Ladies and gentlemen, welcome to the Atlas Copco Q1 2020 report. Today, I'm pleased to present CFO, Hans Ola Meyer. 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. Hans, please begin.
Thank you very much, welcome to everybody on this conference call this time, of course, more than ever, due to the fact that we cannot have it in another way. As you all know, we have here Mats Rahmström, my CFO here with me. That was a Freudian slip. Sorry about that. We will carry out this presentation of the first quarter results from Atlas Copco in the normal way, which means that I will soon hand over to Mats, and we will have a questions and answer session after that. We have reserved one hour, and we try to stick to that. Again, I hope that the question and answer session will be in the form of one question at a time. That would be much appreciated. With that, I think I'll hand over to you, Mats, right away.
Thank you, Hans Ola. We start with slide number two, Q1 in brief. Orders received came in at SEK 28 billion. We regard that as a very strong month for us. Vacuum Technique did very well, riding on the wave of digitalization in our society. CT, flattish, a tougher market environment for Power Technique, -11%, Industrial Technique, still related to IT, but also extended, of course, to Aerospace this time, -11% as well. We thought we should give you a little bit more insight to the quarter when it comes to orders received. January started off with a record level for Atlas Copco. It was strong in most business areas. February, of course, came in softer. We started to see the impact of Corona in Asia, specifically China.
Somewhat recovery in China in March, but if I take out VT, that continued to be strong also in March. If we take Compressor Technique, Industrial Technique, and Power Technique, organically, they were down 15%-20% in March. The service business continue to grow. It's normally something that is very good for our resilience. It's not as efficient when we see that we cannot get access to customers, of course, and in some parts of the world, of course, there's been a complete shutdown. Margin came in about 20%. Happy about that considering the business environment that we work in. We have open factories, we have closed factories, and we see that we are not as efficient as normal, especially under absorption in both field engineers, and also in our production.
Looking at the dividend for the year, I think you have already seen that, but we will defer the second installment, which is SEK 3.50, to propose down the Extraordinary General Meeting later on this year. The quarter, of course, is shadowed a lot by the COVID-19. The approach that we have had is to secure the environment where we work for our own people, but also take a very active role in society to make sure that we are not part of spreading the virus. To protect lives, on the other side, we see that the best way of doing that for us has been to try to keep our manufacturing units open. In most cases, I would say that still it's been quite good success with that right now.
Italy has been an issue and, of course, India, but in most cases, we are still running our factories around the world. There is a life after the COVID-19 as well, and quite early into this truth, as we said, how do we protect livelihood and the success of our company? We have defined a number of activities where we have no intention to cutting costs. That's been research and development. We can also see that the efforts that we've made in digitalization with all the connected products in Compressor Technique and in Industrial Technique, for example, how beneficial that is now when we cannot always access the customer's facilities. We can also see that we try to use this time for short-term week to maintain employment for the very important resources with a lot of competence about our customer that's in service and in sales, of course.
Intention is, after this, to come out as a stronger company. Take slide number three, which confirms a little bit the numbers. The SEK 28 billion was supported by currency, mainly the US dollars, 3%. Acquisition was also positive on 4%. Talked about the margin at SEK 5 billion and about 20%, happy with that. You can see that I had a restructuring cost in Industrial Technique, still mainly related to the auto sector. You had the positive on the revaluation of the option programs. Return on capital employed, I bridged that for you. The main things are the two latest acquisitions there. You have Brooks and Scheugenpflug, and then you also have the new rules for IFRS in terms of lease. We go to slide number four. Of course, it changes a little bit this time. The business climate has changed dramatically from geography to geography.
Of course, the influence first for the COVID-19 was in Asia for us, and we had the extended shutdowns of the new year celebration in China. Principally, all our factories are up and running again in China. We have not yet fully seen the impact of the virus in Europe and America and rest of the world, but we expect that to come in Q2. There are a few segments. If I take the positives here, you can see Asia is driven by principally flattish in many areas, but the one that stands out is the semi division, both semi equipment and semi service. That's been very strong. Globally as well, we've seen a strong medical business and some of those. North America, we see come in flattish. CT is strong in medical, strong in service there as well.
