Ladies and gentlemen, welcome to the Atlas Copco Q2 2018 Report Call. Today, I'm pleased to present CFO, Hans Ole Maier. For the first part of this call, all participants will be in listen only mode, and afterwards, there will be a question and answer session. Hans, please begin.
Thank you very much, and welcome to all of you to this Q2 conference call. As you just heard, We will do a brief introduction or rather Mats Ramstrom, our CEO, will do a brief introduction to the report. And then as we also heard, we will have a question and answer session.
So I think with mindful of
the time, we go straight at it, right, Mats?
Yes. Thank you, Arthur Ola. And I will start on Slide number 2, which we call strategy in action, and it's to give you a little bit of insight on how we work. From time to time, I get the question a little bit, how can we continue to develop our compressor technique business and find new applications. And I think this is a good story that we have here.
This is a fairly big, as you can see, centrifugal turbomachine. And they come in sizes of 1, 23, and this is a size 3 that we just have launched this year. It's actually up to 35,000 cubic meters of air per hour. So it's a quite a big machine. And it's a machine for big manufacturer electronics.
It could be semi, could be steel, pharmaceutical or food, for example. And when you look at this, the way it worked in the past was that this was rather complex installation for this. And from our side then, a lot of engineering, not so much standard, normally also meant lower margins for us. The team has now built up the Science 1, 23, and this is just about it has been launched. And now I don't know if you can see it, but if you look at the picture, you can see it's built more out of standard modules now.
So when we get quotations of this now, we can actually quote rather quickly. We can shorten the lead time. We can build a standard product for the customer that is still special to them. So you can say the way of working like this is really how we can build organic and very profitable growth. So customer gets a very unique centrifugal with low energy, high energy efficiency, shorter lead times.
It's a win for environment since it's a very energy efficient product. And for Atlas Copco, then we can manufacture and have a little bit higher gross margin and product like this. So it's a little bit of a good story how we continue to build the business step by step. And the launch of this product has been wave our expectations. We have twice as many orders as we actually predicted.
Then we can get into the numbers on Slide number 3. So before that, I should then say that it is actually the 100 report from 1st 1 year.
So I thought you had forgotten that.
So we have supported 5 CEUs so far. And I promise him it would be a good report, and I kept my promise, it's the best report we ever had. So record orders intake, we can see that we have the support by the market in most of our segments. We can also see that the record number of products that we are launching getting full acceptance and traction in the market. And by doing that, I can also see that we are gaining market shares in many of our divisions.
You can see that we have growth in all major areas, and I will cover that a little bit later. Record revenues. I made a note that in 2016, we did €101,000,000,000 in revenues, And now you can see that we are at 24.5%. In principle, the 101 we did, including the mining business at the time. It's quite a steep development of the revenues.
The best indication on the 24.5, I would say, is that the manufacturing team has done a fantastic job with the output of the products. There's still challenges left, but I think step by step, they take this. And I'm pretty sure we don't lose any orders on long lead times. So we are very competitive. Record operating profit and up 18%.
We continue to challenge ourselves. This is a very good quarter, but we still see areas of growth and opportunities, and we continue to challenge all the 21 divisions. We then go to Slide number 4 and maybe start on a look at the graph. And the light gray on the right hand is the revenues. And you can see it's clearly a record.
So once again, the delivery situation has improved quite a lot over this quarter. And the record orders, you see that as well. So orders up 10%, revenue up 11%, profit up 18%. And then if you look at the cash flow, that is then including the discontinued operations, and Hans Ole will guide you on that a little bit later. Move to Slide number 5.
Start in North America. You can see 11% up for the year and 16% for the quarter. I think that's quite a strong development. Happy about that. Looking at South America, you can see the 4% of our business there.
The lion's share of that is now in Brazil, and we don't have the Epiroc on board anymore. Also very stable development for Brazil. Strong Europe, up 13% for the quarter and for the year. And if I go a little bit south, you can see that 5% of our business is in Africa and Middle East. And it is so that the African countries where we are is actually continuing to grow.
And this minus 1 for the quarter is related to the Middle East, both for GAAP orders that we could not replace from last year and also a little bit on the vacuum side. Continue, you can see the strength of Asia being 37% of our business for the year, down 12% up, 8% for the quarter. Maybe you can see them well, that's a little bit of less positive, so to say. But that is related to what we also guided on later on, on the vacuum and semi. So that is the influence of the all the other businesses continue to do pretty good in there.
From an output, I think that Middle East is the one area where we have not really seen the business coming back yet. So maybe that's still to come on an upside for us. At least you can see oil prices have increased quite significantly. Otherwise, the growth in all the regions for all business areas with the exception then of the Middle East. On Slide number 6, you can see that we have 8 quarters of organic growth, which I think is the most profitable growth that we have.
And of course, we can gain market share. We can have a little bit of help. But the most important for us here is a little bit of transformation of technologies. I can see in my old air industrial technique where we took it from air, took it to electric and now we take it more to connected tools. So that transformation generates a lot of value for the customer and also value for our shareholders.
