Ladies and gentlemen, welcome to the Atlas Copco Q1 2020 Report. Today, I'm pleased to present CFO, Hans Ola Maier. For the first part of this call, all participants will be in a listen only mode. Afterwards, there will be a question and answer session. Hence, please begin.
Thank you very much, and very 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 Ramstrom, my CEO here with me. That was the Freudian slip, sorry about that. And 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 then we will have a question and answer session after that.
We have reserved 1 hour, and we try to stick to that. So again, I hope that the question and answer session will be in the form of 1 question at a time. That would be much appreciated. With that, I think I'll hand over to you, Mats, right away.
Thank you, Anton Olav. We start with Slide number 2, Q1 in brief. Orders received came in at SEK 28,000,000,000. We think that's and regard us as a very strong month for us. And vacuum technique did very well, riding on the wave of digitalization in our society.
CT, flattish and then tougher market environment for Power Technique, minus 11 and also Industrial Technique still related to IT, but also extended, of course, the Aerospace this time minus 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 Apacocco. It was strong in most business areas. February, of course, came in softer, and then we started to see the impact on 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, you take compressor technique, industrial technique and power technique, organically, they were down 15% to 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 and when they 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, I mean, about 20%, happy about that considering the business environment that we work in. We have opened factories, we have closed factories. 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 that we will defer down the second installment, which is 3.50 to propose down the extraordinary general meeting later on this year.
The quarter, of course, is shadowed a little bit by not a little bit, a lot by the COVID-nineteen. And 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, we first. On the other side, we see that the best way of doing that for us has been to try to keep our manufacturing unit open. And in most cases, I would say that still, it's been quite good success to 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-nineteen as well. And quite early into this truce, as we said, how do we protect livelihood and the success of our company? As we have defined a number of activities, but we have no intention to cut in costs, that's in research and development.
You can also see that the efforts that we've made in digitalization with all the connected products in compressor techniques and in industrial technique, for example, how beneficial that is now when we cannot always access the customers' facilities. You can also see that we're trying to use this type of short term week to maintain employment for the very important resources is a lot of competence about our customer that's in service and in sales, of course. So intention is after this to come out as a stronger company. Take Slide number 3, which confirms a little bit the numbers. The SEK 28,000,000,000 was supported by currency, mainly the U.
S. Dollars of 3%. And then acquisition was also positive on 4%. Talked about the margin at SEK 5,000,000,000 and about 20%, happy with that. You can see that they had the restructuring costs in Industrial Technique, still mainly related to the outer sector.
And then we had a positive on the reevaluation of the valves. Return on capital employed, if I bridge that for you, the main things are the 2 latest acquisitions there. You have Brooks and Schoigenflu. And then we also have the New Rules or IFRS in terms of lease. We go to Slide number 4.
Of course, it changes a little bit this time. The business climate has changed dramatically, moved from geography to geography. Of course, the influence first for the COVID was in Asia for us, and we had the extended shutdowns of the New Year celebration in China. And principally, all our factories are up and running again in China. And then we have not yet fully seen the impact on the virus in Europe and Americas and Rest of the World, but we expect that to come in Q2.
There are a few segments. If I take the positive 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, it's becoming flattish. TTV is strong in medical, strong in service there as well. And actually, Industrial Technique also has a positive there in the auto sector, but that was mainly related to a weak Q1 last year. Middle East, we reference oil and gas. We can see the utilization of our rental fleet being less as well.
Slide 5 indicates the organic growth per quarter, and you can see it was minus 2% this quarter. Mine is Slide 6, you can see the sales bridge. Talked about the structural acquisition, 4%, the clearance was positive and then on organic. I think I repeat myself a little bit there. Then I thought I would give you a little bit more detail on Slide number 7.