Actually, Industrial Technique also had a positive there in the auto sector, but that was mainly related to a weak Q1 last year. Middle East, with reference to oil and gas, we can see the utilization of our rental fleet being less there as well. Slide five indicates the organic growth per quarter, and you can see it was minus two this quarter. Slide six, you can see the sales bridge. I thought about the structural acquisition, 4%, the current was positive, and then on the organic, I think I repeat myself a little bit there. I thought I would give you a little bit more detail on slide number seven. Some positives and some challenges then. If I start with Vacuum, which is now at 23% of the group and growing.
In semi, normally we have said that we have seen technology investment. This time we also found a little bit of capacity investment. That's mainly in memory. We can also see strong business for the coating applications. Also in scientific, where we can see medical, pharma, and food, for example. In Compressor Technique, there are a number of products that plays an important role in society. In general, you can say that small compressors, medium-sized compressors, and big compressors all came down. The demand is reduced. There are some segments that we are present in, now that's pharma, it's medical, it's water treatment, food and beverage, for example. In general, it was somewhat slower. Industrial Technique. Auto, it's still negative. We can see a lot of shutdowns, of course, in Europe. Aerospace, considering the development of that industry, also a challenge.
Off-road and also general industry. They have a tougher time there with some of the key segments being down. The one thing that's positive is that with the mix of technology that we offers now, we can see great success in key strategic electric vehicle programs. Power Technique, we could see our own rental fleet. The utilization came down. I assume that it's the same for the generalist rental companies because we can see that they postpone investment in CapEx, and we have had even one or two cancellations as well. Compressor Technique on slide eight. Organic line on minus three, it kept up fairly well anyway. Looking at the profit level there, positive for currency, you can clearly see the under absorption in both service and manufacturing.
In the compressor case, Antwerp is our main hub, and there we had a shutdown for two weeks when the government there introduced the social distancing. It was difficult to run the line in the same way as we had in the past. We closed the line, or we closed the factory even for two weeks. Made sure that we changed the processes, and that we reopened after two weeks, and now it's up and running, although not to the same level as before. I'm happy with the team there, what a fantastic job they've done to get going again. Italy has been shut down for quite some time. This week, we have been able to open up products that are critical to society, and those are some of the ones I mentioned before. It's running with a lower utilization.
At least it's up and running, and we'll try it again. One of the challenges for us is the service business in Compressor Technique, although that we have these 120,000 connected compressors, it has been very difficult to be on site. Of course, many customers don't want to see us during this corona time. That's a little bit of a challenge for us there. Vacuum Technique had a record quarter. Fantastic to see the orders received. All the factories that they have are up and running, and principally running on max capacity. That's very positive. Nothing more to add there, I think. Industrial Technique, as I started out with, probably the three of the more important segments have challenges with demand. To be able then to deliver that 20% was pleased to see that.
From a operation standpoint, I would say that there are, of course, a number of challenges. Going forward, looking forward, I would say more the demand picture that is more challenging for Industrial than anything else. We completed acquisition of Scheugenpflug , and that's a new platform for us for dispense into smaller applications like electronics or for different industries as well. Not in this quarter, but ongoing then, that we have secured 76% of the shares in ISRA VISION as well. Power Technique, what should I mention here? Maybe the drop there in margin. You can see then that the rental was down, and also service was down, and that was the main explanation for the gap there on profit margins. Same thing here now, Antwerp is up and running, China is up and running, Rock Hill is up and running, where we have the operations.
It's more the demand picture here that is a challenge going forward there. Summarizing, happy with the orders received, happy with the revenues. I think we gapped a little bit the understanding of the operating profit margin. We continue to invest to come out as a stronger company in R&D, the digital initiatives, working very close with our suppliers to be sure that we are first in line when this turns around again. I think I hand over to Hans Ola.
Thank you, Mats. This is the more complete income statement as you see on the slide now. Mats has made all the comments on the operating profit. I think we just take a look further down on the net financials. You've seen in the report that the underlying interest net that we have, and we actually expect to be at that level going forward as well, is about SEK 65 million negative. That's the run-rate. The extra SEK 50 million negative roughly in Q1 is related to exchange losses on foreign exchange loans in certain subsidiaries around the world. Of course, that happens when we have such turbulence in the world, and some currencies have really taken a beating in this turmoil. That is the explanation.