You can see in compressor technique that more and more the technologies go from traditional compressor into VSD technology. Sheath like that is very important as well. You can see the centrifugal where we have redesigned the centrifugal, making it much more efficient for our customer. As I described in the first slide, this is also very interesting. And this is I don't mind at all putting money into R and D if we can see that we can find these transformation areas.
Slide number 7. I think I commented on most of it. You can see the currency then going from negative positive, so 2% both on revenues and what we should see. And Hans Ulle will guide you a little bit later on that. Then we come to the split of the business on Slide 8.
And I'm, of course, extremely pleased to see that compressor technique is doing so well considering the profit margins on the size of our business. Looking back a little bit, we have had industrial being very strong. We have oilfield being very strong, continue to be strong business. And now we can also see that the gas and trusses business is strengthening and also positive for the smallest compressors in the cloud. So very positive outlook for compressor technique.
If you look at industrial technique, we can see that for many years, MDI has been extremely strong with a strong drive in Asia, and that continues. But I would say over the last two quarters, we can also see more of the traditional general industry business being off road accounts, for example, aerospace and other general industry, and that's also now being fairly positive for the quarter. In vacuum, of course, semi equipment has been a huge driver for the business. And now we can also see service business continuing to be strong. And in Power Technique then, we have rental have been strong for us, also the portables.
And this course, we can also see quite a big improvement of the generator and fuel business. Essentially, the bit of drivers in the different business areas.
And let's step
into Slide number 9 and take a look at the compressor technique. I would guide you to look at the graph first, and the light gray one, which is the output, the revenues on the record levels. And this is an eye, of course, where we have had challenges. We have reported that there were a number of quarters. They still have some challenge on some components, but step by step, I think they take this challenge.
And I think we deliver on our commitment to be a little bit better every quarter. Orders received. I think it's an amazing quarter, really strong. And if you then look at the record profits at 23.4 percent and that includes a little bit of a negative currency as well, I think it's an outstanding result for compressor technique. Another thing that is outstanding is this new launch of the oil free platform.
It was the big launch a few months ago internally in the big event, and we will actually bring this to the Capital Markets Day so you can get acquainted with this fantastic product. 10% at least more efficient than our old product, that's huge money for our customers. And compared to other products, then it could be up to 35% more efficient. So this could be a game changer and a really nice product. This is Slide number 10, Convector technique.
And I'll try to clarify a little bit what we think about this industry. So you can see, it's a solid order levels, organic growth of 8 year on year. And if you look at some of the characteristics of the business right now, We can still see that the utilization of the semi factories is still very high, and we can see that on the development of our semi service business. That's very high as well. We can see our industrial business continue to be very strong.
So industrial and the Bouff Services division are continuing to give in a very good way. But then we say then on the key account business, which is equipment business on semi. And there you have geographically a number of accounts, not that many. But it is a key account business, and it's not so that when we say that business is going to be somewhat slower, we don't mean that all the accounts have stopped buying. There's a certain number of accounts where we see less activities in the coming quarter.
And to counter that a little bit, we continue with our internal efforts to strengthen service, and we do that successfully in the 2 areas, semi and industrial and also the industrial products. And there we increasingly launched tons of new products under the different brands. So we're helping ourselves a little bit on that. Some of the external factors we can see. IC sales, it's continuing to be strong.
Utilization is strong. Pricing for ships is, I think it went up a little bit. It was flattened down a little bit. But we don't see this as a general trend for the complete industry. It's more a
pause between some of the key accounts for the coming quarter.
Operating margin, 25.8%, very pleased with that. And you can see one of the new products. This is also quite a nice product that we will launch now into the market. This is an industrial product. We move to Slide 11, that's Industrial Technique.
Strong and record levels of orders, continue to see strong Asia, strong Europe. In the beginning of the year, it was a little bit more challenging in North America, but I still think this is where we're catching up a little bit. So I think that's strong even stronger than is the development of general industry accounts, principally everything outside the motor vehicle. And they also handle the revenues in quite a good way for the intent to catch up a little bit during the coming weeks, actually working throughout the summer. And you can see the margin at 23.4% as well, which is very satisfying.
On the product, try to bring a little bit of product to our business area. This is also interesting product because normally you take it to test it on the line. But this new development makes it possible then to replicate a joint characteristics in this bench, which means that you can be very much more efficient when you service tools or exchange tools online. So this is something that our customer will like. Shower Technique
at
Slide 12. Continue with organic order growth of 5%. Strong in Europe, Africa. We see a little bit of flattening business in India, but all the other business areas are doing quite okay. This is more of a seasonal effect for them, and this is the area where we see a little bit of seasonal effect.
We could see both revenues going up, but at the same time, you can see the margin a little bit lower than we expected. And a couple of things that influenced this, we have increased power and flow quite successfully in volumes, but that has less margins. And then we also have a little bit of the strategic changes that we have done over the last year and a half. We can see a little bit of under absorption in cost. This could be, for example, when we moved the hydraulic attachment service in Trapper Rock, then we have a little bit other absorption that it could be in logistics, for example, and things like that.