Some positives and some challenges then. If I start with Latium, which is now than 23% of the group and growing. In semi, normal, we have said that we have seen technology investments. And this time, we also have a little bit of capacity investments, and that's mainly in memory. We can also see strong business for the coating applications, but 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 compressor all came down. The demand is reduced. But there are some segments that we are present in that that's pharma, medical, it's water treatment, food and beverage, for example. But 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. So they have a tougher time there with some of the key segments sitting down. The one thing that's positive is that with the mix of technology that we offer now, we can see great success in key strategic electric vehicle programs.
Power Technique, because our own rental fleet, the utilization came down. I assume that it's the same for the general lease rental companies because we can see that they postponed investment in CapEx and we have had even 1 or 2 cancellations as well. Compressor technique on Slide 8, on organic line of minus 3, we kept up fairly well anyway. Looking at the profit level there, positive for currency, but you can clearly see them down their absorption in both service and manufacturing. And in the compressor case, Antwerp is our main hub and that we had to shut down for 2 weeks.
When the governor introduced social distancing. It was difficult to run the line in the same we had in the past. So we closed the line We closed the factory even for 2 weeks and made sure that we changed the processes and that will reopen after 2 weeks. And now it's up and running, although not to the same level as before. But I'm happy with the team there, what a fantastic job they have 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. So it's running with the lower utilization, at least it's up and running and you can try it again. One of the challenges for us is the service business in compressor technique, although that we have with this 120,000 connected compressors, it has been very difficult to be on-site. And of course, many customers don't want to see us during this corona time.
So 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 intrinsically running on max capacity. So that's very positive.
Yeah, nothing more to add there, I think. Industrial technique, as I started out with, probably the 3 of the more important segments have challenges with demand. So to be able then to deliver that 20% was pleased to see that. From an operational standpoint, I would say that there are, of course, a number of challenges. But going forward, looking forward, I would say, more the demand picture, it is more challenging for industrial than anything else.
A completed acquisition of Schoigenflu, and that's a new platform for us for this brand into smaller applications like electronics for different industries as well. Not in this quarter, but ongoing then, that we have secured 70 6 percent of the shares in its division as well. Power Technique, what should I mention here, maybe the drop there in margin. And 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. And so it's more the demand picture here that is a challenge going forward. So summarizing, happy with the orders to see, happy with the revenues. And I think we've got a little bit the understanding of the operating profit margin. We continue then to invest to come out as a strong company in R and D, the digital initiatives, working very close with our suppliers to be sure that we are first in line when this turns around again.
Then I think I hand over to Antoine. 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 65,000,000 negative. That's the run rate.
So the extra SEK 50,000,000 negative roughly in Q1 is related to exchange losses on foreign exchange loans in certain subsidiaries around the world. And of course, that happens when we have such turbulence in the world and some currencies have really taken a beating in this turmoil, but that is the explanation. But 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, 65,000,000 as we have. 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 that roughly that level we expect going forward for a while.
And Mats already commented on the return on capital employed, so I don't need to repeat that, 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. Then if we look at items affecting comparability and acquisitions, of course, we have a couple of big, well, 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.
So that's one of the main reasons there. Then 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.
Then you can look at the 20.4 percent and say, well, that's the best we have as an adjusted number for this year anyway. So on that, I would more just comment that you see that there is 0.5 percentage point effect from last year to this year. And if you sort out the different columns here, you see that we have had a help compared to last year with about 1 percentage point equivalent from currency. And that is perhaps something that you can remember. Then 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.
And of course, this is a quarter which even in the quarter has the disruption in itself. And 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 the it looks a bit extraordinary.
Mats already commented that there are a number of negatives due partly to the COVID and partly to an unfavorable sales mix that exaggerates, let's say, the negative from there. But 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. If we then move on, and 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. So that basically explains it.
Before I leave you only on the FX effects, if 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. So and we had 4.60 plus in Q1, as you know. So that's at least some kind of reference. If on the balance sheet, I think for anyone that doesn't live here in Sweden, it looks like we are expanding massively. But SEK 5,000,000,000 more than SEK 5,000,000,000 of that increase since December is actually due to pure translation into a weaker Swedish krona.