Since we don't know anything about that going forward, that's why we only talk about interest net going forward, about the same level, SEK 65, as we had. If we go down and look at tax, again, a tax rate that is roughly in line with what I think we have guided you before. We also think that it's roughly that level we expect going forward for a while. Mats already commented on the return on capital employed, so I don't need to repeat that the acquisition and a little bit of negative IFRS 16 effect is the explanation to that drop in return on capital employed. If we look at the profit bridge then a little bit more in detail, it certainly looks already at the group level a bit unusual.
We have sorting out the effect on the revaluation of the provisions for the long-term incentive program to the right. I'm on slide 13, if you have lost track. If we look at items affecting comparability and acquisitions, of course, we have a couple of big, very recent acquisitions that have yet to come into profitability even due to the relatively heavy weight of amortization of purchase price adjustments and intangibles. That's one of the main reasons there. Currency is helping us clearly in the quarter, and then you have the rest, so to speak, call it the organic development, which looks like we lose a krona for each krona we lose on revenue, which is, of course, dramatic. We have to remember, though, that this is a bridge between a quarter a year ago and the most recent quarter.
It's not an indication of how the trend as we move forward is. You can look at the 20.4% and say, well, that's the best we have as an adjusted number for this year anyway. On that, I would more just comment that you see that there is a half a percentage point effect from last year to this year. If you sort out the different columns here, you see that we have had help compared to last year with about one percentage point equivalent from currency. That is perhaps something that you can remember. On the organic flow-through, you can then turn to the next page and look at, if we move one slide forward. There we go. You see also by business area. Of course, this is a quarter which even in the quarter has the disruption in itself.
That means that look at Compressor Technique, for example, or Industrial Technique, that there is a quite heavy effect all the way down to operating profit when revenues fall quickly and suddenly, even in the quarter, so to speak. Vacuum Technique looks, of course, a bit strange. I can only repeat again that it's comparing a single quarter a year ago with this quarter, and that's why it looks a bit extraordinary. Mats already commented that there are a number of negatives due partly to the COVID-19 and partly to an unfavorable sales mix that exaggerates, let's say, the negative from there. Again, I say if we have the currencies that we had at the end of March, then we are already in that currency situation. It's not that we expect to lose further on the currency aspect as we see it today.
We then move on, the others, I only think I should point out that on Power Technique, you've seen the comment in the report also that there is a very negative sales mix there between the more profitable products and the less profitable products. That basically explains it. Before I leave you, only on the FX effects, we look going forward, we don't expect very much different in Q2 than in Q1, possibly a little bit less positive impact in Swedish krona on the operating profit compared to the same quarter last year. We had SEK 460+ in Q1, as you know. That's at least some kind of reference.
On the balance sheet, I think for anyone that doesn't live here in Sweden, it looks like we are expanding massively, but more than SEK 5 billion of that increase since December is actually due to pure translation into a weaker Swedish krona. For the rest, of course, we have the acquisitions that goes into intangible assets that also explain a big portion of the increase. Otherwise, nothing much to say. On cash flow, which is page 16, we have the big difference in the improvement compared to last year is actually in the working capital. In Q1, we almost always have a little bit of a tying up of more capital that is more seasonal affected than ever. Comparing to last year, we have the same tendency, but it's much less.
That reflects that we were already coming into the quarter with a slightly more negative external demand picture, and that was then accentuated by the COVID-19 happening. If we move on from there, I don't know if we need to comment more on that, Mats. You already said it.
No. You've got it.
Yeah. That's on page 17. Then I'll leave it to you for the most wanted slide.
I don't know about that. I guess you have an option this quarter not to give an outlook, but at least we will give it a go to see how transparent we can. We are trying then to talk about the activity levels among our customers between the Q1 and Q2. Of course, you can see that we believe it's very uncertain what will happen, and that's completely linked to the COVID-19, of course. What we see is that if you look at March development, you can see that we have not seen the full impact yet in Europe, America, and rest of the world. Hopefully, the slight turnaround in China will continue, so that's on the positive side. For us then, if it's a lockdown, we normally can work with products that are critical for society.
