Ladies and gentlemen, welcome to Atlas Copco Q2 2020 Report. Today, I am pleased to present Hans Ulamaier, CFO and Maestro Armstrong, 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 Ole Meyer. Please begin your meeting.
Thank you, and 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 Q2 results for Atlas Copco. And I'll soon hand over to Mats.
He will take you through his comments, and then we will go into the Q and A session as usual. And 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, and let's begin, Marc.
Thank you, Hans Ulla, and thank you for calling in. We will start with Slide number 2, which is of course Q2 in brief. I would say this is the 1st Q3 with the impact of COVID-nineteen. And of course, we can see an impact on top line from that, which we expected as well. But 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 is an opportunity or you can say it's an issue. And of course, we have to restructure a little bit. 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 comes down to with sourcing, of course.
But that positive note was that I think it started out more as a supply issue, but as we said, there are very limited supply issues in Nata Cocoa, and it's in some areas more driven by the demand. And coming to the demand, you can see that CT compressor techniques, they were down 13%. And I think once again, they showed the resilience they have in their business models, the impressive in so 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.
But at the same time, we can see that the COVID has impact on scientific and industrial products. Industrial Technique might be hit the hardest. We have talked about outdoor and aerospace before. And this quarter, we can also see, as expected, the general industry and service being weaker. And in Power Technique, minus 30 for the quarter and in principally the utilization of our products either in our specialty rental or at our channel to market is rather low.
If we 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 and 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. And profitability, we call it a healthy profitability. The reported number is 16.1 and the adjusted and underlying amount is 18.6. Percent.
And there are some onetime costs that I will cover as soon. But at the same time, as we delivered 18.6 percent, we continue to invest in our future, but also our customers' future. So R and D investments are kept, The digitalization efforts that we have is kept and also strategic projects, and that's why we also call it a healthy profitability that we both delivered, but we believe the good profitability and at the same time invest in the future. Giza Vision, we are close on that acquisition, and we have a new machine, just about 92%, and it's a new leg for us and a new platform for growth. If we go to Slide number 3, Q2 in figures, and that's confirming then that orders were down 17 for the group and revenues kept up slightly better at 8.
I said that we had a reported margin on 16.1%, 18.6% was the adjusted one. And there are a couple of things that fill that gap and that's the development that was copper shares and makes us reevaluate the long term incentive program for $237,000,000 And then we have the pension settlement, which relates back to 2014 with EDWARSH. And we have a restructuring program in vacuum, mainly in industrial vacuum, not really linked to the COVID situation, more the profit program that we are running there. And then we have a restructuring program in power, which is linked to crude oil as well. So that's the main gaps, but I think Kansu will give you a little bit more granularity on this later on.
If you go to Slide number 4, it's the geographical map. And starting with Asia. You can see now our sales split is 38% in Asia. It's probably more related to the situation where different societies are offset from the COVID or not. And the positive development is mainly related to the vacuum technique and other business areas are also down in the region.
And then Europe and Africa, obviously, there are also slightly negative, and obviously doing some of better service in some parts and also some segments like medical and food and water, for example. America, still hard hit, minus 27 for North America. And it still has an uncertainty going forward without that region. Although what we could see as slightly positive, the quarter started off fairly slow. And June had a capital of extra day versus last year.
But at least there is some positive signals in the sales results in June. Move to the next slide. Slide 5. And just a confirmation then on the organic order growth. We can take next time the sales bridge.
You can see that the currency now is again slightly minus 1. It's mainly the U. S. Dollar. We can see the weakening dollar and Consumula will give you guidance on Q3 later on.
Next slide, order by business area. And given then the scenario, we can see that compressor technique keeps 47% of the group's revenue. But of course, vacuum technique is gaining ground. And considering the operating profit from that division, I think that's quite okay. And of course, significantly more difficult situation in industrial and power right now.
