Ladies and gentlemen, welcome to Atlas Copco Q2 Report 2019. Today, I am pleased to present CEO Mats Rahmström and CFO Hans Ola Meyer. For the first part of this call, all participants will be in a listen-only mode. Afterwards will be a question-and-answer session. Speakers, please begin.
Thank you very much. A very warm welcome to everybody on this conference call regarding the second quarter report 2019 from Atlas Copco. We will follow the usual format. That means that in a few minutes or a few seconds, Mats will make his own comments. You can follow, of course, on the slides that are on the web. He will try to keep you updated on what he speaks about on that. After that, we will have a question-and-answer session. I repeat, as we normally do, that we would like all the questions to be restricted to one at a time to allow as many people as possible to come in the queue line for questions. I think that's all for now. Then I hand it over to you, Mats.
Thank you, Hans Ola. I will start on slide number two, which its heading is Q2 in brief. Order growth for the quarter, SEK 26 billion, 2% organic. We are quite pleased with that. The next is mixed equipment demand. I think we can distinction between big and long-term investment and maybe smaller, more operations spend. If I start with the bigger, more futuristic investment, we still see those coming through. We can talk about technology investment in semi. We can see, for example, electrification in auto. Also, some of the bigger compressor for more of futuristic CapEx investment. That, we have not seen a change in demand there at all.
On smaller, more short-term operational spend, there we can see that there are uncertainties in the market. Sometimes they push out orders a little bit, or they take some time to get to a decision. Let's cleared up. We have seen that in Q1. We have also seen that in Q2. Very happy to see that the customer appreciates our service product portfolio. You can see that they continue to grow in all areas, although at a lower relative growth rates. With the growth in all regions except Asia, you can see that U.S. was strong for us. Also Mexico and Canada was included there. You could see strong growth there as well. Some changes in Europe. We have seen a more flattish development from the different Business Areas.
Asia, we might be tough on ourselves [on this industry's] a decrease when it's down 1%. There we can also see that in the past quarter, we have seen more of the decrease coming out of vacuum. This, we can see that it's spread throughout the business areas, [principally], and therefore certainly on the shorter demand on operational spend, that it takes more time to get decisions. Profitability, SEK 5.6 billion, adjusted was 22%, and it's mainly two things. I think that it's the long-term incentive revaluation of options, and then we have the one-time cost for adjustment in the auto sector in Industrial Technique. Despite the trade discussions, the Brexit, different sanctions we have around the world, and maybe not helping, but slower demand in semi and auto, I think the quarter was really strong and solid for us.
Over the year, now the first two quarters, we have 16 acquisitions that are now, some of them related to CT, and we can talk about that a little bit later. You can also see that we have now completed the Brooks acquisition, which gives us the cryo and the chillers, and there you can see Eurochiller and also Powerhouse. A little bit new platform for us to build from as well. If I then change to slide number three, which then confirms that we finalized the acquisition of Brooks. It's two things that I see it. We get a new platform for cryogenic technologies, but also for chillers. Cryogenic is mainly for semi, the toolmakers, and the chiller is a little bit broader, used in different applications. We also get including in that is the 50% ownership of the Ulvac Cryogenic.
We have decided there to announce that we will start a new division with a very clear focus on the toolmakers. They will have some of our pumps, mainly turbo pumps and also the cryogenic pumps to really make sure that we are the best partners for the toolmakers in that industry. Normally when we focus, we are very successful, so we have just announced that internally as well. The run rate for the company right now is around $150 million on the cryo part, and then on top of that, you have the 50% on Ulvac [audio distortion]. As you can see down, we have taken a slightly dilutive effect, and that's including the PPA, and of course, the base for revenue was slightly higher than we announced the acquisition from the beginning.
We go to slide number four. Maybe starting on the graph, you can see it's quite solidly ordered Q2. It's the second-best that we have had, although supported by currency, of course, and it's actually the record for us in terms of revenue. Hans Ola will talk you through a little bit the cash flow later on, but I will leave that to him. We go to the geographic markets on slide number five. Very pleased with the development in North America and South America, 6% and 11% growth. We can see it's coming from increasingly all the business areas in those two regions. There's -1 in Americas and one in South America, but it's a little bit up and down, but that's exactly very strong growth.
