Ladies and gentlemen, welcome to Atlas Copco Q2 2020 report. Today, I am pleased to present Hans Ola Meyer, CFO, and Mats Rahmström, CEO. For the first part of this call, all participants will be in a listen-only mode, and afterwards, there will be a question and answer session. I'll now hand the word over to Hans Ola Meyer. Please begin your meeting.
Thank you. A very welcome to everybody to this beautiful summer day here in Stockholm, Sweden. Even though it's a virtual call, we have to say that we're so proud of that weather today. We will try to entertain you for the next hour or so, going through the second quarter results for Atlas Copco. I'll soon hand over to Mats, and he will take you through his comments, and then we will go into the Q&A session as usual. I repeat, as always, in order to give as many people as possible the chance to put their specific question, please keep it at one question at a time. Thank you. Let's begin, Mats.
Thank you, Hans Ola, thank you for calling in. We will start with slide number two, which is called Q2 in brief. This is the first good quarter with the impact of COVID-19. Of course, we can see an impact on top line from that, which we expected as well. We also learned a little bit about the inefficiency that comes with the COVID. From an operational standpoint, of course, you can see that social distancing, it's an opportunity, or you can say it's an issue. Of course, we have to restructure a little bit thus, we are not as efficient as we normally. Different types of lockdowns also makes it cumbersome for service to be as efficient as before. Transport cost is also something that is increasing, and it's cumbersome with sourcing, of course.
That positive note, I think this started out more as a supply issue, as Hans said, that there are very limited supply issues in Atlas Copco, and it's in some areas more driven by the demand. Coming to the demand, you can see that CT, Compressor Technique, they were down 13%. I think once again, they show the resilience they have in their business models, the interest of these too many segments and the strong service performance. Vacuum Technique, minus 2%, have tailwind with digitalization of society. We can see that both equipment and service are doing quite well. At the same time, we can see that the COVID had impact on scientific and industrial products. Industrial Technique might be hit the hardest.
We have talked about Auto and aerospace before. This quarter we can also see as expected, General Industry and Service being weaker. In Power Technique, -30% for the quarter, and in principle, the utilization of our products, either in our specialty rental or at our channels to the market is rather low. If you go to Service, which is the next point, I must say that I'm very pleased that we have invested too many years in Service, helping our customers with uptime, and also the last few years when we have invested quite heavily in connectivity and data analytics, that is really proving valuable in times like this. Profitability, we call it the healthy profitability. The reported number is 16.1%, and adjusted, an underlying demand of 18.6%. There are some one-time costs that I will cover soon.
At the same time as we delivered 18.6%, we continue to invest in our future, also our customer's future. R&D investments are kept, the digitalization efforts that we have is kept, also strategic projects, that's why we also call it the healthy profitability, that we both deliver what we believe is a good profitability and at the same time invest in the future. It's ISRA VISION. We are close on that acquisition, we have an ownership just above 92%, it's a new leg for us and a new platform for growth. If we go to slide number three, Q2 in figures, that's confirming that orders were down 17% for the group, revenues kept up slightly better than at 8%. I said that we had a reported margin on 16.1%, 18.6% was the adjusted one.
There are a couple of things that fills that gap, and that's the development that Atlas Copco shares makes us reevaluate the long-term incentive program for SEK 237 million. We have a pension settlement which relates back to 2014, with Atlas Copco. We have a restructuring program in vacuum, and mainly in industrial vacuum, not really linked to the COVID-19 situation, more of the profit program that we are running there. We have a restructuring program in Power Technique, the main gaps that I think Hans Ola will give you a little bit more granularity on this later on. If you go to slide number four. It's the geographical map. Starting with Asia, we can see now our sales split is 38% in Asia. It's probably more related to the situation where different societies are opened up from the COVID-19 or not.
The positive development is mainly related to the Vacuum Technique. The other business areas are also down in the region. In Europe and Africa, what is there? What is doing some of the other service in some parts and also some segments like medical, food, and water, for example. America, still hard hit, -27% for North America. We still have an uncertainty going forward about that region. Although what you could see as slightly positive, the quarter started off fairly slow. June had a couple of extra days versus last year. That did reveal some positive signals in the sales result in June. Go to the next slide. Slide five. Just a confirmation then on the organic order growth. We can take next one, the sales bridge. We can see that the currency now is again slightly -1%. It's mainly the US dollar.