So it's a little bit of an issue, but step by step, we will also improve that. Also, interesting product, combining a compressor and a generator in one of these tools, I think it will be a very interesting company for our rental companies. Then we go to Slide 13. And then I think I will get a little bit of help from Hans Ole.
Well, let's look at a little bit further down the income statement and just not spending too much time because the numbers you have seen. As you saw in the report, the financial net improved, I should say, from a negative of 395 to a negative of 200. The last year, of course, included an extra interest charge, as you saw in the report. So it's both periods also include some one costs. So perhaps it's most valuable for you to see look a little bit ahead what to expect.
And I think that we apart from the fact that we cannot judge certain extra and one times that come. But on the run rate, I would rather think that we are at 100,000,000 to 125,000,000 dollars in the interest net going forward per quarter. So it's coming down considerably compared to those 2 quarters that you see on the slide, but that's what we expect.
Further down, you
see that the tax rate also came down from last year, and we think there as well that this is a reasonably good estimate of what you should expect in the near term. Somewhere around the 25% mark is what we think. If I refer back to some comments earlier this year, you might remember that when we come, let's say, into 2020, for example, and helped by further corporate income tax reductions in the world, we are more looking at somewhere 24% to 25%, so a bit lower again. But that will not happen until primarily we see the corporate income tax reduction in Belgium, which is about to happen in 2020. But it's already decided.
It's just that it's not happened yet. I think I move from there and into the Slide 14. You see for the whole group that the effect of volume, price, mix and everything, so to speak, the organic generation of profit in relation to organic revenue growth was 27.5% or, let's say, a little bit less than 30%. As you remember from earlier, we had talked about that, that with the composition of Atlas Copco Business Model, that is probably what one should, over time, expect from the company somewhere in the region of 30%, perhaps 35% as a drop through from revenue growth. And the reason for that is, of course, that we are not 100% levered.
We buy a lot of sourced products and we don't get the full 100% value add on that. The currency impact from a margin point of view was pretty neutral in this bridge, as you can see. On the currency, with €75,000,000 positive in absolute value in Q2, again, looking ahead, we believe that in Q3, the similar comparison quarter on quarter, year on year will be somewhere €200,000,000 to €300,000,000 positive perhaps. So always as always, very difficult to predict with accuracy, but somewhere in that region. If we turn to Page 15, again, I repeat that 30% to 35% for the group is what we think is pretty long term achievable from revenue growth.
And here you can see that we have variations between the business areas. I think the compressor technique and vacuum technique results are not so let's say, not so much to say. They have been almost at 50 or even above 50 in 1 quarter and then they are 35. So I think still we see that it's moving towards more of a long term sustainable flow through margin in this quarter. Industrial Technique is spending perhaps relative to the size more than the others when it comes to really moving on next generation of products, etcetera.
And that has been affecting to a certain extent the how much drop through you see there. In Power Technique, Mats mentioned already, it's mostly a sign of, let's say, that the absorption of the existing costs is difficult to adjust. It's difficult to adjust the structural changes like selling the light and concrete business and to leave, let's say, the hydraulic attachment business to Epiroc, which has happened in a fairly short period of time. So over the next couple of quarters, we definitely hope that, that will show improvements. If we move to the balance sheet on Page 16, I think you can see for yourself that's pretty dramatic changes in one way, but not so dramatic if you consider that it's Epiroc, the distribution of the Epiroc business that explains the big reduction.
Basically, it's that and the mega distribution of cash that we did, both the annual dividend and the redemption. That's the main changes in this $43,000,000,000 reduction between March June of total assets. Moving to 17, cash flow. I think it comes quite a lot from the balance sheet changes. And we have said in the report, we have $3,100,000,000 in operating cash flow compared to $4,800,000,000 last year.
And the whole difference is to be found in the way that the change in working capital has been in Q1 last year versus Q1 this year. This is not surprising compared to if you look at the order trends that we have had for quite a number of quarters. If and alluding to what Mats said initially, if we try to in unofficial numbers and that's why we cannot write them, but we have, of course, possibilities of estimating what it would have been excluding discontinued operations. And then the last year number would have been roughly SEK3.5 billion in operating cash flow for Atlas Copco continuing operations and this year roughly SEK 3,000,000,000 because or just short of SEK 3,000,000,000 and which means, in other words, that the change in working capital is primarily within the discontinued operations. That's the quick summary of that.
So with that, I think we move on to Page 80, the final one, and I'll leave that to Mats.
Okay. I tried to take you through a little bit our reasoning around the outlook. If we start with the CT business, as I asked, being truly the bigger segments, we see the big machines are doing well, Industrial products are doing well as well. And also, the smaller products are doing fairly well. So there's really no reason for us to see an increase in that business.
On the other side, there's no reason for us to decrease the expectation on that business. So there are many segments in the market, and we have a fairly positive view on development there. So we just remain at the current high level. On Industrial Technique, you can see that we have a strong outlook for many years. I think that we had a strong outlook this quarter as well.