And 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 effective than ever. So comparing to last year, we have the same tendency, but it's much less.
And 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-nineteen happening. So if we move on from there, come I don't know if we need to comment more on that much. You already said it, but yes, and that's on Page 17. And then I'll leave it to you for the most wanted slide.
I don't know about that. Yes, 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. And we are trying then to talk about the activity levels among our customers between the Q1 and Q2. And of course, we can see that we believe it's very uncertain what will happen, and that's completely linked to the corona, of course. But 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.
And hopefully, the slight turnaround in China will continue. So that's on the positive side. But for us then, if it's a lockdown, we normally can work with products that are critical for society. But in many cases, we don't get access to their customers' facilities and service products. So that's a little bit on the negative side.
So that's why it's so uncertain for us what will happen in each country and what we'll be allowed to do in terms of care. I can see that we do have a huge favor here with the 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 have said that we're going 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.
So the diversified business model, when we are in different geographies, you can see that we have 36% of our sales in the quarter in Asia, leading products and have these presence in different segments will, of course, help us quite a lot. But then we also talked about the livelihood of RMPs and the company and said that we like to come out strong after this. So there are a number of things that I mentioned earlier that we are not going to cut back on. So we will see a drop in demand at the same time, and there is 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. Then we move over to the questions and answer session. Can you please, operator, give the last instructions, please?
Thank you. Our first question comes from the line of Max Yates from Credit Suisse. Please go ahead.
Thank you. Could just my first question is on when you talked about the down 15 to 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.
So 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 am not looking down March myself. I'm looking at how Bola could see if
we have 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. But 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.
But it's difficult to it's an aggregated number that Mats mentioned. But I mean, maybe
you can guide a little bit like a lockdown in account B, then it will have the same impact, of course, on service as well. So maybe it's the correlation there, the need to follow in the coming quarters on a principally. So if we cannot access that, it's very little that we can do online that we can charge for. We need a physical visit on-site to generate revenue. So I think even if we can't guide you exactly then, I think that is the correlation to look out for them if we can or cannot access customers.
Okay. That's helpful. And just my follow-up question is we've had a lot of other companies sort of talking about so short time working schemes and quantifying cost actions that they're taking. I'm sure there is lots you're doing kind of 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 1,000 employees around the world. And 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. And around just about 8,000 people have some sort of program and we take advantage of that, but it's possible intrinsically. And if it's not short term, of course, then we come to another situation where we see better recession and then we need to adjust accordingly as well. I don't know
if you have that. No, I think that's accurate.
Okay. That's helpful. Thank you.
So just perhaps to be clear, and I'm sorry if you already said that much, that the 8,000 people are the ones affected in some way. It could be from 10% to 80% or 100%. So there is a weighting of that, that is difficult to exactly calculate. But there is quite a big group affected at least in some way. Okay.
Thanks. Thank you.
And the next question comes from the line of Guillermo Peigneux from UBS. Please go ahead.
Good afternoon. Guillermo Peigneux from UBS. Thank you, everyone, for taking my questions. Actually, I wanted to know a little bit about the margin pressure that you saw during the quarter. And I wanted to get some clarity as to how much of the 3 sea items you mentioned in your press release will be persistent or to what extent they will normalize as we go forward.
I guess you mentioned investments, R and D and utilization. And obviously, Greg, you're always trying to do a lot of efforts. So but I'm trying to get more or less when you will normalize these investments. Also, you mentioned increased costs on COVID-nineteen, 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? And then lastly, you mentioned on the assumption, and I guess I linked the question to finished goods inventory reduction for the most of the businesses and the short cycle business you run. Are we now at a good level? Or should we expect more under absorption in next few quarters? Thank you.
Gjermot, just if I missed that in the beginning of the question, you're referring to the group or a specific business area?
Yes, it's to the group, but obviously, I went through the specific business areas. I guess investments in R and D is present in CT and IT. You mentioned the increased costs in BT and the absorption also in Power Technique. So I was linking everything together.