Move to the next slide, which is competitor technique. I think I mentioned it earlier, and I think the business model that the OEONO proved 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, water, but also the geographical presence that they have. And on top of that, of course, they have 40 plus of the revenues coming from service. I think that's a really good model.
And that's the reason, of course, why they can deliver a very strong operating profit during these times at 21.4%. And 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. And not only for compressor techniques, but for all business sites and also 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. And then we see the semi. Sequentially, you can always say that it's a number of key accounts. It's still very positive in the same industry. The digitalization is positive long term.
And right now, I would say that we can see spike in demand triggered by people working from home, but also in the 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 high utilization. At the same time, we see that we didn't see it as much in Q1, but scientific and industrial, no surprise really that they follow a little bit the impact from the crude situation. And just as a reminder then, the adjusted operating margin was 24.1%, we reported 19.6%. And here in between, we had the potential settlement and the restructuring and mainly in industrial.
Go to industrial technique, and there you can see that they've been hit quite hard. And it's not really any segment that stands out a bit more positive at this point, although it's challenging, aerospace even more. And as I communicated in earlier quarter, it's very unlikely that GINN will keep up. And this is what we see in the quarter as well, but generally, Industry and Services is also following the same trend. Then some of you that follow us might say, well, couldn't they deliver the higher operating margin?
And of course, it's triggered by the volumes. But I would also say it's triggered by the rapid change. If you look at the graph, the really 35% down, and you can see the difference between other business segments, normally, revenue keeps up for a few more months, and this is stronger correlated. So 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 suggest 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. And at the same time, we also hear that we keep investing in the future for for products, R and D and the utilization. Positive was that we managed to close on the ITSA acquisition. And if you go to the next slide, you can see 2 pictures. This is 2 main segments that they operate in.
The top one is surface vision. This is 70% of Itau's business. And on the bottom one, this is industrial automation, and this just represents 30% of the business. And I would say that on the industrial automation, we can give access to ISRA on the Google, and 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 normally the end user in the main part of this rental channel. It's the channel to the market and the utilization in rental companies and our customers, but also own rental is rather low.
And that also impacts the profit because of the sales mix. Then we go to the next slide, Group Tutel, and then I think I hand over to you, Hans Wilhelm.
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 percentages 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 4,476,000,000,000 or 4,476,000,000,000, which would mean a 17% decrease from last year's number and actually about 20% if we do adjust it for last year. But 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 onetime effect, which is related to withholding tax provisions for dividends that we receive internally from country to country within the group. And that had an impact of about 5 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. But 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 expected now and Q3 last year, is probably going to be a couple of 100,000,000 negative, where as you saw, Q2 over the same quarter last year was minus $90,000,000 So 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. But that's what we have. And then if we go to the next slide, which is number 14 then, this is the whole group, and it's difficult to read through.
But let me, for 1, 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 about it's close to 3 percentage points negative compared to last year, 2.7 to be more exact. And together with the roughly 2% negative coming from myzentotaxine, it explains this 5% difference percentage points difference from last year. Within that volume price and other, let's call it organic, the big impact is really the COVID-nineteen 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, I mean, under absorption of the structure that we have and the force, the human resources that we have.
So that's the big impact. And 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. But again, I want to stress that the impact of those subsidies from governments 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. So that's how it would look from a group point of view.
If we turn to Page 15, 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. But it's basically a big normal volume effect and a mix effect that makes the margin deteriorate somewhat, but it's at the high level as you see. Vacuum technique is in a similar way having negative impact from the COVID 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. And then we have the 2 that Mats also pointed out, industrial technique and power technique, suffering on all accounts basically.
And 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 Istra acquisition is included. But 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 10,000,000,000 and then the corresponding increase in intangible assets and a little bit here and there in the working capital.
So that summarizes that. The effect of profit and balance sheet adjustment is in cash flow. And then we are on Page 17. And 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 buildup of working capital in the quarter compared to a rather substantial buildup in Q2 last year. All in gives us an operating cash flow, which is about SEK 1,100,000,000 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?