In many cases, we don't get access to the customer's facilities and service products. That's a little bit on the negative side. That's why it's so uncertain for us what will happen in each country and what we'll be allowed to do in principle. I can see that we do have a huge favor here with a decentralized organization. We are very quick to act in each region, and we do that fantastically well. Right now, we have 20 different setups, where we coordinate activity on a daily, on a weekly basis, to make sure that we act in the best possible way.
We've said that we want to make sure that our employees stay safe, and at the same time, we communicate that we would like to be open to maintain the supply chain, to make sure that we're working and help out in society where we can. The diversified business model, where we are in different geographies, you can see that we have some 36% of our sales in the quarter in Asia, leading products, and have this presence in different segments will, of course, help us quite a lot. We also talked about the livelihood of our MPs and the company, and said that we like to come out stronger after this. There are a number of things there that I mentioned earlier that we are not going to cut back on.
We will see a drop in demand at the same time, and there are a certain number of costs that we will not adjust, but then all other costs we will adjust to the new market condition.
Great. Thank you, Mats. We move over to the questions- and-a nswer session. Can you please, operator, give the last instructions, please?
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. Our first question comes from the line of Max Yates from Credit Suisse. Please go ahead.
Thank you. My first question is on when you talked about the down 15%-20% in compressors in March, I just wanted to understand whether you had seen any major differentiation between your service business and your equipment business within that number, because obviously a feature of Q1 has been that service still grew, but obviously the restrictions have become greater in Europe and the U.S. I just wanted to understand how those two businesses differed within that commentary you gave on March, or whether we should assume that Q2 faces similar pressure across both of these businesses.
I have not broken down March myself. I'm looking at some data to give some input for you there.
Not surprisingly to us, at least when you have these sudden drops, it is as we have seen before, more accentuated on the equipment side. You're right, in certain geographical regions, we saw it also on the service side. We don't know how long the development will be there, and Mats commented on China, for example, where we don't see exactly the similar situation in April as we saw in March, for example, or even in February when it comes to China. It's an aggregated number that Mats mentioned.
Maybe you can guide a little bit like, a lockdown in a country, it will have the same impact, of course, on service as well. Maybe it's the correlation there we need to follow in the coming quarters then, principally. If you cannot access that, it's very little that we can do online that we can charge for. We need that physical visit on site to generate revenue. I think even if we can't guide you exactly, I think that is the correlation to look out for then, if we can or cannot access customers.
Okay. That's helpful. Just my follow-up question is, we've heard a lot of other companies talking about short-time working schemes and quantifying cost actions that they're taking. I'm sure there is lots you're doing behind the scenes, but I just wondered, do you have any kind of commentary around temporary cost measures, cost actions that you're taking and potentially what, if any, quantification you can give around this? Thank you.
We have approximately 39,000 employees around the world. Today, we'd like to use this as much as possible because we think it's such a huge strength to keep them in employment. Around just about 8,000 people have some sort of program, and we take advantage of that. It's possible intrinsically. If it's not short-term, of course, then we come to another situation where we think that's a recession, and then we need to adjust accordingly as well. I don't know if you have a...
No, I think that's accurate.
Okay. That's all. Thank you.
Just perhaps to be clear, and I'm sorry if you've already said that much, that the 8,000 people are the ones affected in some way. It could be from 10%-80% or 100%.
Yeah.
There is a weighting of that is difficult to exactly calculate. There is quite a big group affected, at least in some way.
Okay, thanks.
Thank you.
The next question comes from the line of Guillermo Pena from UBS. Please go ahead.
Good afternoon, Guillermo Pena from UBS. Thank you everyone for taking my questions. I wanted to know a little bit about the margin pressure that you saw during the quarter. I wanted to get some clarity as to how much of the three key items you mentioned in your press release will be persistent, or to what extent they will normalize as we move forward. I guess you mentioned investments in R&D and digitalization, and obviously there you're always trying to do a lot of efforts. I'm trying to get more or less when you will normalize these investments. You mentioned increased costs on COVID-19, and I guess that has to do with supply chain as well. Have you seen any stabilization of supply chains, or should we continue to expect a bigger impact on increased costs?