Okay. No, but as much said already in the beginning, there were investments in we call them investments. Of course, they end up as costs in the profit and loss, both on R and D and digitalization and so on that are projects that we want to keep. So that is not sort of an increased cost per se, in some cases even that. But it's certainly not something that goes away when the revenue drops and that's what we have seen in the Q1 and it will be there in the second quarter as well, obviously.
On the absorption side, no, you can definitely not say that we are already a couple of weeks after or let's say a month or 2 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 weight to what grade of under absorption will we continue to see. But 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. But 12 months later, of course, you will see the effects of the more agile business model and the possibility to adapt, etcetera.
But we expect that the drop through of the falling revenues right now will hurt the profit margin, obviously, that's for sure. And maybe
I can use some granularity and example then. If we take safety first for our employees, if we have a line running somewhere and we detect 1 employee that is suspect could be infected, then we will stop that line, we will clean that line up and we will send the people home and make sure that it's very uncertain when it comes to under absorption how that will play out even per factory today. So and we're going to continue to put the safety or employee first.
Thank you.
And 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 the supply chains organization so that I could better understand what makes it somewhat flexible, somewhat reactive. If you could talk about to what extent it is we generally managed or call it in 80 degree globally, these sort of things and how you've been able to mitigate the disruption to the various supply chain challenges so far.
That's question number 1. The second question is about the vacuum technical performance, which was obviously extremely strong this quarter once again. But I'd like to understand to what extent there were some full lean effects in demand for semis in Q1 in anticipation of potential supply disruption? Thank you.
And 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 to the operations in Korea and China and Japan. We believe that they have a strong supply chain that will support demand. CT, they make a lot of core components in Anne Saifen and then they supply to other factories around the world for us. And that's why these 2 weeks when we restructured the setup of the processes was very important to us.
And when we see that they are up and running, they're doing so in a safe way. We're happy about that. So that helps out quite a lot. And the shutdown in India, that's not so good. Of course, a lot of companies, including ourselves, is sourcing foundry goods from India.
So that is something we look forward to, but that could open up. Industrial Technique, I could say that northern part of Europe supplier base is working quite okay. It's more challenging in France than the southern part in Italy, for example. So there we have challenges, but I think the number one challenge is still for industrial tech is still the demand from customers. So Italy and India, 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 preordering into the strong BT numbers? So I think that was basically the question.
Yes. It could be, of course. I mean, I'm sure that, yes, a handful of key customers in this segment. And of course, they look after that we'll be able to keep open. So I thought there is some sort of impact on that.
We don't know how much. We don't know that actually. So but 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. And when you gave us the indication that the business was down 15%, 20% in March, That was excluding VT, right? So what was the other trend for VT in March?
Are you getting into our internal reporting? I think so. But that the comment was for the 3 business areas today, the CP and IT and PT, that's correct, that you assumed.
Okay. Thanks.
Thank you.
And 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 Gail's question just about the kind of dynamics in semiconductor. If we think about the orders in dollar terms, ballpark $700,000,000 how lumpy was that order intake, I. E. Did you have some very specific large contracts from 1 or 2 guys or was it more broad based?
So that's the first issue. And then 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? Because we see some fairly positive things coming from the likes of TSMC, SD Micro, ASML, etcetera. And what I wanted to understand is, is that your feeling talking to them?
Well, if I start with your last question, what we hear and see among these key customers in the world, what we pick up is that the coronavirus has accelerated increasingly a bit on for a lot of the products. On Zoom is one area, of course, we trade these things. You can also see gaming being a big opportunity for me as well. So and what is the new way of working after this? And I think everyone think that it will change in the way we operate.
So but it's still a key account market to orders will come and do a little bit. But overall, we stay with the prediction that we have For many years now, we said this is a very, very interesting industry. Things like this have accelerated the demand for type of products in the sector.