And I think what could impact that industry is more a little bit the tariffs and maybe the trade wars. It doesn't really matter to us. We have good market share in Europe, and I think that the whole industry could, of course, be impacted. But it's a little bit out of our control, so we're not going to predict that. So then we say it's going to continue in
a strong level. And the
general industry has picked up and we see good numbers for Q2 as well. The power technique, although that we're trying them to, we are in the construction business mainly. We are trying to get in more on the industrial business in this business as well. But as we see except for the seasonal effect, we think it remains on a good level. On the semi side and the vacuum side, no reason for us to say that industrial, I think that follows a lot of the city, what I talked about in the general industry.
So we have a positive view on higher cable level there as well. And as I said, both service divisions, both for semi, which indicates a high production rate and also industrial side is doing fairly well. And what you said, the semi key account business where we can identify in the coming 3 months, there is a number of key accounts that just take a pause in the CapEx investment, and that is the prediction we do there right now. And that's why we have said that we remain on the current high level for most of the segment and we say somewhat down there in TMS.
Thank you, Mats. With that, we move over to the question and answer session. So operator, if you would just repeat the procedures, please.
And the first question comes from the line of Lars Borsakov of Barclays. Please go ahead. Your line is now open.
Hi, good afternoon, gentlemen. Thanks for taking my Matt, I have to start just with the trend and outlook for semiconductor equipment, perhaps unsurprisingly. You're stressing a few key accounts in the coming quarter. I wonder whether you can give a little more color on what you see drive lower spending in these accounts. Is it more on the display side compared to the semi side?
And also, as I said, you are stressing 3 months. I wonder whether it sounds like you see there's more sort of a short term air pocket with some demand deferrals or spending deferrals, not a broad based slowdown. But I wonder what sort of visibility you have on spending specifically in these accounts to suggest that, that might resume in Q4 or early 2019?
It's a good question. Difficult to answer though. Of course, the vacuum division, they can probably look 12 to 18 months into the future, but with a lot of uncertainty as to what's going on. And we have then decided that we're going to comment on the coming quarter in our statement. But when it comes to a little bit the customers, I think you'll get a little bit of guidance when we looked at geographical maps where this was somewhat a weaker business.
But it's not all the accounts. As I said, we continue to see good CapEx spending in some accounts. It's just that this quarter, when we look 3 months ahead, we can then see that the activity and the recruiting level on some of these accounts is significantly or it's lower, I should say. And that is what we can predict. And I will get back to you at the next quarter report and give you another 3 months what we see down.
It changed quite rapidly, and they changed their decisions. And as you know as well from some of the other reports, some of these products end user probably go into consumer products, they see even a little bit of seasonal effect there. So I don't think when we state this, if you follow the semi industry, you follow the other reports in this industry, it does probably not come as a surprise to anyone. But that is what we can say at this point.
And the next question comes from the line of Brian Phillips from Jefferies. Please go ahead. Your line is now open.
Yes. Thank you, Graham Phillips. Congratulations, Hans, on the 100. I hope we get the next 100 from you as well. Just again on vacuum technique, when we look at the drop through margin and thinking into the 3rd Q4, and you obviously have guided that it would have come down from the figures we were seeing last year and the earlier part of this year.
What's the risk that it could undershoot that sort of range if we get a weaker mix because I presume semi is higher margin than general industrial. And I know you're building up service, but is that going to be enough to compensate? Or is there a risk we could undershoot?
From a margin point of view, of course, there is a difference between the different areas. We have an industrial sector that is growing very nicely in industrial applications, but it's also, of course, at the level where you're building presence and you're building new product launches, new product offers, etcetera. So there is no doubt that we have differences, and
I think we have commented on that
before. The real importance, and I will not end this comment with giving you a percentage of margins of FICREA, but the focus of vacuum technique and as you know since long of Atlas Copco is to make sure that we have agility and resilience enough to weather even periods with weak investment demand or, let's say, equipment demand from customers. So we have seen no big difference when we look at vacuum technique from that compared to, let's say, the rest of Atlas Copco. In fact, there are certain parameters where vacuum technique is even ahead in terms of possibility to be agile when it comes to manufacturing resources, etcetera, etcetera. The difference with compressor techniques is, of course, that they don't have such a big profitable service business, but it certainly carries the same type of less volatile profile than, for example, compressor technique.
Yes. Okay. And then the sharp drop between the 1st and the second quarter from 52% down to the 33%, was that caused specifically by things like cost price mix or a step up in
R and D. And when we're thinking into the
future, the extreme ultraviolet that we learned when we visited the facility in the UK here, I would imagine that is higher margin. The mix is obviously quite low at the moment. But if you look at ASML and the volumes that they're talking about putting out on that and other customers may take that up as well, should that not be positive and result in a higher drop through margin on this division versus others?