We can see the weakening dollar and Hans Ola will give you a guidance on Q3 later on. Take the next slide, order by business area. Given then the scenario, we can see that the Compressor Technique keeps 47% of the group's revenue. Of course, Vacuum Technique is gaining ground and considering the operating profit from that division, I think that's quite the case. Of course, significantly more difficult situation in Industrial Technique and Power Technique right now. Go to the next slide, which is Compressor Technique. I think I mentioned it earlier, but I think the business model that they owning proves to be very resilient to changes in the business environment. Both at the number of segments that they are present in. Some of the segments that are doing better is medical, food or water, but also the geographical presence that they have.
On top of that, of course, they have 40+ of the revenues coming from service. I think that's a really good model. That's the reason, of course, why they can deliver a very strong operating profit during these times at 21.4%. On the inefficiencies, I mentioned that it is transport operations. It's a little bit more cumbersome with service and of course with sourcing as well. Not only for Compressor Technique, but for all business areas. I want to give a credit to the creativity among our employees and the commitment to make this happen. It's a fantastic team to work with. We go to the next one, which is Vacuum Technique. Then we see the semi. Sequentially, I would say that it's a number of key accounts. It's still very positive in the semi industry. The digitalization is positive long term.
Right now I would say that we can see a spike in demand triggered by people working from home, but also an industry like gaming is very positive. If you look at the utilization of fabs in that industry, it's close to 90%, which indicates that it's high utilization. At the same time, we see then that we didn't see as much in Q1, the scientific and industrial, no surprise really, that they follow a little bit the impact from the COVID-19 situation. Just as a reminder then, the adjusted operating margin was 24.1%, we reported 19.6%, and here in between, we have the pension settlement and the restructuring, and mainly in industrial. Go to Industrial Technique, there you can see that they've been hit quite hard. It's not really any segment that stands out as looking more positive at this point.
Auto is challenging, aerospace even more. As I communicated in earlier quarters, it's very unlikely that GI and MV keep up. This is what we see in the quarter as well, that generally industry and service is also following the same trend. Some of you that follow us might say, why couldn't they deliver the higher operating margin? Of course, it's triggered by the volumes. I will also say it's triggered by the rapid change. If you look at the graph, the real is 35% down, and you can see the difference between other business areas. Normally that revenue keeps up for a few more months, and this is strongly correlated. The orders on hand is delivered quicker, and that change, and also that the structure of the profit and loss makes it more difficult to protect bottom line.
I would actually stretch to say that from an operational standpoint, agility is about the same as we have in the other business areas, but the structure are quite different. At the same time, also here, we keep investing in the future for products, R&D, and digitalization. Positive was that we managed to close on the ISRA acquisition. If you go to the next slide, you can see two pictures. This is the two main segments that they operate in. The top one is Surface Vision. This is 70% of ISRA's business. On the bottom one, this is Industrial Automation. This represents 30% of the business. I would say that on the Industrial Automation, we can give access to ISRA on the global. It's a very strong and simple synergy to understand.
This machine is checking the paint quality on this car here, and of course, that's an environment that we are very familiar. Technology-wise, I would say that they are in the sweet spot of the global trend of automation. We go to the next slide, Power Technique. As I said, intrinsically, as you know that it's the construction market is one of the end user in the main part of this. The rental channel is the channel to the market and the utilization in rental companies and our customers, but also our own rental is rather low. That also impacts the profit bit, also the sales mix. Then we go to the next slide and group total, then I think I hand over to you, Hans Ola.
Thank you much. Let's look at the total income statement here. You have all the numbers since before, so I don't need to waste time of going through the % here. When it comes to the financial net, perhaps I could just repeat that, of course, the adjusted operating profit, which is not seen on this slide, is 4,476, so SEK 4,476 billion, which would mean a 17% decrease from last year's number, and actually about 20% if we do adjust it for last year. For financial net, no big surprises. We enjoyed low interest environment, the interest rate environment, of course. When it comes to taxes, you saw that we commented specifically on a one-time effect, which is related to withholding tax provisions for dividends that we receive internally from country to country within the group.