Yes. So this is done trying to judge a little bit activity level among our customer segments between Q2 and Q3 then. And of course, when we say it remains uncertain, it's linked to the COVID situation globally, where we do follow all the guidelines recommended. And as you know, that change on a daily basis, where we can and cannot travel and where we can do things. But with some of them more positive view on the end of Q2, we still see that activity levels in the manual segment is increasing and somewhat can be related back to the uncertainty of what will happen.
But we have a slightly more possibility than on the activity level among our customers in the future versus the future.
Excellent.
Very good. So operator, I think we're ready for the Q and A. So if you just repeat the routine, please.
Thank you. And our first question is from Klas van der Linde from Citi. Please go ahead. Your line is open.
Yes. Hi, Mats. Hi, Hans Ola. It's Klas from Citi. So my question is on demand.
And it's obviously it's very good to see that larger compressors are holding up well. But I'm curious on the smaller and midsized compressors and to what extent demand improved towards the end of the quarter. You're obviously guiding for somewhat high demand. So could you tell me a little bit about trading by regions on the smaller and mid sized side and where you saw most pick up as we went through the quarter? I will start here.
But I think that more still follows not so much by segment, except for the segments that are a little bit protected. And those are the ones that is related to society functions like water medical. And those stay positive on a global base. But then it's difficult to talk about segments right now. Of course, we could see it more of a V shaped recovery in China, but it's not sustainable, as I said already in the previous call, as long as we don't open up in Europe and America.
Now I hope, do hope that we will see then a better comeback of business and activity levels in Europe, and this is for Phil, in the end of the quarter. And as you can follow yourself, the COVID situation in America with escalating, so it's very uncertain what will happen and how you can travel. So I think you can follow the our trend, follow in principle how we open up societies and the COVID situation.
One quick follow-up for you, Hansel, you promised to be quick. On the drop through and inefficiencies, how should we think about the Q3 as safety measures are introduced, you work in a different way, social distancing and so forth, which can create that inefficiency still, but then you have the people on short term working. Will you have the same impact on savings? So will the net effect be similar when we go through the Q3?
Well, I mean, it's difficult to make a projection on the Q3, and we normally don't do it. But 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 support. However, of course, met by gradual improvements of the efficiencies as we get more accustomed to the somewhat new processes, etcetera. But I don't think that one should expect any dramatic changes on the net of those two things into Q3.
And our next question is from Max Yates from Credit Suisse. Please go ahead. Your line is open.
Thank you. I just want 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?
And could you talk a little bit about kind of as things have opened up, specifically sort of what the inefficiencies are linked to COVID-nineteen and specifically what it is that you were doing kind of differently with your servicing even as things open up to socially distance?
Thank you. Well, the service, if I start there, it's still, of course, limited to access to customers around the world. So if we do have access and they run production, then you can expect the services back up and running. And there is not a huge built up demand that we have to cover. And a difference between the different business side, but I think your question was more related to CT.
So customers are up and running. We will execute on the service programs that we have in place. And 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. And then 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 the customer 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, on us monitoring the performance of their products.
And I believe that over time, this will lead to more service contracts for Atlas Copco, and this is the uptime on the products. But it's very difficult to give an exact picture since it's too distant from county to county and also changing from PMT day by day action. Okay.
Are you seeing any of your sites locked down currently? And 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 impacts there? You had sort of Antwerp, obviously, shutting down in the quarter.
But in the U. S. Now or any regions, are you seeing actual disruption to your own production?
I mean, we see disruption in the first maybe I should say, intrinsically everything is up and running. So that's not the big issue anymore. Then we don't have the full capacity due to the restrictions. The only country I would say that it's still a challenge, where we have limited capacity is in India. Otherwise, we are running intrinsically with the capacity that we have in those plants around the world.
And 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, etcetera, and Florida, whatsoever, it's a very fluid situation, and we cannot just make projections for how that will impact us.