I'm sure it will, but everything that you saw in those displays and what you hear is, of course, a way to describe why we believe this is a very strong area for the future. It doesn't mean that one can translate into a walk through for the next quarter, etcetera. You heard about how this was an interesting talking about EUV systems and that but it's not the reflection that we can predict even the number of orders growing very steadily over each quarter. But on that, as you said, 52% to 35%. I just encourage everyone that don't make too much of these percentages in detail per quarter because it's out of our hands to know even beforehand what it will be.
So that's why I think if you take the average of that, you get a very high number still, and that is showing we are still in a situation where we are investing in order to cope with the capacity. Hence, we are not surprised that revenue for revenue, extra revenue doesn't give exactly the same impact on the profit as we speak. But it's impossible to say that the now the next quarter we report now with this outlook, we will look for 12% or 13%. It's absolutely impossible. So again, I come back.
We know afterwards when we have reported, but beforehand, I can only guide in the sense that I said that the 30% to 35% is probably what you can expect but over a period of time. Okay.
Thanks very much. I'll get back in line.
Thank you, Graeme.
I can also comment a little bit on what we see and the interest for us in semi in general. And I think this is I understand that you might want to focus on the quarter sequentially what's going to happen. But when we look at it, we still see the underlying demand for this type of products increasing over time. If that's 1 year or 2 years or 5 years, it doesn't really matter that much. But even when I see our own factories, I can see how we work with the connected products.
They work with edge computing, forward computing even cloud then. So I see that's how we gather all this data. You can see that how compressor technique is working with the digitalization. Our industrial tech doing the same thing. So it's a very clear trend that we will see more and more the connected factories.
I think every new car you step into today, you can see that more of them are also connected in a very good way. And I would say, especially if you look at the new Chinese models, you can see that they are very detailed in the way they look at it. And of course, everything else we do with our electronic gadgets. And this is the real reason why we want to be in this business and invest in this business. So to have up and down in quarters, I think we flagged for that, and you know the industry as well.
But this is the reason why we think this is important.
Thanks, Jan.
Thank you.
And the next question comes from the line of Sebastian Couture from Redburn. Please go ahead. Your line is now open.
Hi, good afternoon. One question on the on trade tariff. Do you face any impact on your product components or supply chain? I think that you must do facilities in China and do they export to the U. S?
Thank you.
First, maybe I should comment that we are really in favor of free trade. And we don't think there is much of winners in this, what's going on right now. But we have looked at what we do manufacturing in the U. S. And what we import in terms of I think you have the aluminum tariffs, you have the steel tariffs, then you also have this 800 Chinese product that have been identified as getting a little bit higher than tariffs on those as well.
And if we apply price increase between 10% 15% to the components that we use in the U. S, If that is a good scenario or not, you can debate, but that's the best one we have. So the direct impact would be less than $10,000,000 But that, of course, we try to counter with price increases, efficiency changes, supplies as well. So I don't think
it's not it's more of
a risk of the economy, I would say, that some of these things just taking industry down and they get nervous in terms of investments. But in general, the direct impact is not significant.
Okay. Quite good. Thank you.
And the next question comes from the line of Peder Vohlen from Handelsbanken. Please go ahead. Your line is now open.
Thank you and thank
you for taking my question. Coming back to the semis, sorry about that. But if you look at deliveries and your order book, you saw deliveries increasing very sharply year on year but also quarter on quarter with 5% or so. And could you make and here you have talked about you need to invest in capacity towards the mid demand. Is it fair to assume that deliveries will continue to sort of grow sequentially despite then maybe orders, at least on the semi part, seems to be coming down?
That's my first question. And secondly, regarding the your outlook statement on demand, you're very clear to talk about other parts within the vacuum technique doing fine. So in order to try to sort of get the key account part out of that and assuming that semi is on the equipment side, maybe just shy of 50 percent of the vacuum business, would the others compensate that you could have flat demand for the entire vacuum technique? And then I think I stop and get back in line.
Yes. On the revenue side, as you point to, I mean, we have built up quite an order book in vacuum and particularly on the semi side, of course. And as long as no one pulls the panic stop, which they don't, we continue to deliver on that order book, which means that it will continue to be a strong revenue quarter. That's everything that we can see and expect on that one. We the previous comment, as you understood, I know that it was on the order situation and you will improve.
So no, we don't see that you should expect that to suddenly stop in any way. It will continue. Exactly what it will be is, of course, extremely difficult to predict, and that's why we don't do number projections. You were asking about the
On the semi a little bit. And I mean the semi part, the business ASIs, we can obviously see fairly easily. And then you know that 60% of that business is related to semi and maybe then take out a little bit of the semi service, which we think is going to continue to increase. And then we cannot guide you exactly how much it will be, but at least we can say we can see in this some key accounts that we'll see less business in the coming quarter. I'm sorry if you want more, but that's where we are.
And then of course,
we continue to repeat that we are talking the sequential development in our outlooks and comments, as you probably know, all of you on the call, but just to make sure.
Yes. But I mean, again, when you deliver, your deliveries goes out. The order book is a lot of some equipment in there. And hence, the leverage questions get even more interesting. And it's still delivering a healthy product in terms of mix when you produce.