That had an impact of about five percentage points, which also indicates what I would say is the reasonable expectation for the near future for tax rate, i.e., 23%, roughly in that order, I would say. When it comes to the impact on the operating profit of FX, we'll talk about it soon on the profit bridges. As Mats alluded to, when we look at today's situation of the currency of the FX, we were, of course, a little bit taken by the very sharp decline of the dollar the last couple of days, which means that we now see that the bridge between Q3, as we expect it now, and Q3 last year, is probably going to be a SEK couple of hundred million negative, where as you saw Q2 over the same quarter last year was minus SEK 90.
To give you an idea, and that has happened really in the last couple of weeks of the dollar deterioration. If that stays, I don't know. That's what we have. If we go to the next slide, which is number 14, this is the whole group, and it's difficult to read through. Let me for once talk a little bit here about the column, which is volume price mix and other also on the group level. If we translate that column into effect on the profit margin, it's close to three percentage points negative compared to last year, 2.7 to be more exact. Together with the roughly 2% negative coming from items affecting , it explains this 5% difference, percentage points difference from last year.
Within that volume price and others, let's call it organic, the big impact is really the COVID-19 related aspects, meaning that there is an underlying volume component, yes, which we expect, but it's accentuated in this situation by more of the inefficiencies, by more of the higher adjustments, i.e., higher transport costs, service variance, under absorption of the structure that we have and the force, the human resources that we have. That's the big impact. When I say that, it's taken as a net effect after the various supports that we do receive around the world, we have received in Q2 around the world. Again, I want to stress that the impact of those subsidies from government is only helping somewhat to mitigate the negative impact that we have had from the COVID situation.
On top of that, of course, there is real cost containment measures as well that help us, again, to mitigate this big negative from both the volume, the sales mix, and the COVID related. That's how it would look from a group point of view. If we turn to page 18, a couple of more comments per business area. In Compressor Technique, they are affected by negative sales mix and the COVID situation together with the grants is not such a big impact if we take it as a net effect. It's basically a big normal volume effect and a mix effect that makes the margin deteriorate somewhat. It's at a high level, as you see.
Vacuum Technique is in a similar way having negative impact from the COVID-19 related costs that we just talked about, but on the other hand, gets almost a compensating positive effect from the volume increase in that case. Then we have the two that Mats also pointed out, Industrial Technique and Power Technique suffering on all accounts, basically. You can see that very clearly that the impact on the margin is huge from those volume drops that they have had. If we then look to page 16 on the balance sheet, I just want to remind everybody that in June 30 balance, the whole ISRA VISION acquisition is included. As you know, since it was closed at the same time, basically, we don't have any revenue nor profit in Q2.
We only have the balance sheet impact, and you can see that clearly from the cash going down from year-end 2019 with about SEK 10 billion, and then the corresponding increase in intangible assets, and a little bit here and there in the working capital. That summarizes that. The effect of profit and balance sheet adjustments is in cash flow. Then we are on page 17. I think in a very quick summary, we have lost from profit cash generation, if I call it like that, but we have, compared to last year, improved in terms of less build-up of working capital in the quarter compared to a rather substantial build-up in second quarter last year. All in gives us an operating cash flow, which is about SEK 1.1 billion better than the same period last year.
With that, I hand it back, and you give your closing remarks on the near-term outlook, Mats?
This is trying to judge a little bit the activity level among our customer segments between Q2 and Q3 then. Of course, when we say it remain uncertain, it's linked to the COVID-19 situation globally, where we do follow all the guidelines recommended. As you know, that change on a daily basis where we can and cannot travel and where we can do things. With some of them more positive view on the end of Q2, we've seen that activity levels in manual segment is increasing, and that somewhat can be related back to the uncertainty of what will happen. We have a slightly more positive view then on the activity level among our customers in Q2 versus Q2.
Excellent. Very good. Operator, I think we're ready for the Q&A. If you just repeat the routine, please.
Thank you. If you wish to ask a question, please press 01 on your telephone keypad. Just as a reminder, we kindly ask you to limit yourself to one question at a time to give everyone the opportunity to ask their question. After which, feel free to reenter the queue if you wish to ask another question. It is 01 if you would like to ask a question. Our first question is from Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Mats. Hi, Hans Ola. It's Klas from Citi. My question is on demand, and it's very good to see that larger compressors are holding up well, but I'm curious on the smaller and mid-sized compressors and to what extent demand improved towards the end of the quarter. You're obviously guiding for somewhat high demand, Mats. Could you tell me a little bit about trading by regions on the smaller and mid-sized side, and where you saw most pickup as you went through the quarter? I will start here.