Europe, there can be still positive for most of the BAs, but we can see it on a lower level, I would call it more of a flattish scenario right now. We can take Africa, Middle East, CT have had a really strong quarter in that region as well. I said in the beginning, we might be tough on ourselves, and we have decline in Asia year-over-year to down 4%, now it's then -1% for the quarter. The difference that I see is that in the past, we have had three positive BAs, we've been down in Vacuum, now I would say it's more of a flat scenario for most BAs.
I need also to confirm that this is still on a very high level for us, and it's above the level, of course, we had in Q2, Q4 last year. Summarized it, North America, positive, good development, more flattish in Europe, slightly negative in Asia. I think they are impacted more and more by the trade discussions that they have with the U.S., specifically China. Slide six. I would say just a confirmation on the organic growth. We have had 1% down for this quarter, then it's 2% organic. Number seven is the sales bridge. You can see that we did have support from the currency. Hans Ola will later guide you for Q2 when it comes to currency. Slide eight, looking at the group, I think I called Power Technique the superstar of Q1.
They continued to grow 10%, strong, I think, they become a slightly bigger part of the group, of course. Operating profit right now about 17%. Of course, if I trade a little bit Power Technique group versus the decline Vacuum for the mix, of course, that's not positive, but we are very happy with the development of Power Technique. Compressors had three records, I will come back to that. Vacuum, as you can see, they were down 7% on revenue, 7% on orders, but still delivered close to 25% operating profit. I think they've shown that they can act in an agile way. I was positively surprised by Industrial Technique, where some 50%, 60% is auto related, and they're only down 1%. Considering what we have seen in the industry over the last six months, I think they're holding up really well.
I go to slide number nine. That's the Compressor Technique. I think you can say that they have a triple record for the quarter. They had record orders, record revenues, and had record profit. Of course, I'm quite happy with the return on capital employed, that's 100%. If you look at the machine on the corner there, it's a new blower. This is for the low-pressure segment. Step by step, we are more and more active in the low pressure, which is actually one of the market segments where we are not the leader. I think they're building a quite a good product portfolio. I'm quite certain that that will continue to grow. They found a really good concept on acquiring distributors. I would say that the value creation is very quick in those cases.
I'm very happy to see that they have acquired as many of them, although they are quite small. Vacuum Technique on slide 10, down 7% both orders and revenue, still strong operating margin. They continuously bring new products to the market. This one is an oil-free, focusing on the food segment, which we have identified as a good opportunity for us as well. If you look at the level in the graph, we can talk about the swings in the industry, but even this Q2, you can see it's quite on a good level if you compare all the way back to 2017. Quite okay with that performance, and at that level, of course, gives us quite good operating margins.
Industrial, I mentioned it before, considering what's going on with this industry, it's a little bit of a balance between the daily sales and production output is coming down. At the same time, you're building capacity and competencies around electrification on the new models. Of course, we are more driven by the CapEx spend, new models, new powertrain, things like that. That's a little bit what keeps this up, but you clearly see that daily spend here as well. It's taking more time, although that a lot of quotes are out there, but to close on the quotes, and that's a little bit of an indication, of course, for us.
There is normally a correlation between the [MVI] sales and the general industry that we haven't seen in the past, but there are Tier 1 to Tier 2s in the general industry segment that will be impacted by the decisions in the auto industry as well. We continue to develop the service business quite okay, and here is one where we had that on the operating margin, you can see, and where we had the one-time cost of SEK 30 million for the adjustment to the auto sector. Innovation there that we bring is a new battery tool for the aerospace industry. Mainly, it's quite a unique product that I think they will be supplying into the aerospace industry as well. There you can see on the graph as well that order intake was on a very good level for the quarter. Slide number 12, Power Technique.
Strong development specifically in North America. The specialty rental business is really delivering a good result, a good value to our customer, and they continue to grow. This is one of the areas where we find it most difficult to develop service, but now we have had a couple of quarters where I see that service also coming along in a good way, and we have changed a little bit from a structure perspective there. They also had record revenues for the quarter and a record operating margin at 17.4%. The innovation here, you are well aware on the compressor side that we have the variable speed technologies that we also utilize that in our vacuum pumps, now we take advantage of that in the [VSG], so this is the variable speed generator, in line with the environmental expectation on us, some up to 40% reduction of fuel.