So my question is really how much of increased investments have you actually seen affecting your cost base in the quarter?
I mean could it
be massive? You order a lot of equipment, of course, and have they come in more as a bunch in the second quarter affecting leverage? Because I don't see that the actual deliveries being that much of a change in the mix between semis and industrials.
No, no. But I mean, I just come back to my previous question. We don't actually, we don't see the drama that you seem to see. I we have talked for 3 more calls about continuous investments in order to make sure that we don't just have capacity to meet the order book, but also to have the margin in installed capacity that we always want to have. Those costs, if you see it like that, is coming on gradually.
It's not that it didn't come at all in Q1 and everything comes in Q2. The reason why this famous flow through varies is because we are cutting every quarter, and that is not helpful if you want to understand what is the real business development over a couple of years. That's why I keep coming back to that 30%, 35% is more what one should expect, both from vacuum technique and compressor technique and industrial technique over a longer period of time. There will be lots of variations in each quarter also in the future, I'm sure.
Yes. That's very clear. Thank you so much for that. I'll get back in line. Thanks.
And the next question comes from the line of Ben Uglow from Morgan Stanley. Please go ahead. Your line is now open.
Good afternoon and thanks for taking the question. I had a couple. I wanted to come back to Deloz's question at the beginning. Mads, could you just give us a little bit more color perhaps on the reasons that some of the key accounts are kind of giving for deferring the CapEx? I mean, is it a case of overbuilt capacity, too much memory, concerns on pricing?
Is it about smartphone or display? Just give us a qualitative sense on why they might be sort of holding back? Or do you feel that this is all very company specific? So that was question number 1. Question number 2 is could you say just a little bit about the quoting activity in China?
Because obviously, they are still in a long term CapEx build out in semi. You've been involved in some of the projects. How does that pipeline look over the next 6 to 12 months? And a very final question just on tariffs. I appreciate that your direct exposure is limited.
Are you hearing in the market, and I'm not necessarily referring to Atlas Copco, but are you hearing anything about component shortages and or stockpiling? So those are my questions.
Okay. If I start with the end user products, we normally don't break it down that way. Maybe that's a good question for some of our customers, and I'm sure you follow them as well. But already in Q2, I think there was a little bit of flagging for the smartphone, both for the major brands, so to say. So maybe that is one of the reasons why you say, do we have enough capacity at this point?
Do we continue to invest? But we have not heard any customers saying to us that, okay, now we have fulfilled this and we are okay for the coming years. It's more like to say we take a pause here and we look at our investments. And of course, when the investments come together with maybe a couple of competitors, we are up there to quote on this. So we don't see that specific end user product with the exception of what we already said in Q2 from some of our customers then.
What was the second one?
The liquidity in China specifically, John?
It's I think they we have been very happy with the orders we have had over the last few quarters. They are part of the region where we see less activity for the coming quarter. And when they are back, I don't have the details on that actually. So I skipped a little bit on that one.
And on the tires, shortages of components, if we hear something. In Bakken specifically? No, no, no. That was generalizing then.
Can you repeat it was,
yes. Yes, just I mean in terms of components across all the businesses, are you seeing any evidence at all or hindering just in the market in the channel that there is a sort of stockpiling or an inventory build in components? No. I think
in Fiji, it's still the foundry goods that is the number one thing that we are hunting down to make sure that we have enough supply. You can see in Industrial Technique, I think they are on the electronics a little bit, that they hunt down components. Less. I don't think it's piling up anywhere, at least not from our product ranges that we have. We have the change in regulation on emissions again, I think, for some of the portables.
And that will be in our inventory going forward, I believe we'll have to buy a lot of those this year already. But it seems significant for the group, of course.
But you guys are fine in terms of your own sourcing, there's no issue at all?
We are not we are doing better and better, but it's doing a fantastic job. But there is a lot of challenges that pop up on a daily basis in our operation when we are trying to increase capacity at our sub suppliers. And many times working together with them, even going to their sites and helping out. So there is a lot of activity and a huge commitment to deliver products on time from our teams over here. So we're not out of it.
I'm just saying that step by step, we are getting better. And I don't see any of our competitors being better. So I think our lead times are competitive.
And the next question comes from the line of Gael De Bruy from Deutsche Bank. Please go ahead. Your line is now open.
Hi, thanks very much. Good afternoon, everybody. I have two questions, please. The first one relates to vacuum technique. If we actually assume that the semiconductor segment enters tougher times for more than just 1 quarter.
Then how do you judge your ability to product to protect margins? I mean, 4 years ago, the margins at Vacuum Technic were probably 700 bps lower. So I mean, based on what you've done to develop the service offering, but also to expand capacities, Is there a way you could help us understand what could be the new trough margin for that business? So that's question number 1. And then the second question is for Power Technique.
I think you mentioned primarily a seasonal effect this quarter to explain the lower performance. But it seems there also been a sudden change in demand for Power Technic in Q2 versus Q1, at least, with the order growth falling from 16% to 5%. So it seems there is a bit more than just seasonality. I mean if you could elaborate on this.
