Atlas Copco: Currency Weighs, But Demand Holds

A significant takeaway from this report is that Atlas Copco is growing organically, however the currency effect is significant to give the impression that the company is shrinking. Revenues fell by 5 percent and orders by 3 percent. Strip out the currency impact, which knocked 11 percentage points off both figures, and the underlying business actually grew: Orders rose by 5 percent organically and revenues by 3 percent. This distinction is important when deciding whether the company has a demand or an exchange rate problem. Currently, it is almost entirely the latter, though it is worth bearing in mind that FX cuts both ways and a future reversal is not a sufficient basis for a thesis in itself.

Orders received came in at MSEK 45 395, down from MSEK 46 604 last year in reported terms, while organic order growth of 5 percent points to real demand momentum. The reported operating margin landed at 20.4 percent, slightly better than the 20.1 percent a year ago, though it is worth noting that the adjusted operating margin, which excludes items affecting comparability, was 20.5 percent versus 20.8 percent. On an underlying basis, margins are therefore marginally softer year-on-year, even if the resilience is still notable given the currency drag and tariff costs. Earnings per share came in at SEK 1.28 versus SEK 1.35 last year, a modest decline. The figure warranting closer attention is operating cash flow, which dropped from MSEK 6 575 to MSEK 4 355, a decline of 34 percent. This was driven mainly by an increase in inventories and trade receivables during the quarter. It is worth watching but not yet alarming.

At first glance, Vacuum Technique's revenue decline of 5 percent looks weak, but a closer inspection reveals that this is largely due to currency effects. Organic revenue growth was 8 percent, with order growth came in at 32 percent organically. Vacuum is the most interesting division in the report because it supplies equipment to chipmakers, and the semiconductor industry is in the middle of a clear upcycle. Orders for vacuum equipment to the semiconductor and flat panel display industry grew strongly in all major regions, both year-on-year and sequentially. This is a leading indicator. Orders today will become revenue in the coming quarters, and the order book currently being built in Vacuum Technique suggests the possibility of a stronger second half of the year.

Compressor Technique is the largest division by some distance and remains the engine of group earnings, which is why its weaker performance deserves attention. Reported orders were down 10 percent with organic orders down 3 percent. The bulk of the headline fall driven by a 10 percent currency hit rather than operational weakness. The decline came mainly from gas and process compressors, where the comparison quarter benefited from large marine LNG and air separation orders that did not repeat. Industrial compressor demand was essentially unchanged on an underlying basis, and service was a clear bright spot, with healthy order growth across all major regions. Nevertheless, the slower order intake on large equipment serves as a reminder that the Vacuum upside story alone cannot carry the group. For the overall trajectory to improve from here, Compressor needs to stabilise alongside continued strength in Vacuum.

The macro backdrop for this report is genuinely difficult, but it is important to understand the relative weight of the headwinds. The dominant problem is currency, which has knocked 11 percentage points off both orders and revenues. Trade tariffs are also evident in the costs, but management considers them to be a smaller factor in the margin factor than currency. With manufacturing spread across multiple continents and operations in over 180 countries, the company has more flexibility than most to reroute supply chains and adjust pricing. The near-term outlook remains unchanged, with customer activity expected to stay at current level. This is not particularly exciting, but it is steady, and in today's macroeconomic climate, stability is underrated.

The first is whether the surge in orders for Vacuum Technique translates into revenue over the next two quarters. If so, the organic growth picture becomes considerably harder to overlook. The second is the cash flow trajectory. A single-quarter increase in working capital is not a concern in isolation, but if it continues into Q2 it will start to raise questions about operational discipline. The business is performing better than the reported figures suggest, the semiconductor tailwind is real, and the headline drag from currency will not last forever. Whether this will be enough to change the share price trajectory depends on how the next two reports develop.