And our next question is from Lars Brorson from Barclays. Please go ahead. Your line is open.
Hey, hi Matt, Santora. Just following up on the question with regards to CT. I appreciate you pointed out CT's exposure, Matt, to critical industries, obviously, a high service contribution that drives that relative resilience from a revenue standpoint So I So 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? And then to the point on small and medium sized, you talked about that being weaker in Q2.
It wasn't entirely clear from what I heard earlier whether you're seeing evidence of that turning and whether that is leading you to a slightly more optimistic outlook into Q3 sequentially. And
I did catch a few things on U. S. About the service. And of course, in Q2, we're not talking about service growth. We are talking about limiting the drop due to the specific situations.
Of course, it's not just equipment that is affected in the situation. So but at the end, I perhaps you have to articulate again at the end of the question what specific points you were asking about. I missed it, sorry.
Yes, I'll keep it short. That's right. I was after your the development at the organic order level through services. I appreciate it's obviously not growth. It is the decline, but how that service development compares to the overall down 13% for CT as a whole?
0.1. 0.2%, 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, on a general basis like this. So we see that and follow it month by month how that improves. And that's why we also have the outlook improve because we think that April May specifically were not at all good for any type of business in almost anywhere in the world. On the service side, again, no, I can just repeat.
It's as we have said, it's much less negative on service development compared to last year than for the equipment. But I will not go into gauging exactly how that looks vis a vis the peak in 2019 or anything. But you just have to take that comment for what it is. Less negative, but compared to last year, it's negative.
Maybe to elaborate a little bit on that. I mean, we don't see a quick turnaround in auto, for example, or aerospace. So what we indicated in principle that you can have society, then you have a medium sized customer being a little bit more active. And of course, that would benefit, of course, general industry type for industrial customers. So that's a little bit where we put our hope for Q3 that we see inventory activity level there.
And just finally, Hans Oren, can you help us just understand the impact of furlough schemes in the quarter? And was there a sort of a disproportionate impact from that, a positive impact in CT, I guess, relative to, for example, IT?
No. It's the same basically that the as I said, the direct impact of 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. But it's no way disproportionate and explains that why compressor technique is at 21.4 instead of something worse or better or for IT to be in that. It's really a positive small positive part together with a big negative part of the COVID impacts that we have seen.
And our next question is from Andrew Wilson from JPMorgan. Please go ahead. Your line is open.
Hi. Good morning, guys. Thanks for taking my question. Just 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. We've kind of seen that in the numbers.
Just interested if you're sort of prepared to help us in terms of if you are actually seeing any kind of sort of brighter spots on any of those areas as we kind of 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. Just interested in any help you
can give us specific on industrial technique.
Yes. I mean, we are in a very good position in general for the transformation from gas, petrol type of cars, combustion engines to electrification. And of course, those programs in general are running along and that we can see being positive. And we see from Q1 to Q2, I would say that thing, of course, in China, we can see higher activity level in terms of quotation, things like that. And 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. And I hope that they can now stay open. I know that they have started sometimes and shut down again. But when they're up and running with operations and some of the best selling cars over there, then that's, of course, very positive.
And I think those are the 2 areas where we see change right now between Q1 and Q2.
And maybe just to follow-up on the specifics around services. Is service historically a good indicator in terms of those customers? Because 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 the industrial techniques, Leroy? Yes, please. Yes. You can say that the utilization of tools, it's the service and maintenance is done due to the applications complexity and the number of rundowns you do. Of course, if you shutdown something, there is no need for service.
And when they start running operations again, you get the number of tightening and then get back on the service programs as well. And we have approximately 100 service tool cribs on-site. So that would be an immediate effect and a positive effect for our customers and for us. That's great. Thank you.
And our next question is from Sebastian Groder from Redburn.
First question on BT and the order intake. 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. So it's full speed ahead on the orders that we have.