Well, I think that more still follows, not so much by segment, except for the segments that are a little bit protected. Those are the ones that is related to society functions like water and medical, and those stay positive on a global base. It's difficult to talk about segments right now. Of course, we could see it more of a V-shaped recovery in China, it's not sustainable, as I said already in the previous call, as long as we don't open up in Europe and America. I do hope that we will see then a better comeback of business and activity levels in Europe, and this is what we have seen in the end of the quarter. As you can follow yourself, the COVID-19 situation in America is escalating, so it's very uncertain what will happen and how you can travel.
I think you can follow our trends, follow in principle how we cannot survive this on the COVID situation.
One quick follow-up for you, Hans Ola. I just promise to be quick. On the drop through in efficiencies, how should we think about the third quarter as safety measures are introduced, you work in a different way, social distancing and so forth, which can create that inefficiency still? You have the people on short-term working. Will you have the same impact on savings, or will the net effect be similar when we go through the third quarter?
Well, it's difficult to make a projection on the third quarter, and we normally don't do it. There is less and less of this support because we bring back more and more people to more normal. In certain segments where the demand, and then I'm talking sectors of industries, is still very low compared to 2019, there will be short-term work going on, but there will be less and less of support. Of course, met by gradual improvements of the efficiencies as we get more accustomed to the somewhat new processes, et cetera. I don't think that one should expect any dramatic changes on the net of those two things into Q3.
Thank you.
Our next question is from Max Yates from Credit Suisse. Please go ahead, your line is open.
Thank you. I just wanted to ask on compressor servicing and how quickly in places like the U.S. and Europe you've seen that normalize. Are we now at sort of backup levels that we saw last year in terms of servicing? Could you talk a little bit about, kind of as things have opened up, specifically what the inefficiencies are linked to COVID-19 and specifically what it is that you are doing differently with your servicing, even as things open up to socially distance? Thank you.
Well, the service, if I start there, is still, of course, limited to access to customers around the world. If we do have access and they run production, then you can expect the service is back up and running. There is not a huge built-up demand that we have to cover. A difference between the different business areas, I think your question was more related to CT.
Yes.
As customers are up and running, we will execute on the service programs that we have in place. What helps us a little bit throughout this period is, of course, that many customers have service contracts with us, and then we continue to invoice for those services. We have had the opportunity then to change a little bit the way we, not maybe the way we go to market, but the way we operate with customers, that we can help them to accelerate the digital analytics on the compressor fleet that they have. Even if we cannot be on site, they see the value, of course, of us monitoring the performance of their product. I believe that over time, this will lead to more service contracts for Atlas Copco, and we see the uptime on their products.
It's very difficult to give an exact picture since it's so different from country to country and also changing from, in principle, day by day actually.
Yeah. Okay. Are you seeing any of your sites locked down currently? This is actually your own production sites, I guess are there any parts of the U.S., because it's obviously very uneven in terms of the COVID impact there. You had sort of Antwerp obviously shutting down in the quarter, in the U.S. now or any regions, are you seeing actual disruption to your own production?
We see disruption in them. First, may I say that in principle, everything is up and running. That's not the big issue anymore. We don't have the full capacity due to the restrictions. The only country I would say that it's been a challenge, where we have limited capacities in India. Otherwise, we are running in principle with the capacity that we have in those plants around the world.
From a service point of view, like Mats said, that's why as you mentioned U.S., and we all read the news about California, et cetera, and Florida whatsoever. It's a very fluent situation, and we cannot just make projections for how that will impact us.
Sure. Thank you.
Thanks.
Our next question is from Lars Forsén from Barclays. Please go ahead, your line is open.
Yeah. Hey. Hi, Mats and Ola. Just following up on the question with regards to CT. I appreciate you pointed out CT's exposure, Mats, to critical industries. Obviously, a high service contribution that drives that relative resilience from a revenue standpoint in the quarter, but your order intake is still down 13%. I think it's the first time for a second quarter, at least since 2009, we've seen a book-to-bill below one. I just want to get a little more flavor around the order intake. Can you help us specifically with what the service growth was at the order level in Q2?