This we think could be a very interesting product for us. We come to slide number 13 now, and that's a confirmation on the numbers, and you can also see in the graph there for the group that a very strong and solid quarter for us in Q2. On to you, Ola.
Thank you, Mats. Just continuing a little bit on that operating profit, Mats commented it already. If you go down below that, of course, what you see in this table, as you know, is the reported numbers of margin. We think it's fair to say that the operating profit adjusted was 22%, and last year, the same adjustment led to a margin of 22.4%. That has been commented. Financial net, before we come to profit before taxes, is much less negative this year, only SEK 64 million, which reflects that we borrow less, we borrow cheaper. It's not so much that the run rate of interest rates have changed so dramatically, but we have left some old loans last year that is now affecting our borrowing rate. The effective borrowing rate has come down. Last year was also affected by some one-time costs in the financial net.
When we look at the tax expense, also a better relative performance at 23.1% compared to an effective tax rate of 25.5% last year. These numbers, as always, will oscillate a little bit in between the quarters. We still believe that 24% is the right expected level for the near-term future on that one. Further down, you can see the development of return on capital employed. Perhaps only to mention the return on equity that seems a little bit out of order in an increase from 26%- 41%. We should remember that last year, when it comes to return on equity, it's fully including the discontinued operations. Hence, specifically the equity of last year was still quite different than from this year. When it comes to return on capital employed, we are able to do continuing operations for both quarters.
That's the reason why it looks a little bit strange. But, 33% on ROCE and 41% on equity should be the actual run rate situation of this year, at least. We turn to the next page, number 14, the profit bridge there. First for the group as a whole, you can see that the most interesting column is, of course, the one where we have taken out currency, we've taken out one-time items. We have taken out the revaluation effects of long-term incentive programs due to the share price movement, et cetera. We come to a negative impact on operating profit whilst having a slight positive impact on revenues. This, of course, as anyone would understand, should be compared with the numbers for each of the quarters, SEK 25-ish billion on revenue and operating profit almost SEK 5.5 billion. These numbers are very, very small.
That's what I'm trying to say. Don't build too much into the flow-through of this particular quarter. We will come to the components in the next page. On the FX, SEK 250 million, roughly, million in positive effect on EBIT. We expect that to be roughly the same or in the same neighborhood at least for Q3 compared to Q3 2018, more or less the same. When it comes to the sequential impact of currencies compared to Q2, we expect it to be fairly similar to Q2 this year. If we then move on to the next, we see the different business areas, a bit of a messy outcome in some ways, you could say. When you looked at the Compressor Technique, for example, again, we have a negative on the operating profit, but there is some volume and price addition to revenue.
I think the comment is already made in the quarterly report. We have a negative effect from seeing most of the growth in the parts where the profitability for various reasons is not exactly the same as for the full business area. There is on the large compressors, et cetera, there is a certain difference there. At the same time, I would say for all business areas, when we are in a relatively low growth environment, what we continue to do is invest heavily in R&D, and we also continue to invest in our market presence to support the service growth, et cetera. That's a little bit of comment on that.
Just seeing the column of acquisitions in Compressor Technique might seem a bit strange, knowing what Mats commented about that we really want to see a lot of distributor acquisitions, et cetera, that they are very value accretive. Here we see that in this bridge it looks a little bit different. I would stress that this is a one first year bridge, which includes the amortization of intangibles effects, et cetera, which of course is quite significant in the first year. That, I would say, is the reason why it looks a little bit different from what Mats commented before. Vacuum Technique, of course, when we drop, like we also see in Industrial Technique, when we have this drop in the short perspective, this is what I expect to see, a little bit more drop through percentage than if we would grow by the same amount.
The reason basically is that we keep doing R&D investments. We keep investing in the market presence, et cetera. The adjustment to the new lower revenue level is never 100%. There we can also see the same when it comes to Industrial Technique, basically. Obviously, they have a restructuring cost in the right-hand column, as you know, of SEK 30 million, roughly, in this quarter. Not much to say on Power Technique. Very good results, very good flow through of profit. If we then move on to the next page, which is number 16, balance sheet. Not offering too much of extra comments there. We've said most of it, and I think the comment there on including effects of the new leasing accounting recommendation, IFRS 16, explains why the fixed assets have gone up quite significantly compared to a year ago. Otherwise, it's a pretty normal thing.