Okay. And then my second question is on compressor technique and the equipment demand, which is a lot better than back in 2 1009, even if it's a different crisis. But do you see customers trading up for more efficient compressor? Is that an explanation behind the relative 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 cost on the energy. And of course, when we introduce model, it's always better efficiency that helps customer quite significantly and also with the drive for a positive development on environment. I think we now in the future get double benefits from having the best range on energy efficient products. So first, you can talk to the customer about the energy efficiency financially, but also the greenhouse gases type of discussions at the U2 level.
So we see an increased demand for efficient compressors.
And our next question is from Gael De Bruy from Deutsche Bank. Please go ahead. Your line is open.
Yes. 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? So 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.
So 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?
Yes. If I start with the quarter then, I think we gave you as much as we could. Of course, the quarter started up quite weak when there was a lot of uncertainty in the marketplace. And linked to that, it has opened up and some more positive news. So it finished off stronger.
But as I also said that versus year on year, we also have 2 more days that's linked to service paying with AMP. 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. And then you have the channel to the market, it could be retailers or it could be the rental market.
They have a loom utilization on the equipment they have in their fleet today. And that plays next. And the CapEx investment at this point, a little bit less interesting. And we have had some cancellations, but mainly that they have postponed the purchase later in the year. In compressor technique, it's more industrial applications and there in so many more segments, they're not dependent on one segment.
So there's a clear difference between the customer segments in CT and PT.
And 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 outdoor sector, I have 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. And that we see as very positive for our technologies where we have the defense equipment and the self care tubing, but also the assembly tools. That's at least one area where I can say that, that's positive for us. That's a encouraged development, and we are prepared for that for a number of years with the technologies that we offer.
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 Technik. 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 extent? And then the follow-up on that is an update, if possible, on the Xindao factory and the innovation center that you are basically building in Shanghai. If you could give us an update on how that is evolving?
On the pull through
for vacuum technique, well, I mean, it's pretty uneventful really in that I talked about they have a positive volume compared to last year, an impact of that, but on the other hand, have all the extra COVID related costs this quarter. So it doesn't perfectly even out. So yes, 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. But just too many specific things that falls in 1 quarter or another, but it at least approaches the famous 30%, 35% that we have talked about for a couple of years already.
So I think we just, put it down as a relatively normal situation.
And the second question, was that regarding construction or building or what's the price?
The investments in Qingdao and Shanghai for vacuum technique.
No, we believe that we should be close to customers, in this case also China to China. So we keep investing in line with demand in the marketplace. And 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. We continue to invest in that market.
Thank you. Good.
Thank you, Guillermo.
And our next question is from Andreas Koski from Nordea. Please go ahead. Your line is open.
Yes. Thank you and 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 weaker demand in any business area?
Yes. I can I mean, it's on the we don't see really a big difference business area to business area other than, of course, that we have one business area, which have not suffered anywhere near the other 3, as you know? So if there is a recovery like our outlook is indicating, it's obviously the other 3 that is mentioned. When it comes to vacuum technique being the 4th one, then you know that this is a key account business. We have as much a good feeling about the general climate like we've had for a while and whether that leads to specific better demand in next quarter or the quarter after that in terms of demand for our products and services is very, very difficult to call as always.
But 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.
Yes. And 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's very much linked to the opening up of other parts of the world linked to Europe and America. And we don't see that happening. I think it will probably more flatten out. So I think that In China. Yes, in China.
We've got the B shaped recovery. But now it's dependent
on the remaining part of the world, basically.
Yes. Yes.
And could I do also do
a quick follow-up on compressor technique because 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? Or 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 year. I think it's that it's more long term people around the table, they can do this, they said this is strategic for us. We're going to keep investing in this new line and 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.
But I think that will have some momentum throughout a slowdown like this.
And then, 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 for compressors. But I'm sure you picked that up.
Yes, absolutely.
And 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 Istara acquisition. Is this fair to assume that this is your gateway to wider industrial automation space?