Lastly, you mentioned under absorption, and I guess I link the question to finished goods inventory reduction for the most affected businesses and the short cycle business you run. Are we now at a good level, or should we expect more under absorption in the next few quarters? Thank you.
Guillermo, just if I missed that in the beginning of the question, you're referring to the group or a specific business area?
It's to the group, but obviously I went through the specific business areas. I guess investments in R&D is present in CT and IT. You mentioned the increased costs in PT and the under absorption also in Power Technique. I was linking everything together.
Sure. Okay. As Mats said already in the beginning, there were investments. We call them investments. Of course, they end up as costs in the profit and loss, both on R&D and digitalization and so on, that are projects that we want to keep. That is not sort of an increased cost per se. In some cases, even that. It's certainly not something that goes away when the revenue drops, and that's what we have seen in the first quarter, and it will be there in the second quarter as well, obviously. On the absorption side, you can definitely not say that we are already a couple of weeks after, or let's say a month or two, at level in terms of that. We will not be comparable with the normalized situation compared to last year, for example.
The impact of that is, of course, extremely difficult to say to what grade of under absorption will we continue to see. It's like we have commented in earlier days that in the first quarter after a sudden change or a drop, you can't do so much at all. 12 months later, of course, you will see the effects of the more agile business model and the possibility to adapt, et cetera. We expect that the drop through of the falling revenues right now will hurt the profit margin, obviously. That's for sure.
I'll give some granularity and example then. If we take safety first for our employees, if we have a line running somewhere and we detect one employee that we suspect could be infected, we will stop that line, we will clean that line up, we will send the people home. It's very uncertain when it comes down to absorption, how that will play out, even per factory today. We're going to continue to put the safety of our employees first.
Thank you.
The next question comes from the line of Gael de Bray from Deutsche Bank. Please go ahead.
Thanks very much. Good afternoon, everybody. The first question I have is about your supply chain. Would it be possible to talk a bit more about this supply chains organization, so that I could better understand what makes it so much flexible, so much reactive? If you could talk about to what extent it is regionally managed or coordinated globally, these sort of things, and how you've been able to mitigate the disruption, the various supply chain challenges so far. That's question number one. The second question is about the Vacuum Technique performance, which was obviously extremely strong this quarter once again. I'd like to understand to what extent there were some pull-in effects in demand for semis in Q1 in anticipation of potential supply disruption. Thank you.
If I start a little bit on the supply chain then when it comes to vacuum, I mentioned that we principally take advantage of all the capacity that we have. They are more local. The operations in Korea and China and Japan, we believe that they have a strong supply chain that will build support to the demand. CT, they make a lot of core components in Antwerp, then they supply to other factories around the world for us. That's why these two weeks when we restructured the setup of the processes was very important to us. When we see that they're up and running, and when they're doing so in a safe way, we're happy about that. That helps out quite a lot.
The shutdown in India, that's not so good because a lot of companies, including ourselves, is sourcing foundry goods from India. That is something we look forward to, that could open up. Industrial Technique, I could say that northern part of Europe's supplier base is working quite okay. It's more challenging in France than the southern part, in Italy, for example. There we have challenges, but I think the number one challenge still for Industrial Technique is still the demand from customers. Italy and India, I would like to see a little bit more progress during the quarter to support our supply chain.
I think there was one second question was, is there any element of pre-ordering into the strong VT numbers? I think that was basically the question.
It could be, of course. I'm sure that just a handful of key customers in this segment, and of course, they look after, will we be able to keep open? I thought there is some sort of impact on that. We don't know how much. We don't know that actually. I'm sure that it's probably the right conclusion that they've placed some extra orders. We could not predict a record quarter when we started this quarter.
Okay. When you gave us the indication that the business was down 15%-20% in March, that was excluding VT, right? What was the order trend for VT in March?
Now you're getting into our internal reporting, I think so. The comment was for the three business areas.
Yeah
IT and PT. That's correct, as you assumed.
Okay. Thanks.
