerning how they have chosen to develop each of their respective underground hard rock capabilities (Base and Precious metals). However, even more interesting is the truly staggering indirect flow on benefits these "managed" evolutions have had on their companies, the mining industry and the global economy as a whole.

An original concept shows that SACC may have (over decades) restricted faster underground hard rock mining techniques, thus increasing the costs of underground mining. This significantly increases global commodity prices that benefit them many times over when it comes to surface mining and exploration machinery sales.

Global commodity prices may have been increased 2-3-4 fold or more, due to this supply restriction

By Stephen D. Simpson

With the Federal Reserve firing up the presses for a third round of quantitative easing, it's only a matter of time before more talk of imminent hyperinflation pops up. While calm discussions on the prospects of hyperinflation are rare (and there's often a tinge of hysteria or paranoia around the topic), the reality is that the U.S. does have some disturbing trends working against it in terms of demographics, debt/deficits, and a policy of easy money that debases the fiat currency.

What's more, thumbing through the history books shows that periods of extreme inflation or hyperinflation (definitions vary) are not all that uncommon around the world. Post-World War I Germany is probably the most oft-cited example, but a range of countries including Greece, Russia, Argentina, China, Brazil, and Zimbabwe (most recently) have seen stretches of inflation severe enough to call it hyperinflation.

What does hyperinflation

When I last wrote on Ingersoll-Rand (IR) in February, I thought that this industrial conglomerate was the sort of perennial underachiever that could do well if and when management started delivering better results and the market really bought into the idea of reliable improvement. Although it's still early, it looks like Nelson Peltz's involvement with the company has improved sentiment, and it does look like management has credible plans for healing what has been a long record of underperformance.

Success At Last?

Ingersoll-Rand has been talking about restructuring since 2008, but didn't have a lot to show for it before this year. Now something certainly has to be taken in the context of a terrible U.S. construction market (which also hurt rival/comparable Johnson Controls (JCI)), but the relative outperformance of others like Stanley Black & Decker (SWK), Lennox (LII), or Dover (DOV) can't be

As a tiny industrial company focused around capital equipment and generating more than half of its revenue from Europe, it shouldn't surprise anyone that Hurco (HURC) is seeing some challenging operating conditions. That said, the company is managing this tough market reasonably well and while the next couple of quarters are likely to be touch-and-go, the long-term potential of this company ought to make it a solid candidate for small-cap investors.

Third Quarter Results Show Some Resiliency

All in all, Hurco did pretty well in a tough market during its fiscal third quarter. Revenue did fall 1% as reported, while adjusting for currency shows about 6% growth. North America was a source of strength for the company, as 6% shipment growth led to 18% revenue growth. European sales were down 7% on a 10% drop in units, while revenue from Asia-Pacific dropped 12% on a 13% shipment decline. While this

Many words have already been written about the global slowdown in heavy equipment demand, and the consequences that has brought for well-known industrial names like Caterpillar (CAT), Deere (DE), Komatsu (KMTUY.PK), and Cummins (CMI). For Joy Global (JOY), though, it's not just about a global slowdown in machinery orders, nor even a slowdown in mining equipment. Rather, the key question for Joy Global and investors over the next six to 18 months is whether 2012's dramatic slowdown in coal is a new normal or just another trough in a cyclical up-and-down story.

A Little Good News In Fiscal Q3, But You Have To Look For It

This was not a strong quarter for Joy Global. Expectations have been steadily eroding for months, but the company still missed the target for the quarter.

Revenue rose 22% as reported from last year, but organic growth was more on the order of 11%.

Institutional investors may have the tools and resources that make international investing indistinguishable from domestic investing, but the retail investor is not so lucky. Consequently, high-quality industrial names like Atlas Copco (ATLKY.PK) can often go unnoticed by many investors. While Atlas Copco doesn't have the left-for-dead valuation of some industrials, investors who want a blue chip company with solid growth prospects can still pick up these shares for less than fair value.

Q2 Results - Another Beat, But Worries Building

Atlas Copco has built a pretty good reputation for itself as it pertains to guidance and financial performance. Nevertheless, while financial results continue to come in solidly with respect to expectations, order trends and basic end-market conditions do have investors and analysts concerned.

Revenue rose almost 18% as reported for the second quarter, with organic revenue up about 9%. Reported growth was led by the mining and industrial business (up

Q2 2012 was another terrible quarter for the global telecom equipment industry. China's Huawei, the last of the leading firms to report, posted a 22% percent decrease in net profits for H1 2012. Huawei's local rival ZTE (ZTCOY.PK) published preliminary half-year profits that were down 60-80% year-on-year.

The global market leader, Ericsson (ERIC), saw net profit fall by 61% in Q2. Alcatel Lucent (ALU) and Nokia Siemens Networks, the joint venture between Nokia (NOK) and Siemens (SI), continue to struggle, both reporting losses.

While a sluggish global economy is partly to blame for the poor results, deteriorating industry profitability is not a new development. The sector has struggled for more than seven years. The main contributing factor: the emergence of Chinese competitors Huawei and ZTE on the global stage.

In this article we look at how the new Chinese competition completely altered the competitive dynamics of the sector and the

Q3 2010 Earnings Call

October 22, 2010 08:30 am ET

Executives

Ronnie Leten - President & CEO

Hans Ola Meyer- SVP of Controlling and Finance

Analysts

Nico Dil - JPMorgan

James Moore - Redburn

Daniel Cunliffe - RBS

Ben Maslen - Merrill Lynch

Ola Kinnander - Bloomberg

Colin Gibson - HSBC

Fredric Stahl - UBS

Arnaud Brossard - Exane BNP Paribas

Presentation

Hans Ola Meyer

Thank you [Pereira] and very welcome to everybody to this presentation of the Third Quarter Results for Atlas Copco. I particularly welcome also the participants on the telephone conference of course. We will do the usual format. I will very soon hand over to Ronnie who will takes us through his comments on the quarter results and the trends and after that we will immediately jump into the Q&A session. So I don’t think I waste anymore than just