Could you discuss your medium term ambitions and long term ambitions in this area? And 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? You think that is the peak incremental margin you are expecting? Thank you.
I can start with Itra. And it is correct that we follow the global trend of automation. That said, it's not that we're going 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. So if you follow-up, as you can see that we are quite picky with our niches, where we believe that we can add value and be number 1 and number 2.
And now we enter into something that this should and should grow faster than the general business that we have. And we also see that's an organic journey to develop, taking advantage of the synergies for us from Atlas Copco and give the Itza team access to the customer base that we have, of course. And at the same time, this is something that is a starting point, of course, and it could be adjacent acquisitions going forward. But right now, the focus in on Israel and developing the business there and the integration there. But I think it's a very, very interesting segment in the market that is probably had some excessive throughout COVID and the supply chain challenges that our customers have.
Then you
have the margin S and P. Yes. 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. And 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. But when we grow, it also comes with adding some costs when we grow. So 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% to 35% is what we'll expect. But when you see sudden changes like this, these numbers can be really pretty wild in a separate quarter.
So 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. It depends.
Again,
if you say going forward, Q3, Q4, Q1, Q2, Q3 next year, yes, then I think I can say, yes, you're right. It should work like that. But to separate out next quarter and give you an indication what will be the impact then is very, very difficult, and I don't even attempt to do that.
And our next question is from Sebastian Kurname from RBC. Please go ahead. Your line is open.
Yes. Hi, gentlemen. So I would like to ask something about the EBT division where you have organic decline, order decline, whereas peer companies like VAT Group have a 32% order growth in the quarter. So I was wondering whether you have a very different exposure to the semiconductor industry where you might also have like 30% year on year growth, but then this is compensated by, I don't know, 50% drop for industry or low vacuum applications. Can you give us an idea of what your split is there between sema and the rest of the market at the moment?
Yes.
I think you were referring to some information from VAT. Was that correct?
VAT Group, correct, yes.
Yes, exactly, which indeed serve the same type of semiconductor industry, as we say. But 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 1 quarter to another. But 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. So in that respect, yes, we do see a similarity with what you referred to from VAT.
But how weak is then the industry side of BP? It's not only the industry. I mean, 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. So this is why you cannot make the correlation 100%. But 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, the second question, if I may. In CT, I still don't understand how I mean CT was the blowout today, really good order intake, much better than what we expected. This late cycle, short cycle split, I don't really understand that yet. Short cycle understands small compressors, they are suffering from COVID. Large compressors are a bit more project driven, projects that maybe started last year or 2 years ago and where you now see the orders coming in.
But then you say that we don't expect this to weaken, but then you imply basically that the larger projects are not going
to weaken due to COVID, right?
So basically, industrial engineering and plant engineering is not suffering from COVID. That's what you would like 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. But we're trying to say 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, and that's the bigger projects that have a more long term plan, but we have seen those continue throughout the slower periods. It was not meant to be linked to specific COVID situation.
But 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?
Yes. If there is a slowdown in those segments, we will also suffer from that. Yes, that is correct.
Okay. But it's important that it's longer projects, as Mats pointed out. So it's not following the same short cycle reaction.
Yes. Yes.
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.
And 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 or more structural changes going on in the industry?
But you're right, we could see those changes happening already before COVID-nineteen. And of course, shutdowns of factories linked to COVID-nineteen. But otherwise, you can see that most of the big OEMs around the world is in a transformation phase from combustion type of engines, where 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 then. And then what the future brings in terms of how the auto industry will look like, I think that's a little bit unknown. But it's a very interesting transformation that I think could benefit us versus competition.
But that's a little bit positive. So I think this is something that follows to something that was slightly negative before COVID, of course, accelerated with complete shutdowns of factories. All right. Thank you.
That then 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. But yes, corona and COVID and the authorities decide if that will happen. So with that, goodbye from us.
Thank you so much. Thank you. Bye bye.