If I just start and we take it together on the down in semi, well, your view is your about the long term down in semi. We won't comment on But what is the margin impact? Well, we talked as we have never done before, we will not start by guessing or projecting the margin if there is a downturn. But we come back to and say that when we look at the vacuum technique business over both good and less good times, let's say, a business cycle, we have no reason really to see why the profitability over such a period should be very different from compressor
technique. That's
a little bit my only comment. And then in more detail about what does it mean in the near future and so on, I will skip that. Mats, you I was thinking
about the margins. And then if I back it up a little bit in the troughs and all, one of the key characteristics of the segments and the product that we might to be in are products that are important for the customers' process, maybe a little bit smaller in terms of the CapEx. So I think that when you understand the process and if we can continue to bring innovation to our customers to pay premium for a better product, the impact is huge for them. And to exchange something where we have the process understanding and the right product for that application is unlikely. So I think in that sense, we kind of just strategy starts by protecting that we do something that is a good to customer.
Yes. So in other words, we stress a lot to be in the right segment of a business in order to limit the exposure of dramatic price cuts, let's say, from
the customers. And it's important that we continue with the innovation.
Absolutely. Innovation and then agility. And as I said, I mean, vacuum technique is definitely in line in some parameters ahead of the rest of the group when it comes to the possibilities to adjust both in speed and in size. And of course, that remains to be proven in the case of vacuum, but you have seen it in Atlas Copco in previous times. Then on the Power Technique orders, was it more than seasonality?
Well, if you when we say seasonality, it's the absolute level that we comment. If you go from Q1 to Q2 to Q3, you will see certain seasonality. The growth slowdown is very difficult to say whether 'sixteen was a reflection of a specific quarter and 'five is a reflection of another quarter. Is the second one bad? And is the first one top quarter?
Very, very difficult to assess in that way, Gale. So over 2 quarters, you could also phrase it that we have grown by 10% roughly. So yes, we think that is pretty okay.
Okay. So basically, there was no change in the underlying demand, for example, in China, something like this?
No.
And the next question comes from the line of Matthew Spur from Exane.
I wanted to ask one on Industrial Technique and the incremental margin there where you could square a couple of things for me. So quite low drop through, but you talked about R and D, which sounds obvious. And then you talked about market presence. I wonder if you could explain what you mean by that. Are you talking sort of investment in more sales or a little bit of giving away pricing to take share?
And then on the R and D, can you just square it with if I look in the income statement, the percentage of R and D versus sales looks about the same to me for the group as a whole.
Compared to what?
Percentage of sales from last year.
But we were talking about in Industrial Technique or
What's Industrial Technique? You said you've increased R and D. Obviously, you don't get the percentages by division. But if I go to the group as a whole, take your R and D development costs and look at it as a percentage of revenue, especially the same year on year?
Yes. I mean, exactly, if you take a 12 months perspective, those type of ratios varies very little, and it takes a long time to move them dramatically. But if you look in a specific quarter, my comment was more that they do market investments, I. E, in more presence in Asia, for example, and they do invest quite a lot in the new technologies of joining technologies that they are investing in. And that, you can see, compared to the rest of the group, they have a pretty high level of spend.
But it was more a comment that the flow through or the drop through from that revenue growth was not very high, as you say. But I'll leave it also to comment by Mats,
I think. Yes. We're thinking about the plan that we have for Industrial Technique when we look at this year then. And you were right there when we said that we would like to spend a little bit more in R and D. And that is to keep up with the capital trains.
Automation is one of them, where we see more and more robots. And we have launched new products that you will also see on the Capital Markets Day that is extremely flexible to work with robots. So that's one of the areas where we spend a little bit more money. If you go automation, you also need more of a screw feeding. So we see an opportunity to be more in that business as well.
We are in there with the headroom business, for example. And then on service, they spend a little bit more money on service to really make sure that they have a good offer to the customers and making sure that they can actually do the predictive maintenance in a good way and give the customer a little bit more time. And so these are areas where we can take a step ahead of competition again and see if we can actually expand a little bit the market value. On the market coverage, the one region, it's China, as you brought up. And we say that in the motor vehicle industry, we have good coverage, but we can do significantly more on the general industry in all these regions.
And there, we have a couple of parallel tracks. And we said that we supersize a little bit the general industry plan in China. So those are 2 areas, 1 in R and D, 1 in Eurogaffic that we spend a little bit extra money on industrial techniques this year.
All right. And can I ask a quick one on vacuum technique? You talked about trying to build the service in the same way to compressor. Can I just ask conceptually, does the installed base my my understanding was a lot of the equipment comes obsolete very quickly and they sort of throw it away and put new stuff in? Does that stop vacuum in any way getting to where you want it to compared to compressor?
I think that I mean, if you look at the split of sales in CT, it's about 40%, I think, for service. We do not think that we can reach the same level in vacuum. I think we are just above 20% so far this year. But somewhere in between, we can do more when we do product offerings in vacuum. And this is what we are building up that the customer can choose different packages for their applications intrinsically.