We have a growth, if we turn to the next page instead, page 17, cash flow. You see that there is a lower cash flow compared to last year. I want to repeat that as we follow the IFRS rules, we have to include a discontinued operations cash flow until it's out. This would be basically the last quarter that I mention that. Last year, if we adjust for the effect of discontinued operations, the cash flow would have been slightly better, even SEK 3.2 billion, the operating cash flow versus SEK 2.4 billion. The explanation to it, when I compare apples to apples, so to speak, continuing operations, you would find in change in working capital that would explain more than that difference on operating cash flow. It's a bit confusing as you cannot see that really in these numbers.
In other words, Epiroc had quite a negative working capital change last year, and actually a slightly negative contribution on operating cash flow compared to the rest of Atlas Copco. That's basically most of that explanation on that. I turn the next page and leave it back for a short comment on the outlook by Mats.
Yes. The outlook after a very solid Q2. What we're trying to do, give you a little bit of guidance on the activity level we see in our segments in the market. I must say it's based on our view right now at the moment. Based a little bit on what we see in terms of what I call an operational spend. It takes quite some time for customer to go from quotation to orders. We can see that some customers have pushed orders a little bit into the future, and we could also see a little bit of shift in North America that was strong for us, and Europe a little bit more flattish. We could see that although comparing with a good benchmark from last year that Asia, I believe they are influenced by the trade discussions in principle.
Most of our customers are in one way or the other international, I don't think they see this increased protectionist or uncertainty in the market as anything positive. I would say that takes a little bit, and that's what it's based on, is that we think that it takes a little bit more time for the customer to make up their mind and order products from us. That's also why we say it's on what, it's the picture that we have just presently.
Thanks a lot, Mats. We are ready, please operator, if you could just repeat the procedures for the questions, please.
Ladies and gentlemen, if you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw a question, you may do so by pressing zero two to cancel. Our first question is from Guillermo Peigneux from UBS. Please go ahead. Your line is open.
Hi. Good afternoon. It's Guillermo Peigneux from UBS. I wanted to ask about your feelings around the quarter. I guess question is, if the quarter got slower as we progress through quarter, if the entry point was a little bit better than the exit point when it comes to order intake, or the assessment of demand as we progress through the quarter? Thank you.
I think that we calculated also that we were short on two to three days versus last year. I don't think we have a firm trend that we can communicate in certainty that it was any specific trend that we could read into the quarter right now. I think it's more based on what I said before, that we see customer being hesitant to take decisions and that we have seen push outs in all the business areas. I would say that maybe PT a little less, but a little bit in PT and in IT as well. I think that's more what it's based on the outlook.
Thank you. When it comes to follow up, actually on operating leverage, when it comes to CT and VT, so Compressor Technique and Vacuum Technique, are we now at the balanced mix when it comes to large compressors versus stationary medium size and smaller compressors? Are we seeing now a balanced, let's say, operating leverage as we go through the next few quarters? Or there's still negative operating leverage to be accounted for as we go forward? On VT, maybe just alluding to previous comments from Hans Ola on the operating leverage. Are we now at the low thing which we could see now operating leverage normalizing from the current 47%-50% to more normal levels? Thank you.
Well, if I take it as I made the comments there, I think it's valid both for VT and CT. On calculating percentage flow through for a quarter is at best a mathematical exercise. It's very difficult to say that it adequately reflects, let's say, the situation. It's not giving a lot of guidance for the next quarter either, unfortunately. On your first question on CT, now in balance or not, it depends very much on how the quarter plays out and what gets invoiced and what doesn't get invoiced, and so on and so forth. I think I will always revert to that over time, we believe that a flow through of about 30% is reasonable to expect
From a business that is set up the way we are. There is no huge difference between the business areas in that respect. Everything will oscillate around that. Very difficult to pinpoint that it's because of this and that. Apart from the more very broad comments that I just offered, that we keep doing investments in R&D, we keep doing investments in market presence because we don't have any reason not to do it, if I may say so. If the revenues are not there that quarter, it will give a lower effect on profit, and that's what it is.
Thank you so much.
Thank you.
Our next question is from Sebastien Gruter from Redburn. Please go ahead. Your line's open.
Good afternoon. One question on CT sales in Q2. I don't know if there was any production issues in the quarter or the lead time increase we see in the division is driven by the change in mix with more larger compressors and less small and medium size. Any highlights you could give on CT sales?