Then to the point on small and medium-sized, that you talk about that being weak in Q2, it wasn't entirely clear from what I heard earlier whether you are seeing evidence of that turning and whether that is leading you to a slightly more optimistic outlook into Q3 sequentially.
I'm not sure that I caught everything, Lars. I did catch a few things. You asked about the service and, of course, in Q2, we're not talking about service growth. We're talking about limiting the drop due to the specific situations. Of course, it's not just equipment that is affected in this situation. At the end, perhaps you have to articulate again at the end of the question what specific point you were asking about. I missed it. Sorry.
Yeah, I'll keep it short. That's right. I was after the development at the organic order level from services. I appreciate it's obviously not growth, it is a decline, but how that service development compares to the overall down 13 for CT as a whole, point one. Point two, what was the comment specifically earlier with regards to the demand outlook into Q3 for the small and medium-sized compressors, please?
Well, I think Mats touched upon the last one, that it's affecting in line with the opening up of the societies and everything. That's the best estimate we can give and comment on a general basis like this. We see that, and follow it month by month, how that improves. That's why we also have the outlook improve, because we think that April and May specifically were not at all good for any type of business in any, almost anywhere in the world. On the service side, again, no, I can just repeat. As we have said, it's much less negative on service development compared to last year than for the equipment. I will not go into gauging exactly how that looks vis-a-vis the peak in 2019 or anything. You just have to take that comment for what it is.
Less negative, but compared to last year it's negative, yeah.
Maybe to elaborate a little bit on that. We don't see a quick turnaround in auto, for example, or aerospace. What we indicate is in principle that you open up societies, you have the medium-sized customer being a little bit more active. Of course, that will benefit, of course, general industry type industrial customers. That's a little bit where we put our hope for Q3, that we see increased activity level there.
Just finally, Hans Ola, can you help us just understand the impact of furlough schemes in the quarter, and was there a disproportionate impact from that, a positive impact in CT, I guess, relative to, for example, IT?
No. It's the same basically that, as I said, the direct impact of a quick shutdown of the operations like we saw and then the inefficiencies with that is much bigger than the help we have got around the world in some countries from governments for supporting the short-term unemployment. It's in no way disproportionate and explains why Compressor Technique is at 21.4 instead of something worse or better. It's really a small positive part together with a big negative part of the COVID impacts that we have seen.
Thank you.
Our next question is from Andrew Wilson from JP Morgan. Please go ahead. Your line is open.
Hi. Good morning, guys. Thanks for taking my question. On the Industrial Technique side, clearly it feels as if a very large part of that business has been under pressure through the Q1 and particularly Q2, and we've kind of seen that in the numbers. Interested if you're prepared to help us in terms of if you are actually seeing any kind of brighter spots on any of those areas as we move through the quarter, just thinking about some of the customers opening a little bit more and potentially the backdrop for service improving as well, and perhaps if that's a useful lead indicator for us in terms of at least activity picking up a little bit. Interested in any help you can give us specifically on Industrial Technique.
We are in a very good position in general for the transformation from gas-natural type of cars, combustion engines to electrification. Of course, those programs in general are running along, and that we can see being positive. We see from Q1 to Q2, I would say that being of course, in China, we can see a higher activity level in terms of quotation, things like that. Then of course, the shutdown industries in the U.S., linked to Detroit, for example, when they open up, of course, that's positive for us. I hope that they can now stay open. I know that they have started sometimes and shut down again. When they are up and running with operations and some of the best-selling cars over there, then that's of course, very positive.
I think those are the two areas where we see a change right now between Q1 and Q2.
Maybe just to follow up on the specifics around services, is service historically a good indicator in terms of those customers? I think as they start to reopen lines, the service comes through pretty quickly and then potentially, equipment orders would follow. Is that the right way to think about it?
On Industrial Technique, you mean?
Yes, please.
Yeah. You can say that the utilization of tools with the service and maintenance is down due to the application's complexity and the number of rundowns you do. Of course, if you shut down something that is unique for service, and when they start running operations again, you get the number of tightenings, and then we're back on the service programs as well. We have approximately 100 service tool crews on site, so that would be an immediate effect and a positive effect for our customers and for us.
That's great. Thank you.
Our next question is from Sebastian Guder from Redburn. Please go ahead. Your line is open.
Hi. Good morning. First question on VT and the other in tech, and I'd like to know if you have suffered from some delays, as customers are waiting from U.S. authorization to install tools. That's my first question.