Thank you.
The next question comes from the line of Ben Uglow from Morgan Stanley. Please go ahead.
I hope everyone's well. It's actually similar to Gael's question, just about the kind of dynamics in semiconductor. If we think about the orders in dollar terms, ballpark $700 million, how lumpy was that order intake? Did you have some very specific large contracts from one or two guys, or was it more broad-based? That's the first issue. Secondly, just more generally, in terms of your customer conversations with the semis OEMs in particular, how do you see the year playing out? What type of dynamic, what type of conversation are you having with them at the moment? We see some fairly positive things coming from the likes of TSMC, STMicro, ASML, et cetera. What I wanted to understand is that your feeling talking to them?
If I start with your last question, what we hear and see among these key customers also what we pick up is that the coronavirus has accelerated, principally, the demand for a lot of the products. Working from home is one area, of course, created these things. You can also see gaming being a big opportunity for many as well. What is the new way of working after this? I think everyone thinks that it will change in the way they operate, but it's still a key account market, so orders will come and go a little bit. Overall, we stay with the prediction that we have for many years now that this is a very interesting industry. Things like this have accelerated the demand for these types of products in the sector.
Just what you probably expect us to say, Ben, on the first part of the question, it is a key account market, and if a couple of orders come in the one quarter instead of the other, it makes it quite an impact sometimes. Here it's not like, "Yes, we forgot to tell you, we have a SEK 300 million order in a one-off." No, it's not like that, of course. It's difficult to make the call because it is a key account market, as you said, and there are big customers. Nothing that stands out in that extraordinary way that we would have told you.
Understood. That's helpful. One quick follow-up, just on China, in terms of the sort of resumption of activity, are you seeing a catch-up effect? I, for example, in the service market, in the service area, are you seeing a sort of desire to, not win back, but increase service as a result of what was lost in let's say, February and early March? Has there been a sort of disproportionate pickup?
Maybe Hans Ola picked something else up, but what I've seen, and when I talked to the general manager, was it's more like it's waking and see more activity. It's more on that level, yes. I think we have to give it a couple of months. It's sustainable as well. Of course, the industries are also dependent on success of fighting the virus in Europe, America, of course. I would give it another quarter to see if there's a stable business and stable markets where they supply their goods to. Right now, our GMs are happy to see that they see more activities and they can move more freely in between different cities.
Thank you.
Right.
Sam, thanks.
Thank you.
The next question comes from the line of Andrew Wilson from JPMorgan. Please go ahead.
Hi. Good afternoon, everyone. I just have another question on vacuum, actually, on the industrial side. I'm sort of interested by the commentary that demand seemed to be going up there as well. I know you touched on sort of pharma and medical and the coatings. I guess my starting point would've been assuming that industrial might see similar declines or developments to the sort of industrial compressors. Can you just sort of, I guess, maybe correct me, right, in terms of that line of thinking or just provide a bit more detail on sort of why the industrial side was also good?
In industrial vacuum
Yes.
Yes, please.
We could see that when we had less orders, as well. There is a correlation between the semi industries and the coating applications, and there's an overlap there, and I think that has helped the industrial business as well. If you take more general vacuum to general industry, I would say it's probably more following the CT demand, to break it down.
That's helpful. Maybe if I can just squeeze in just a very quick second question just to clarify an earlier comment. When the Antwerp facility was closed in Compressor for the two weeks, did you actually lose sales, or were sales deferred in that period, or were you able to make up the shortfall from other operations?
I would say that probably we lost something, but that must have been very little. I would also say that we also maintained 50% of the capacity in our distribution center, so everything that was available from inventory we could ship to customers as well, and we also continued to manufacture parts as well. It was mainly the final assembly product, and I think most customers have accepted, and I have not heard anything about specific lost business in Compressor Technique.
That's perfect. Thanks very much, guys.
The next question comes from the line of Lars Brorson from Barclays. Please go ahead.
Hey, guys. Thanks for taking my question. I hope you're both well. I want to just briefly, Mats, to talk about gas and process compressors. I saw strength in China, materially lower orders in North America . Year-over-year yo u obviously had a very strong run for a couple of years here. Is this quarter down to lumpiness, or do you think we now enter, should we say, more of a sustained slowdown, even once the environment starts to normalize post-COVID-19? I'd be particularly keen to understand how you see China within that regard.