And just what you probably expect us to say then on the first part of the question that it is a key account market. And if a couple of orders come in the one quarter instead of the other, it makes quite an impact sometimes. But here, it's not like, yes, we forgot to tell you we have a SEK 300,000,000 order in a one off. No, it's not like that, of course. But it's difficult to make the call because it is a key account market, that's to say, and there are big customers.
But nothing that stands out in that extraordinary way than we would have
told you. Understood. That's helpful. And one quick follow-up. Just on China, in terms of the sort of resumption of activity, are you seeing a catch up effect, I.
E, 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 early March? Has there been a sort of disproportionate pickup?
So maybe Hans Ul will take something else. But what I've seen and when I talked to the general manager, whether it's more like it's taking and see more activity. It's more on that level yet. I think we have to give it a months. It's sustainable as well.
And of course, the industries are also dependent on success or finding the value in the Europe and America, of course. So I would give it another quarter to see if there is a stable business and stable markets where the supply will go through. But right now, our GMs are happy to see that they see more activity, that they can move more freely in between different cities. Thanks, Ben.
Thanks.
Thank you.
And 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, but on the industrial side. I'm sort of interested by the commentary that demand seems to be going up there
as well. I know you
touched on sort of pharma and medical and the coatings. I guess starting point would have been assuming that industrial might see similar declines or developments to the sort of industrial compressors.
Can you just sort of, I
guess, maybe put 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?
Industrial vacuum only question. Yes, please. No, that is we could see that when we had less orders. Well, there is a correlation between the semi industries and the coating applications. And there is 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 following the CT demand, if you break it down.
That's helpful. And 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
and for the 2 weeks,
did you actually lose sales or were sales deferred in that period? Or were you able to make up the shortfall in the middle operations?
I would say that if we probably we lost something, but that's not what have been very little. I would also say that we also maintain 50% of the capacity in our distribution centers. So everything that was available from inventory, we could ship to customers as well. And we also continue to manufacture parts as well. So it was mainly the final assembly product.
And I think most customer has accepted and I have not heard anything about specific loss, business meaning, professor Chintaglin.
That's perfect. Thanks very much, guys.
And the next question comes from the line of Lars Wasser from Barclays. Please go ahead.
Hey, guys. Thanks for taking my question. I hope you're both well. I wanted just briefly, Mads, to talk about gas and process compressors. I saw strength in China, but materially lower orders in North America and Europe.
You 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, she would say, more of a sustained slowdown even once the environment starts to normalize post COVID? And I'd be particularly keen to understand how you see China within that regard.
Okay. It is, as I just remind you and you know this, Lars, that, of course, gas and process, we talked about DT 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. So 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 a very strong period a year ago.
And 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 said to you.
But 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. But 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're handling this.
It should help the resilience to a certain extent. Yes. That's lumpiness.
Can I ask more generally on the business for China? Sorry, I was a bit late on the call, but just as a follow-up finally. On China, generally outside of VT, did I hear you say, Han Solo, not the same trends in April as in March? I'm just trying to understand the sustainability of the recovery in March. And I know it's difficult to talk about weekly or monthly order trends here, but 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. And there, we saw, if you call it a comeback or we saw a normalization after the very, very low February, if I call it like that. It stayed into 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 June, to be honest, at this stage.
But it's too early to say that China is back. I mean, they are too important in the global network of what they do and what we do. But we take it at least as a positive sign right now.
So Understood. Thanks, both.
Thanks, Ian.
And the next question comes from the line of Jonas Bedin from Citi. Please go ahead.
Yes. Not sure if that's the right name, but Thomas from Citi. Hi, Matt and Anssoga. I was late on the call, busy day. Hope you haven't touched on this.
Let's see. So on services, I get that there are differences in the service models of BT versus CT. But 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? Because obviously, if we have major shutdowns in Europe and parts of America in the second quarter, I'm a little bit scared that SITA can take a hit on the service side.
So, yes, if you could touch on
that, that would be very helpful.