No. I guess I know what you relate to, but we have had no impact from that. It's full speed ahead on the orders that we have.
Okay. My second question is on Compressor Technique and the equipment demand, which is a lot better than back in 2009, even if it's a different crisis. Do you see customers trading up for more efficient compressor? Is that an explanation behind the resilience of equipment demand?
I don't think it's an explanation just on the quarter, but in general, 75% of the costing of buying and running a compressor comes from the energy. Of course, when we introduce models, it's always better efficiency that helps customer quite significantly. Also with the drive for a positive development on environment. I think we now in the future get double benefit from having the best range and energy efficient products. First, you can talk to the customer about the energy efficiency financially, but also the greenhouse gases type of discussion, the CO2 level. We see an increased demand for efficient and compressors.
Okay. Thank you.
Our next question is from Gael de Bray from Deutsche Bank. Please go ahead. Your line is open.
Yeah. Thanks very much. Good morning, everyone. Can I try, in Q1, you provided the exit rate for the quarter, and that was obviously very useful at the time. Could you perhaps try to do the same for Q2? Maybe give us some kind of indication on the order or revenue performance in June. That's question number 1. The second question is about, could you perhaps elaborate on why we see so much weakness in PT now and not in CT?
If I start with the quarter then, I think we gave you as much as we could. Of course, the quarter started off quite weak when there was a lot of uncertainty in the marketplace. Linked to that, it has opened up, some more positive views, so it finished off stronger. As I also said, that versus year on year, we also have two more days. That's linked to service, mainly down. We have more service in the field, so I think we leave it with that. Compressor Technique versus Power Technique. If you look at Power Technique, they go more to infrastructure and construction projects. Then you have the channels to the market, could be retailers or it could be the rental market. They have a low utilization on the equipment they have in their fleet today.
That makes the CapEx investment at this point, a little bit less interesting. we have had some cancellation, but mainly that they postpone the purchase later in the year. In Compressor Technique, it's more industrial applications, and they're in so many more segments, we're not dependent on one segment. there's a clear difference between the customer segments in CT and PT.
Is there anything in the proposed Green Deal recovery packages across the world that could support the infrastructure projects of PT down the line?
I think a lot of the support that's been to the auto sector, I'm not fully read up on it, but I can see that they have indicated that this support is granted if you invest in more electrification, for example. That we see as very positive for our technologies, where we have the defense equipment and the self-pierce riveting, but also the assembly tools. That at least one area where I can say that's positive for us that they encourage that development, and we are prepared for that for a number of years with the technologies that we offer.
Okay. Thank you.
Thanks.
Just as a reminder, if you do wish to ask a question, please press zero one on your telephone keypad. Our next question is from Guillermo Peigneux from UBS. Please go ahead. Your line is open.
Hi, good morning, Hans Ola. Good morning, Mats. Two questions really linked to each other. One is regarding the operating leverage impact in technique. Would you consider that kind of 28%-30% normal as we speak, or are you applying investments as we speak that are deteriorating the operating leverage to some extent? The follow-up on that is an update, if possible, on the Qingdao factory and the innovation center that you are basically building in Shanghai. If you could give us an update on how that is evolving. Thank you.
On the flow through for Vacuum Technique. Well, it's pretty uneventful, really, in that I talked about they have a positive volume compared to last year, an impact of that. On the other hand, have all the extra COVID-19 related costs this quarter. It doesn't perfectly even out. Yeah, it's a pretty normal situation, I would say. Don't, and I've said it before, I can repeat it again, but don't look at specific percentages in a quarter flow through and try to take guidance from that. That's just too many specific things that falls in one quarter or another. It at least approaches the famous 30%-35% that we have talked about for a couple of years already. I think we just put it down as a relatively normal situation.
The second question, was that regarding a construction or building, or what was that?
The investment in Qingdao and Shanghai for Vacuum Technique.
No, we believe that we should be close to customers, in this case also China to China. We keep investing in line with demand in the marketplace. As you know that we are trying to stay a little bit ahead of, so we have room in the capacity to make sure that we can deliver orders promptly when customer orders them. No, we continue to invest in that market.
Thank you.
Good. Thank you, Guillermo.
Our next question is from Andreas Koski from Nordea. Please go ahead. Your line is open.