On CT, in terms of delivery, I would say that in most areas we are back to normal lead times. On the other side, if you have record revenues, record order receipt, you will put a lot of pressure on your supply chain, no doubt about that. The main part of the increase is, as you said, from the bigger gas and process, the bigger oilfield projects, and they normally have a faster delivery time built into them. That's the bigger increase we can see.
Okay, thank you. Just a quick follow-up. You comment on the service growth for VT in Q1, you said a strong growth. In this release you just talked that growth is continuing. I am wondering if you see any impact of production cutbacks in the semi industry, especially in memory.
On semi, of course, there is still a huge installed base that we are hunting down to get service or service contracts. I see that as a positive. If you look a little bit at the utilization of the tabs around the world, you have taken average, you can see that it is down a little bit. Of course, that will not help over time, but I think the bigger potential for us is to make sure that we service the equipment that we build in the last two, three years. That is where I see the bigger potential for service.
Okay. Thank you.
Our next question is from Klas Bergelind from Citi. Please go ahead. Your line is open.
Yes. Hi, Mats and Hans. It's Klas from Citi. Europe is getting a bit weaker there on the small and medium-size compressors. Could you help us with which countries are weak in Europe? Is it more Germany, which was already weaker? Is Germany getting weaker quarter-on-quarter or other countries as well?
I mean, Germany is of course the engine of Europe. The only market that I can really comment on that it's more difficult than the others is of course, in the U.K., where we see the impact of Brexit. That I think goes for most BAs. I'm looking at Hans Ola to see.
It's true, we don't see a huge difference. The only thing is that a couple of countries are not growing at all, and that's, for example, Russia and Turkey. That stand out a little bit more on the negative side, at least. Otherwise, the overall trends are not dramatically different from one part of Europe to the other. There's certainly nothing that comes back to us as a strong warning from the operations either.
I mean, Russia, I would say it's very impacted by the sanctions, by the European Union and also from us.
Okay, thank you. A quick follow-up on the larger compressors, and also gas and process in China. We must be back at the previous peak there in gas and process, I would have thought. Just checking if that's correct, and also where are we versus the previous peak on the larger compressors on the industrial side in China? You are obviously benefiting from mix here, new products. In gas and process, you are benefiting from more LNG. Just to get a sense, Mats, of the relative performance versus, let's say, 2012 levels.
You are correct, we are back on record levels. I think the difference is that it's more diversified in many more segments. In some areas, I think also the divisions have been very task by trying to identify the segments that we find profitable over time. I think it gives a little bit of impact right now, and the product portfolio on oil-free will certainly give an impact on the lead rate for us versus competition.
Thank you.
Yep.
Our next question is from Graham Phillips from Jefferies. Please go ahead, your line is open.
Yes, good afternoon. Thanks for taking my call. I wanted to understand a little bit more, Mats and Hans Ola, about Industrial Technique. You've given some helpful comment in the release about tools and fasteners in the motor vehicle auto business. Can you give us a proportion of tools versus fasteners and rivets, and what are the -1% in orders? Did we actually see an increase in the fastener and rivet side and the tools were clearly down?
We don't break it down on that level for you guys, but intrinsically, the tooling business, the best we can get is a new plant, as you know. If it's a new model, that's fine as well. It's normally after five, six years, we're very happy about that. If it's a remodeling year-on-year, then it's more application based. The one thing that follows the car space, in terms that it would be the rivet for the [Henrob self-pierce] riveting equipment, and the main customers in the world, that is Ford F-150 project. That's where we go hand in hand with people who correlates to the production level. Otherwise, it's more CapEx given.
On the positive side for this side, it is a little bit that, okay, the traditional power train, diesel, petrol. You see a lot of shifts, of course, in projects that it's hybrid or electrification. There's a ton of new battery suppliers out there and new sub-suppliers that we've been very early to go after. It gives results right now. That's what I can say about that.
Okay, thank you. Just one perhaps follow-up for Hans Ola on that. If we look at the comments you make about the impact to margins, with the headwinds from higher R&D and mix, you've been saying that now, I think probably for a good on three or four quarters. Do we start to get into the third quarter where that comparable bleeds through in terms of those higher R&D costs? Are we at the end of restructuring, or do you think we've had two quarters now of restructuring in this business?