Yes, Claus, you have covered that question a little bit earlier. And 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. And we make very little revenue online. We still need to go on-site to make an activity that we actually can invoice. So if you when you look at it and say, okay, Italy right now, very difficult France, very difficult Sweden, a little bit better.
And if you break it down like that, you would see that it's the best correlation you could get right now. And as soon as it opens up, then we can be present on their side to help us with the service again. I mean, I think that the industrial technique that we didn't touch on, but many of our customers have had a complete shock, of course, as you can see. And then we don't get service or work. Yes.
Okay.
No, that's helpful. My follow-up on this is trying to break down CT services between technicians and spare parts. So how much of CT is contractual versus spares today? And out of your contractual services, how much is regulated or what you can 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, very tough one to make try and answer to it, to be perfectly honest. The distribution in general on the services, what we have commented before basically when we've had the Capital Markets Day, it's not that we expect that to change in a very dramatic way between what this 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.
And the next question comes from the line of Mandy Singh from Bank of America. Please go ahead.
Yes. Hi. Thanks for the call and question asking opportunity for the question. I want to understand the incremental margin profile a bit better. I mean, I remember that you said initially that don't do not look at the, for example, the overall group incremental margin in the same way as you have seen in the Q1.
So but to give us a bit more color, how should actually we think about this going forward, if not the 91 Is it closer to 70%? Is it closer to 60%? And within that, what is the color differentiation, let's say, between the various segments also between VT and IT, for example? And 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. We thanks. The difference between the 4 business areas, if we start there, is not so huge, to be honest. They follow a fairly similar business model setup, meaning that a very high proportion is related to variable cost in some shape or form. But I do then also remind you what we said before that from 1 quarter to another, there is not a lot you can do on your cost base.
But if you give it, let's say, within the 12 month 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. So that's not a huge difference. When you 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 DT and CT and others that and the corona outbreak per se, of course, accentuated that number. But when you 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 can 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. But as I said, 90% was a couple of 2 a bit too much. And it's a 1 year bridge, remember that. So it really hinges on what happened exactly in Q1 last year and what happened in Q1 this year. So it's not only an indication of our sort of leverage or negative leverage or whatever you say.
But 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 percent, 35 ish and if we have some positive pricing. And the experience tells us that when it turns the other way around, we have more severe effects. And that's why I talk about 50 plus type of flow through in a situation that we are in right now.
And 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 having to drop?
The key difference we believe and we don't think that it's I mean, Mats has really said the crucial comments already that it all hinges on whether we have access to the customers at all. And in some parts of the world, it is it's not normal where at least have that access, where in some other countries, we don't have. And then 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.
And the last question comes from the line of Guillermo Finur from UBS.
Hi, again. I have a follow-up actually. It's more from an end market perspective, and it's on semiconductors and Bakken. Have you seen China investments in semiconductor sub parts or power pack equipment accelerating just to in a way to go back to Dan's question in a way disproportionately to 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 BT. The semiconductor is specifically pulling just in China or is it more semiconductor generally speaking?
No, but I mean, it goes from different quarters, of course. We normally indicate that when talking about the geographical. And in this case, then you can see the very positive development in Asia. And that was mainly related to down South Korea, China and Japan. And then I mean, it's we have a good position in Korea.
We have a good position in China and strong market share. So in principle, you can just follow them when they launch new factories or launch new products and you can guess at least that we are part of those projects going forward as well.
And 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 movement. But to weight that on the single quarter or to that's impossible, then it's more of a long term bet
that they have on that. But looking forward, of course, the Chinese starts with fairly basic product portfolio, but then they need to ramp up auto development as well to be competitive in this segment as well. So it's not like that it's one investment and nothing happens in several years. But they have had the capital of huge investments and then they will continue to upgrade the technology in the coming years as well.
Thank you very much.
Thank you. Thank you. We have reached the hour. I thank everybody for participating on the call. And the next time in this mode, we are in the middle of July.
So 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.