Again, as I just remind you, and you know this, Lars, that of course, gas and process, we talked about VT being, or semiconductor business being a little bit of a key account. This is also more singular deals, let's put it that way, is weighing much more heavy than for industrial compressors, where it's more of a flow of serving thousands of different industry segments and so on. I think the comment in the Q1 report is the important one, that it's not a bad level. There has been a good demand, but not exactly to the same level as the very strong period a year ago. I think we don't hear anything specific from any region that it follows a different pattern than in general. That's what I picked up, Mats, don't you?
Strategically, we have been working on the product portfolio, and the number of applications. They should be able to handle a downturn in some of the segments in a better way today compared to what they could in the past. It's quite complicated, and many of these applications are... It takes time to rebuild the portfolio a little bit, but they're for sure on their way to enter into more applications and satisfying more segments in the market, and that's why we have the order.
It should help the resilience to a certain extent.
Yeah
what we have, less lumpiness, yeah.
Can I ask more generally on the business for China? Sorry, I was a bit late on the call, just as a follow-up, finally, on China, generally outside of VT, did I hear you say, Hans Ola, not the same trends in April as in March? I'm just trying to understand the sustainability of the recovery in March, I know it's difficult to talk about weekly or monthly order trends here, I wonder whether you can help us understand how you see China from here sequentially.
Well, my comment was about the service business and how impacted it was. There we saw, if you call it a comeback, or we saw a normalization after the very low February, if I call it like that. It affected March as well, and now as the market has opened up gradually, that's what I commented on that. In general, I don't want to stick out my neck in any way regarding what happens in any market for April, May, and June, to be honest, at this stage.
It's too early to say that China is back.
Absolutely. Yeah.
I mean, they are so important in the global network.
Yeah
...of what they do and what we do. We take it at least as a positive sign right now.
Absolutely.
Mm-hmm.
Understood. Thanks, both.
Thanks to you.
The next question comes from the line of Jonas Baden from Citi. Please go ahead.
Yes. Not sure if that's the right name, but Charles from Citi. Hi, Mats and Hans Ola. I was late on the call, a busy day. Hope you haven't touched on this. Let's see. On services, I get that there are differences in the service models of VT versus CT. Why do we see weakness now in IT and PT services, but not in CT services? Did you see any weakness at all towards the end of the quarter in CT? Obviously, if we have major shutdowns in Europe and parts of America in the second quarter, I'm a little bit scared that CT can take a hit on the service side. Yeah, if you could touch on that would be very helpful.
Yes, Charles, we have covered that question a little bit earlier.
Sorry.
It was mainly what we could say that the best correlation we could do is, of course, if we have access to the accounts or not. We make very little revenue online. We still need to go on site to make an activity that we actually can invoice. When you look at it and say, okay, Italy right now, very difficult. France, very difficult. Sweden, a little bit better. If you break it down like that, you would see that it's the best correlation you could get right now. As soon as it opens up, we can be present on the site to help out with the service again. I think that Industrial Technique that we did not touch on, but many of our customers have had a complete shut, of course, as you can see.
Okay.
We don't get service away with.
Yeah. Okay. No, that's helpful. My follow-up on this is trying to break down CT services between technicians and spare parts. How much of CT is contractual versus spares today? Out of your contractual services, how much is regulated or what you could call seen as critical, such as food, beverage, and pharma? Just so we get the sense a little bit what is naked to the current shutdowns.
We don't have a good distribution of those sectors in that way, at least not available here. But I think I understand your question, but it's a very tough one to make, try to announce it, to be perfectly honest. The distribution in general on the service is what we have commented before, basically, when we'd had the Capital Markets Day. It's not that we expect that to change in a very dramatic way between what is service contract of shorter, longer duration and what is more breakdown type of service. I don't even have it in my head, a good distribution on that one right off the top of my head, but we can certainly help you to remind what we had said before in the Capital Markets Day.
Thank you.
Thank you.