As you can see, it's not huge restructurings, of course. It's more related to adjustments to what they see in the automotive demand for the business. Yes, we have done it. We are coming to the end of it, let's say, if there is something that might be significantly less than what we have seen in this quarter, even. Yes. On the R&D spend, it's something that has been going on. It's not that we started it at a certain date last year. Of course, we are now gradually comparing the periods that also had that, so to speak, already strong. If we continue to grow it strongly, then it will always eat into the margin, unless we really see top line growth coming out.
Yeah. Okay. Thanks very much.
Thank you.
Our next question is from Lars Brorson from Barclays. Please go ahead. Your line's open.
Thanks. Hi, Mats, Hans Ola. Mats, could you help us a little bit with your divisional demand outlook into Q3? Or maybe to ask a little bit differently, do you see any of your business areas or end markets deviate from your overall somewhat lower for the group?
If you start some of the major segments in our market, if you start with semi, you can see that all the big players will continue to invest in technology. That's just a given. You can also say that there has been and is still an overcapacity in memory. You can see that utilization is coming down a little bit as well, so I don't think you'll see a turnaround there specifically. I believe that they'll continue to invest in technology, and as I described it before, that market is very Key Account driven. It's not more than 20 accounts around the world that we follow. That's a little bit our view on that.
The auto industry, the balance between new CapEx for electrification versus a little bit to pull the technology than it needs to keep up on the electrification, that is another activity. We might see more on delays than coming down. That we don't know. Of course, that might be the logic of delaying decisions and pushing out some of the orders that we have. That's nothing that we know. We cannot see into the future. But as for your Construction, I think Power Technique seems to continue in a good way. Oil and gas seems to be okay for us. Those are some of the segments that we operate in.
Can I just ask a follow-up to the earlier question on large industrial and gas and process? They've decoupled now for three, four quarters relative to your small and medium-size. Obviously, gas and process up significantly this quarter. How sustainable do you think this is? I guess one argument is for why larger compressors and gas and process would decouple is because there's perhaps a more pronounced replacement cycle coming through. Obviously, 10, 15 years ago, we had this very strong cycle in oil-free, most of which should be a due replacement. Do you see that coming through, or do you think it's really just lacking the underlying small and medium size?
Very difficult to pinpoint, Lars. I think the small and medium size is following really the broad economic indicators to a large extent, whereas the other stuff both have a little bit more erratic top line development. It's what we have commented before, I think still is valid, that we have a few years where there was
Very few large investment projects. Now it's been for a year, you say, that we have commented that it's starting to do much better. That's true, but it comes from a level that was completely depressed during 2016, 2017, and 2018. It's not very easy to predict where it's going. We have LNG investments. We have a couple of these things where we do believe that it will continue because there is new technology in the applications that demand other or more of the same equipment and so on, whereas on the small and medium size, as I said, it's so diverse in its end markets exposure so that it basically follows whatever you can derive from industrial production and general economic growth.
Understood. I'll go back in the queue. Thank you.
Our next question is from Jack O'Brien from Goldman Sachs. Please go ahead. Your line's open.
Hi, good afternoon. First question, just on Power Technique. You've seen record revenues and operating profit there. Just want to understand really the drivers behind the strength in the U.S. specialty rental business. Following on from that, another kind of end market question relating to the Brooks business that you acquired. What sort of growth trends have you seen now? I think I noticed revenues were a fair bit higher recently, perhaps if you can talk about the growth trends there as well. Thank you.
If I understood, Power Technique on specialty rental first. We have seen a strong market in the U.S., and it's mainly down to the oil-free range that we have in the specialty rental offer. That has been very successful. I think they're taking quite some good market shares on pumps and generators, with a handful of accounts with that as well. On top of that, now in the end, the Powerhouse specialty rental business in this quarter then. I think that's linked PT to and I think the portables are doing quite okay as well. We have seen strength in the marketplace. I would assume that competition is also doing well in this area.
On the second part, can you repeat a little bit? I didn't follow exactly the growth and related to Brooks acquisition, I think it was.
Yeah, that was the question. I was just interested in the Brooks business you've just bought, what sort of growth trends they've been seeing year to date, because I know you mentioned a revenue number of about $150 million. I believe it was close to $200 fairly recently. Just interested to know where that business is versus recent peak and the trends that it is seeing.
