Ladies and gentlemen, welcome to the Atlas Copco Q2 2018 report call. Today, I'm pleased to present CFO Hans Ola Meyer. For the first part of this call, all participants will be in listen only mode. Afterwards there will be a question and answer session. Hans, please begin.
Thank you very much. Welcome to all of you to this second quarter conference call, as you just heard. We will do a brief introduction, or rather Mats Rahmström, our CEO, will do a brief introduction to the report. Then, as we also heard, we will have a question and answer session. I think mindful of the time, we go straight at it. Right, Mats?
Yes. Thank you, Hans Ola. I will start on slide number two, which we call strategy in action. 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? I think this is a good story that I have here. This is a fairly big, as you can see, centrifugal turbo machine. They come in sizes of one, two, and three, 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. It's quite a big machine. It's a machine for big manufacturer electronics. It could be semi, could be steel, pharmaceutical, or food, for example.
When you look at this, the way it worked in the past was that this was typically an engineered product meant for the customer, that they have fairly long lead times. It was a rather complex installation for this. From our side, a lot of engineering, not so much standard, normally also meant lower margins for us. The team has now built up the size 1, 2, and 3, and this is just about two of them. It has been launched. Now, I don't know if you can see, but if you look at the picture, you can see it's built more out of standard modules now. 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.
You can say the way of working like this is really how we can build organic and very profitable growth. The customer gets a very unique centrifugal with low energy, high energy efficiency, shorter lead times. It's a win for the environment since it's a very energy-efficient product. For Atlas Copco, we can manufacture and have a little bit higher gross margin on product like this. It's a little bit of a good story how we continue to build the business step by step. The launch of this product has been way above our expectations. We have twice as many orders as we actually predicted. We can get into the numbers on slide three. Before that, I should say that this is actually the 100th report from Hans Ola Meyer.
Wow. I thought you had forgotten that.
No. He has supported five Customers so far, I promised him it would be a good report, I kept my promise. It's the best report we ever had, thank you. 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. 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, I will cover that a little bit later. Record revenues. I made a note that in 2016, we did SEK 101 billion in revenues, now you can see that we're at SEK 24.5 billion.
In principle, the SEK 101 billion we did including the mining business at the time. It's quite a steep development of the revenues. The best indication of that SEK 24.5 billion, I would say, is that the manufacturing team has done a fantastic job with the output of the products. There are still challenges left, I think step by step they take this, I'm pretty sure we don't lose any orders on long lead times, we are very competitive. Record operating profit and up 18%. We continue to challenge ourselves. This is a very good quarter, we still see areas of growth and opportunities, we continue to challenge all the 21 divisions. We go to slide four, maybe start and look at the graph. The light gray on the right is the revenues, you can see it's clearly a record.
Once again, the delivery situation has improved quite a lot over this quarter. The record orders, you see that as well. Orders up 10%, revenue up 11%, profit up 18%. Then if you look at the cash flow, that is then including the discontinued operations, and Hans Ola will guide you on that a little bit later. We go to slide number five. 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. I'm 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 when 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.
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 gap orders that we could not replace from last year, and also a little bit on Vacuum Technique side. Continue, you can see the strength of Asia being 37% of our business. For the year, then 12% up, 8% for the quarter. Maybe you can see now, well, that's a little bit of a less positive, so to say, but that is related to what we also guided on later on the vacuum and semi, so that is the influence of the 8%. All the other businesses have continued 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 of the Middle East. On slide number six, we can see that we have eight quarters of organic growth, which I think is the most profitable growth that we have. 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 area, Industrial Technique, where we took it from air, took it to electric, and now we take it more to connected tools.
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. Shifts 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. I don't mind at all putting money into R&D if we can see that we can find these transformation areas. Slide number seven. I think I commented on most of it. You can see the currency down going from negative to positive, 2% both on revenues and orders received, and Hans Ola will guide you a little bit later on that.
We come to the split of the business on slide eight. 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 process business is strengthening and also positive for the smallest compressors in the pub. A very positive outlook for Compressor Technique. If you look at Industrial Technique, we can see that for many years, MVI has been extremely strong with a strong drive in Asia, and that continues.
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 also now being fairly positive for the quarter. In Vacuum Technique, of course, semi equipment has been a huge driver for the business, and now we can also see the industrial high end service business continuing to be strong. In Power Technique then, we have rental have been strong for us, also the portables, and this quarter we can also see quite a big improvement of the generator and flow business. We change a little bit the drivers in the different business areas. Let's step into slide number nine and take a look at the Compressor Technique.
I would guide you to look at the graph first, the light gray one, which is the output, the revenues on the record levels. This is an area, of course, where we have had challenges. We have reported that over a number of quarters. They still have some challenging 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. If you then look at the record profits at 23.4%, 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 launched a few months ago internally in a big event, and we will actually bring this to the Capital Markets Day so you can get acquainted with this fantastic product. It's 10% at least more efficient than our old product. That's huge money for our Customers, and compared to other products, it could be up to 35% more efficient. This could be a game changer and a really nice product. Go to slide number 10, Vacuum Technique, and I'll try to clarify a little bit what we think about this industry. As you can see, it's a solid order levels, organic growth of eight year-on-year. 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. Industrial and the service division are continuing to grow in a very good way. We say on the key account business, which is the equipment business on Semi, there you have geographically a number of accounts, not that many. 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. To counter that a little bit, we continue with our internal efforts to strengthen service, and we do that successfully in the two areas, Semi and industrial, and also on the industrial products.
There we principally launched tons of new products under the different brands. We're helping ourselves a little bit on that. Some of the external factors, we can see IC sales is continuing to be strong, utilization is strong, pricing for chips is, I think it went up a little bit, it was flat and it's down a little bit. 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. 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 go to slide 11, that's Industrial Technique. Strong and record levels of orders, continue to see a strong Asia, strong Europe.