The next question comes from the line of Madhu Singh from Bank of America. Please go ahead.
Yes. Hi. Thanks for the call and asking the opportunity for the question. I want to understand the incremental margin profile a bit better. I remember that you said initially that do not look at the, for example, the overall group incremental margin in the same way as you have seen in the first quarter. To give us a bit more color, how should actually we think about this going forward? If not the 91% number we can see for the first quarter, is it closer to 70%? Is it closer to 60%? Within that, what is the color differentiation, let's say, between the various segments, also between VT and IT, for example? If you could maybe help, which of these segments actually have the most flexibility in terms of removing cost on very short notice, and which ones are more difficult to do that? Thank you.
Thanks. The difference between the four business areas, if we start there, is not so huge, to be honest. They follow a fairly similar business model set up, meaning that a very high proportion is related to variable cost in some shape or form. I do then also remind you what we said before, that from one quarter to another, there is not a lot you can do on your cost base. If you give it, let's say, within the 12 months period, of course, we have quite some confidence in our ability to reduce the costs to defend the margins, if not protect them, but defend them at least. That's not a huge difference. I think it's correct assumption to say that 91% is not what we expect every quarter.
We gave a couple of examples, both in VT and CT and others, and the corona outbreak per se, of course, accentuated that number. When we have contractions like our outlook now guides, that's our opinion, of course, that we will continue to be in a downturn for a while. It's clearly so that it has historically been at least half of your revenue loss can certainly go away, and it could even be slightly more than that on a short-term basis. As I said, 90% was a bit too much, and it's a one-year bridge. Remember that. It really hinges on what happened exactly in Q1 last year and what happened in Q1 this year. It's not only an indication of our sort of leverage or negative leverage or whatever you say.
I know that in recent years, I've stressed that what is normal in terms of positive flow through when we grow, we talk about some 30%ish, 35% even if we have some positive pricing. The experience tells us that when it turns the other way around, we have more severe effects. That's why I talk about 50%+ type of flow through in a situation that we are in right now.
If I may follow up on the same, but between the equipment side versus the service side, which one would have bigger, let's say, impact or bigger flow through to the margins in case of revenue drop?
The key difference we believe. Mats has really said the crucial comments already, that it all hinges on whether we have access to the customers at all. In some parts of the world, it's not normal where at least have that access, where in some other countries, we don't have. It's more the top line development of the service versus the equipment rather than a big difference in the flow through, if you see what I mean.
Okay. Thank you very much.
Okay. Thank you.
The last question comes from the line of Guillermo Pena from UBS.
Hi again, and I have a follow-up actually. It's more from an end market perspective, and it's on semiconductors on that theme. Have you seen China investments in semiconductor sub-parts or Fab equipment accelerating just to, in a way, to go back to Ben's question, in a way, disproportionately to a recovery just to become more competitive on the semiconductor space? Has the activity in China been significantly better than the activity elsewhere in the semiconductor space?
The semiconductor, is that specifically pulling just in China, or is it more semiconductor, generally speaking?
No, what I mean, it goes from different quarters, of course. We normally indicate that when talk about the geographical and this case, you can see the very positive development in Asia. That was mainly related to South Korea, China, and Japan. We have a good position in Korea, we have a good position in China, and strong market share. In principle, we can follow them when they launch new factories or launch new products, and we can guess at least that we are part of those projects moving forward as well.
Perhaps linked to it, the previous discussions we've had about the China big bet on building their semiconductor industry is clearly there, and we don't see any difference in that in this moment. But to weight that on a single quarter or to that's impossible, then it's more of a long-term bet that they have on that.
Looking forward, of course, the Chinese start with fairly basic product portfolio, but then they need to ramp up all the development as well to be competitive in this segment as well. It's not like it's one investment and nothing happens in several years, but they've had the capital, huge investments, and then they will continue to upgrade their technology in the coming years as well.
Thank you very much.
Thank you. We have reached the hour. I thank everybody for participating on the call. The next time in this mode, we are in the middle of July. If we don't see each other until, you're very welcome to participate at that time as well. Thank you very much. Bye-bye.
That concludes our conference call. Thank you all for attending. You may now disconnect your line.