Yes. Thank you. Good morning. Could I start by asking about your outlook and if you expect somewhat higher demand for all your business areas and in all major regions, or if you expect unchanged or even somewhat weak demand in any business area?
I can start. We don't see really a big difference business area to business area, other than, of course, that we have one business area which had not suffered anywhere near the other three, as you know. If there is a recovery like our outlook is indicating, it's obviously the other three that is mentioned. When it comes to Vacuum Technique being the fourth one, you know that this is a key account business. We have, as Mats said, a good feeling about the general climate, like we've had for a while, whether that leads to specific better demand in next quarter or the quarter after that, in terms of demand for our products and services, it's very, very difficult to call, as always.
The comment you should read for the other three, it's definitely related to this gradual opening up and improvement like you see in so much statistics all around for the time being, with the big uncertainty of setbacks in certain markets, of course, as we have said before.
Yeah. Would you like to comment on the regions as well? Do you think China will continue to improve after the V-shaped recovery that you have already seen?
I think that very much links to the opening up of other parts of the world, linked to Europe and America.
Yeah.
If we don't see that happening, I think it will probably more flatten out.
In China you mean?
Yeah, in China.
Yeah.
There was a V-shaped recovery.
Now it's dependent on the remaining part of the world.
Yeah.
Yeah. Could I also do a quick follow-up on Compressor Technique? You have seen resilient demand for larger industrial compressors in the quarter. Do you think that is because larger projects have been finalized and that it is fair to expect weaker demand, specifically on larger industrial compressors ahead? Do you think there is another explanation for the resilience that you saw in the quarter?
I don't think we have projected it to be a specific slowdown, either. I think that it remains so sound over the last years. I think it's that it's more long-term, that people around the table taking this decision say, "This is strategic for us, and we're going to keep investing in this new line, a new factory," whatever it might be. If it's more of a smaller compressor, I think it's something you can stop and you can start much quicker. I think that we have some momentum throughout a slowdown like this.
Of course, you quite rightly stressed large industrial compressors because on Gas and Process compressors, as we wrote in the report, compared to a high quarter last year, we saw a clearly negative comparison for that particular segment of compressors. I'm sure you picked that up.
Yeah, absolutely.
Underneath.
Okay. Thank you very much.
Yeah.
Our next question is from Mandeep Singh from Bank of America. Please go ahead. Your line is open.
Yes. Hi. Thanks for the call. I just wanted to ask you a bit around ISRA acquisition. Is this fair to assume that this is your gateway to a wider industrial automation space? Could you discuss your medium-term ambitions and long-term ambitions in this area? A very quick follow-up on the incremental margins, contribution margins, overall, do you think, around 53% is what you have reported overall for the Group, do you think that is the peak incremental margin you're expecting? Thank you.
I can start with ISRA. It is correct that we follow the global trend of automation. That said, it's not that we want to be going into every segment. We are trying to define the segment that we think has a good profit pool, and the ones that we can contribute to value creation for our customers. If you follow Atlas, you can see that we are quite picky with our niches where we see that we can add value and be number one or number two. Now we enter into something that should grow faster than the general business that we have. We also see that an organic journey to develop, taking advantage of the synergies from Atlas Copco and give the ISRA team access to the customer base that we have, of course.
At the same time, this is something that is a starting point, of course, and it could be adjacent acquisitions going forward. Right now, the focus in on ISRA and developing the business there and the integration there. I think it's a very interesting segment in the market that is probably having some extra speed throughout the COVID and the supply chain challenges that our customers have. The other margin, Peter.
Yeah, I think when you refer to the 53%, you have to take it for what it is. It's a quarter with almost unprecedented events, of course, looking historically even. The impact when revenues drop very quickly, we are not surprised of having that type of effect on the margin, 53%. That's not extraordinary at all. When we grow, it also comes with adding some costs when we grow. We don't expect that on the other hand, when we start growing again, we always will have 50% positive incremental effect on the operating profit. That's why over a longer cycle, we talk about roughly an effect of 30%-35% is what we expect. When you see sudden changes like this, these numbers can be really pretty wide in a separate quarter. I don't think that I can give you more guidance than that.
My question was more like, second quarter should have seen the worst in terms of the number, and going forward, you should see more in line with your usual trends. Is that fair?