No, exactly. I was just curious when you said growth and what you read into it is actually negative growth, but then I'm with you. Yeah, we saw the last annualized number in August last year when we announced the acquisition at just short of $200 million, $195 million. Now we have seen that very similar to many other suppliers to the same semiconductor industry, including ourselves, as you know, during Q3, Q4, Q1, there has been adjustment to a completely different level. That, I think, is basically what we confirm here. Now that we have closed the acquisition, we see more an annualized number in the region of $150 million. Of course, we also bought a 50% share of a joint venture of Ulvac Cryogenics, and that is still at an annualized revenue level of about $100 million. Is it a negative trend?
No, I would say compared to where we were a year ago, it's clearly negative, and it's very much the same type of picture if you look at other companies and also including our Vacuum business that is exposed to semiconductor customers.
Okay, great. Thank you.
Yes.
Our next question is from Matthew Spurr from Exane BNP Paribas. Please go ahead. Your line is open.
Good afternoon. I had a question back on semiconductor markets again. If I look at your order numbers and then compare that to your commentary, it looks as though you have gone down sequentially. Once you adjust the currency, you have gone down sequentially from Q1, which you obviously say the technology products stay at a high level. Industrial, I think you said, is flat sequentially. Obviously the more run rate semi has declined. Is that pace of decline slowing down from earlier quarters? I wonder if you could give some color on whether you think we are sort of approaching a bottom in general semi markets, excluding your market share gains in technology wins.
If I start, Mats, you jump in. It is true that if you take first quarter to second quarter, you can see clearly that there is a lower order intake. We should also see that these oscillations between the individual quarters for Vacuum Technique has been a feature already before. A number of times, we have had a Q1 that was very strong in 2017. We never believed it would repeat itself in 2018, but it basically did. Now we have a good Q1 again. I do not pretend to know that there is something of a season in it, but it just happens to be like that. In contrast, we see basically that from the first half of 2018 level, the semiconductor part of Vacuum Technique really shifted to a new level. That basically is the level that we have seen since.
In the Key Accounts business, you will see Q3 being a little bit weaker last year, and Q4 looks like a sequential improvement. In fact, it is just where specific orders end up. I would say the same, that for Q1, Q2, that it is not signaling any underlying basic demand trend that is very clear in our book settings. From a sequential point of view.
Okay. Understood. Okay. Can I have a quick follow-up on the acquisition there? You said about the JV, I think you said you're not consolidating it, but are you going to report it as part of the EBIT like some peers do, or is that just reported separately, lower down the income statement?
That's what we know for the time being, that it will be included in the operating profit, yes.
You bring the after-tax into the operating profit, yeah?
That's basically the truth of today, at least. Perhaps IFRS will guide it differently before 30th of September. No, that's what we will do, yes.
Okay, thanks.
Thank you.
Our next question is from Alexander Virgo from Bank of America Merrill Lynch. Please go ahead, your line's open.
Thanks very much. Good afternoon, gentlemen. I guess just a quick one really on your guidance. Mats, you've talked in the past about how surprised you have been that the weakness in auto hasn't fed through into a broader industrial malaise. I'm just wondering, when you think about that sequential guidance and demand, how much of it reflects a change in trends of what you're seeing in Q2? How much of the weakness in the small, medium-sized compressors you've seen might reflect some of that transfer of demand, if you like, from auto into industrial? Whether or not you can just talk a little bit about the complexion of China within that somewhat lower demand sequentially.
I think if you look at our business and a little bit throughout, if you take the industrial compressors, they group a lot into general industry accounts. If you take the general industry business under [audio distortion] brands for Industrial Technique, this is where we have seen a little bit of slowdown, especially in terms of what happens if you still get a lot of growth and you still operate in one of it takes time occasionally from closing to decision. That is maybe leading in some or many of the divisions today that this daily business that if you are uncertain, this is the easiest thing to stop or at least spend a little bit less on.
This is what we mean into this different divisions and it correlates fairly well between the industrial compressors and the general industry and demand and industrial vacuums as well. This is what we have seen, this is a little bit based on the comment in the forward-looking statement as well.
Okay, thank you. A quick follow-up on VT. Just wondering, the Key Accounts impact in the quarter outlook, any indication of size on that? What would the underlying decline have been?