But we think we don't think that the potentially is as great as it is in CT. And it's somewhere in between, Alex and
And when we say that about a little bit more than 20% is service in DT, we have to remember that the majority of that is service to the semiconductor industry, and the smaller part goes to service for the industrial and other applications. And that part is the one that can, from a structural point of view, be compared with compressor technique service perhaps, whereas the service to the semi is a slightly different animal. So it's not a huge portion that can be compared with C. Just on top of Matt's comment, which
Impressive, there are fewer moving parts in the vacuum pump compared to a compressor.
I think we need to take we are running a little bit out of time. We will have a problem to serve all the questions. I think we can take 2 quick ones, but please, if you can restrain to one question each. I think the next in line, operator is school.
Yes. The next one is Andrew Wilson from JPMorgan.
Hi, good afternoon everyone. I will keep it very quick with, I'm sorry, a question about the semi side. Are you seeing as of the conversations you're having with customers, obviously, with this kind of Q3 pocket, someone described it, are you seeing any sort of push from the customers, these key accounts on pricing and kind of any change in what either your competitors are doing in that space? Just trying to understand, I guess, how the customers are treating this next 3 months or so.
No, we have not seen a change in those discussions at all. As I said before, if you're an established supplier to a process, talk more about the process, the process efficiency, the service ability, and it has not changed in any way over the last quarter or so.
Very clear. Thank you.
Thank you. And then the final question for this time, unfortunately. And those of you that have put yourself in line for the question, I hate to say, but we need to follow to take your questions after the common call, unfortunately. But one more question.
The last question comes from the line of Andreas Koski from Nordea. Please go ahead. Your line is now open.
Yes. Thank you very much. The last question will be on compressor technique and the outlook for compressor technique. I heard that you expect demand for compressor technique to remain at current high level in
the Q3. But
we are seeing PMIs trending down, and we have some geopolitical uncertainties with potential territories impacting or potentially impacting demand for your products. And I also noted in the report that demand for industrial compressors didn't improve sequentially in the 2nd quarter. And as I understand it's a little reading older report, it has improved sequentially more or less every quarter since Q4 2016. So I would like to hear your view on the yellow canaries, I. E.
Small and medium sized industrial compressors. Do you see the underlying demand being as strong as it has been in the last couple of quarters? Or what are you seeing there?
First, just if I take one little on that question, Andreas. When we talk about
the sequential development being
more or less flat in industrial compressors, it's we talk about the order intake. And we are not in that comment making any judgment whether the underlying customer demand has actually sequentially changed at all. It's just so that we sometimes have very, very strong order development in the Q1, which you can almost see in relation to the other quarters. So and so it's in the graphs. And so it's not really the right interpretation because the comment is really on our particular order intake, and that can have swings for other reasons.
But that's just as an extra comment, Andreas.
I think on predicting the future a little bit, all my guys on the BA level, they follow, of course, a couple of key indicators for their industries. And they also do interviews with customers and trying to understand a little bit. But I must say that we we spend limited time on trying to predict exactly what's going to happen. It's more market trend, process trends that we spend more related to R and D. And then we do spend a lot of efforts on preparing the company for a downturn or an upturn.
That we spend a lot of time on. We don't act on comments on Twitter. We take it when it's fact, and this is exactly what I did this time. We can see that the steel and aluminum is there. You can see that the tariffs for the 800 components for the Chinese is there.
We are transparent with you what that will have an impact on our industry. If there will be a tariff on cars, for example, I think you can see that it's 2.5% going one way the American or 10% for the American cars going into Europe and 2.5% going the other way. So it's more of a political uncertainty that we share with all companies. So we will just follow and act accordingly when things are affected, I would say.
May I
just on your group outlook as well? Because historically, you've given the group outlook, saying that we expect the amount for copper products and services staying at current level. Or does this mean that you expect it for the group to be somewhat lower? Or if you would combine everything, is it to remain at current high level?
If you read what we write, as we have done for a couple of quarters already, we talk about customer segments, demand from customer segments expected to remain at current high level. That's what we predict for the majority of the customer segments. But we are talking sequentially. We are not talking an increase even though we report year on year increases in order intake. That's a completely different thing.
So if then one relatively important segment is down, yes, then we expect that the overall demand is somewhat lower also for the group because I can't make out that flat, flat, flat plus slightly negative becomes flat. And certainly it's not positive. It's really more a mathematical thing that we are at that current high level, and we cannot predict the order intake with accuracy. We can only focus on the execution. But from a demand point of view, this is exactly what we tried to say.
One important segment, we don't expect to keep this level. And the others, we don't see any change.
So you don't have any segment that you expect growth?
Well, I mean, we said the current high level is a summary of many segments, correct.
Okay. Thank you very much.
Have a good weekend.
Okay. Thank you very much
and a nice summer.
This does conclude the conference call. Thank you all for attending. You may now disconnect your lines.