Well, it depends. Again, if you say going forward, Q3, Q4, Q1, Q2, Q3 next year, yeah, I think I can say, yeah, you're right. It should work like that. To separate out next quarter and give you an indication what will be the impact then is very difficult, and I don't even attempt to do that.
Okay. Thank you.
Okay? Yeah. Thank you.
Our next question is from Sebastian Kuenne from RBC. Please go ahead. Your line is open.
Yeah. Hi, gentlemen. I would like to ask something about the VT division where you have organic decline, order decline, whereas peer companies like VAT Group have a 32% order growth in the quarter. I was wondering whether you have a very different exposure to the semiconductor industry, where you might also have 30% year-on-year growth, but then this is compensated by, I don't know, a 50% drop for industry or low vacuum applications. Can you give us an idea of what your split is there between semi and the rest of the market at the moment?
I think you were referring to some information from VAT. Was that correct?
VAT Group. Correct, yes.
Yeah, exactly. Which indeed serves the same type of semiconductor industry, as we say. If you look at applications, it's not perfectly compatible having a valve-concentrated company like VAT with a much broader range of equipment from our Vacuum Technique business. Even for semiconductor, it's very hard to compare the development specifically in one quarter to another. Let's put it this way, there are segments within Vacuum Technique where we do see similar type of very strong growth compared to last year. In that respect, yes, we do see a similarity with what you refer to from VAT.
How weak is then the industry side of VT?
It's not only the industry. The pace and the timing of making investments for new vacuum pumps in the sub-fab for better and more production in the fab does not correlate timing-wise exactly to when they make orders for the specific chamber tools, for example. This is why you cannot make the correlation 100%. I can assure you that within our offer, even not talking about general industry vacuum, we do see similar types of strong demand trends, yes.
Understood. Very briefly, as a second question, if I may. In CT, I still don't understand how CT was a blowout today, really good order intake, much better than the market expected. This late cycle, short cycle split, I don't really understand that yet. Short cycle, I understand, small compressors, they have suffered from COVID. Large compressors of it, more project-driven, projects that maybe started last year or two years ago, and where you now see the orders coming in. You say that you don't expect this to weaken, but then you imply basically that the larger projects are not going to weaken due to COVID, right? Basically that industrial engineering and plant engineering is not suffering from COVID, that's what you imply by saying that large compressors will not suffer going forward.
That is a misunderstanding then maybe on my behalf then. Of course, all industries that we work with are impacted by COVID. What we're trying to say is that when we have had a slowdown in business in the past and right now as well, we see that it's easier to turn down smaller projects. That the bigger projects that have a more long-term plan, that we have seen those continue throughout the slower periods. It was not meant to be linked to specifically the COVID situation.
That would also mean that larger projects, if there are delays of new starts of larger projects, that your large compressor business will then suffer down the line at some point.
Yeah, if there's a slowdown in those segments, we will also suffer from that. Yes, that is correct.
Okay.
It's important that it's longer projects, as Mats pointed out, so it's not following the same short cycle we had in time.
It isn't.
You see what I'm getting at?
Yeah.
Yeah. I think we have time for the last question now on the call. We will be a little bit over the hour, but let's go for the last question then.
Our last question is from Johnson Imode from Bloomberg. Please go ahead. Your line is open.
Thank you very much. I just wanted to see if you could give us some more color on Industrial Technique and in particular the motor industry, just to see whether the trends you're seeing in terms of the magnitude of declines is weighted more towards COVID-19 or more structural changes going on in the industry.
You're right. We could see those changes happening already before COVID-19. Of course, shutdowns of factories linked to COVID-19. Otherwise, you could see that most of the big OEMs around the world, is in a transformation phase from combustion type of engines, so they spend less on their CapEx right now, into more of hybrids and electrification, and this is where they spend significantly more on the CapEx. What the future brings in terms of how the auto industry will look like, I think that's a little bit unknown. It's a very interesting transformation that I think could benefit us versus competition. That's a little bit what this is. I think this is something that follows to something that was slightly negative before COVID-19, of course, accelerated with complete shutdowns of all factories.
All right. Thank you.
That concludes today's session. I thank everybody on the call for participating and hope to see you well before the next event in October presenting Q3. Yeah, corona and COVID and the authorities decide if that will happen. With that, goodbye from us.
Thank you so much.
Thank you. Bye-bye.