Excuse me, I missed that exactly.
Sorry, Hans. I was just wondering, you call out Key Accounts strong in the quarter and weak in Q3, or weaker in Q3. I am just wondering what the underlying decline would be.
I was saying that due to the fact that it is dominated by Key Accounts, it is very difficult to identify by looking at each quarter number whether the underlying has improved or not. On the contrary, we think that after the first half of last year, 2018, we have from semiconductor demand have had pretty similar. It is different between Key Accounts, it is different between geographies, but that it basically has hovered around the same level since. That is what we expect.
I think the only thing that we can see stand out in both Q1 and Q2 is the China investments that they seem to be very determined to execute on their program. That business has been good to us over the last two quarters.
Very clear. Thank you very much.
Thank you.
Our next question is from Gael D e Bray from Deutsche Bank. Please go ahead. Your line is open.
Well, thanks very much, and good afternoon, everybody. Can I have actually one question for Hans Ola and one for Mats, please? Firstly, could you comment on why there's been such a working capital buildup in Q1 and now Q2 as well, despite much slower revenue growth than a year ago? That's question number one . Question number two is on the growth opportunity in blowers. Could you perhaps give us an idea of the market size, your market share, and the various applications for low pressure here in which you think you have some edge? Is it wastewater treatment, conveying, or just other markets? Thanks very much.
I'll start on the inventory. I think we communicated a couple of times in the quarters that Brexit has an impact on inventories for us, where we build stock in Vacuum Technique to make sure that we can meet the expected delivery time for our customers. As you know, we don't know the outcome of this, but we make sure that we have enough of that. We have a similar situation with a product line out of China, where we have built up stock in the U.S., principally for the same reason of the trade. In Power Technique, we are then following regulations when it comes to environmental friendliness. We are beefing up our inventory on Generation five engines as well. Those are some of the things that are a one-time effect. We also have a little bit of some vacation type of impact in Q2.
The bigger one, I would say, you can see in CT, where you have the long-term orders that we build up and deliver on time, but it takes a little bit of inventory, and the lead time is longer, and the supply chain is longer. Have I missed something, Hans on the inventory there?
No, I think that's true with respect to your comment on the outlook, the hesitancy by some customers.
That is true as well.
To take delivery, which then, until that has leveled out on the inventory side, it has an impact. To follow up on the blowers.
No, I think that on the blowers, it's something we are expanding into. As I said, we're not the market leader, and normally when we look at an opportunity like that, we get the competence right first, and then we get the product portfolio correct, and then we really go after the market. I have not any specific numbers on the size or customers there right now. What I can share with you that we are not the market leader, and we look forward to launching new innovative products in the market, which in the past has proven to be very successful for us, and it normally indicates an energy efficiency that we are driving for and an easy way for us to service the customers.
Okay. Thanks very much.
Our next question is from Andrew Wilson from JP Morgan. Please go ahead. Your line is open.
Hi, good afternoon, everyone. I just have a quick question as a follow-up, I guess, on the vacuum margin. I think the previous commentary you've made has been around a similar kind of three- cycle margin to compressor, but perhaps with a little bit more volatility. I guess just purely observationally over the last few quarters, despite what's been a big change in volume, you've actually clearly done a little bit better than that in terms of protecting the margin. Now, appreciating that FX has helped, do you have any updated, I guess, guides or thoughts or even your own impressions of whether you've been surprised by just how resilient that margin has actually proved to be?
No, I think the characteristics of these two markets are different, we are believing that they are different. It's more a stable demand or supply to the compressor market, it's much more balanced. We also have a higher share of service in that sense. What I'm trying to communicate around them is more like that it's Key Account driven. As long as these Key Accounts are placing orders with us, we are in a very good position to gain market share, which we're doing right now, it is the result of course, the greater swing in terms of the greater swing in operating margin. Over time, we believe it should match in principally where we are with CT. I think it's the greater swings, but we are targeting to be up there in higher operating margins.
Thank you.
Thank you. We have completed the hour. Even if there might be some questions still to be asked, I hope that with the help of our IR department directly to me or anyone, that we can help you with those questions that we didn't have time for. With that, I thank everybody for participating, wish everybody a nice summer. Thank you, speak to you in October again. Thank you. Bye-bye.