In the beginning of the year was a little bit more challenging in North America, I still think this is where we are catching up a little bit. I think that's even stronger than is the development of general industry accounts, principally everything outside the Motor Vehicle. They also handled the revenues in quite a good way, they intend to catch up a little bit during the coming weeks, actually working throughout the summer. 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 every business area.
This is also an interesting product because normally you take a tool, you test it on the line, this new development makes it possible then to replicate joint characteristics in this bench, which means that you can be very much more efficient when you service tools or exchange tools online. This is something that our customer will like. Power Technique. That's slide 12. Continue with the organic order growth of 5%. Strong in Europe, Africa. We see a little bit of flattening business in India, all the other business areas are doing quite okay. This is more of a seasonal effect for them, 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. 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 Epiroc. We have a little bit under absorption that it could be in logistics, for example, and things like that. It's a little bit of an influence, 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. We go to slide number 13. I think I will get a little bit of help from Hans Olav.
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 SEK 395 to a negative SEK 200. The last year, of course, included an extra interest charge, as you saw in the report. Both periods also include some one-offs. Perhaps it's most valuable for you to see, look a little bit ahead, what to expect. I think that 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 SEK 100 million to SEK 125 million in the interest net, going forward per quarter.
It's coming down considerably compared to those two quarters that you see on the slide. 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%-25%. 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. It's already decided. It's just that it's not happened yet.
I think I move from there into 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 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. 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 SEK 75 million 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 SEK 200 million-SEK 300 million positive, perhaps. As always, very difficult to predict with accuracy, but somewhere in that region. If we turn to page 15, again, I repeat that 30%-35% for the group is what we think is pretty long-term achievable from revenue growth. Here you can see that we have variations between the business areas. I think the Compressor Technique and Vacuum Technique results are not so much to say. They have been almost at 50% or even above 50% in one quarter, and then they are 35%. 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, et cetera. That has been affecting to a certain extent 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. Over the next couple of quarters, we definitely hope that that will show improvement.
If we move to the balance sheet on page 16, I think you can see for yourself that 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. The main changes in this SEK 43 billion reduction between March and June of total assets. Moving to 2017 cash flow, I think it comes quite a lot from the balance sheet changes. We have said in the report, we have SEK 3.1 rounded billion in operating cash flow, compared to SEK 4.8 billion last year. 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. Alluding to what Mats said initially, if we try to, in unofficial numbers, that's why we cannot write them, but we have, of course, possibilities of estimating what it would have been excluding discontinued operations. The last year number would've been roughly SEK 3.5 billion in operating cash flow for Atlas Copco continuing operations. This year, roughly SEK 3 billion, or just short of SEK 3 billion. Which means, in other words, that the change in working capital is primarily within the discontinued operations. That's the quick summary of that. With that, I think we move on to page number 18, the final one, and I leave that to Mats.
I try to take you through a little bit our reasoning around the outlook. We start with the CT business, as I asked, being through a little bit the 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. There's really no reason for us to see an increase in that business. On the other side, there is no reason for us to decrease the expectation on that business. Very many segments in the market, and we have a fairly positive view on development there. We just remain at the current high level. On Industrial Technique, you can see that we have a strong output for many years.
I think that we had a strong output 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, but I think that the whole industry could, of course, be impacted. That is a little bit out of our controls. We're not going to predict that. We say it's going to continue in a strong level. The general industry has picked up, and we see good numbers for Q2 as well. The Power Technique, although that we are trying then to be in the construction business mainly, we are trying to get in more on the industrial business in this business as well. As we see, except for the seasonal effect, we think it remains on a good level.
On the semi side and the Vacuum Technique side, no reason for us to say that industrial, I think that follows a lot of the CT, what I talked about in the general industry. We have a positive view on high active level there as well. As I said, both service divisions, both for semi, which indicates a high production rate, and also the industrial service doing fairly well. What we said then is that semi, a key account business where we can identify in the coming 3 months, there is a number in key accounts that just take a pause in the CapEx investment, and that is the prediction we do there right now. That's why we have said then that we remain on the current high level for most of the segment, and we say somewhat down in semi.
Thank you, Mats. With that, we move over to the question and answer session. Operator, if you just repeat the procedures, please.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press zero one on your telephone keypad. The first question comes from the line of Klas Bergelind from Barclays. Please go ahead. Your line is now open.
Hi. Good afternoon, gentlemen. Thanks for taking my question. Mats, 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? Also, as I said, you are stressing three months. I wonder whether, it sounds like you see this more sort of as 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. Thanks.
That's a good question. Difficult to answer, though. Of course, the Vacuum Technique, they can probably look 12-18 months into the future, but with a lot of uncertainty as to what's going on. We have then decided that we going to comment on the coming quarter in our statement. 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 we saw a somewhat weaker business. But it's not all accounts, as I said, we continue to see good CapEx spending in some accounts. It's just that this quarter, when we look three months ahead
We can then see that the activity and the quoting level on some of these accounts is significantly, or it's lower, I should say. That is what we can predict. I will get back to you at the next quarter report and give you another three months what we see then. It changed quite rapidly, and they changed their decisions. As you know as well from some of the other reports, some of these products end-use go into consumer products, we see even a little bit of seasonal effect there. I don't think when we state this, if you follow the semi industry, you follow the other reports, this does probably not come as a surprise to anyone. That is what we can say at this point.
Thank you.
The next question comes from the line of Graham Phillips from Jefferies. Please go ahead. Your line is now open.
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. Thinking into the third and fourth quarter, you obviously have guided that it would've 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? I presume semi is higher margin than general industrial, and I know you're building up service. 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 and 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, et cetera. 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, I'll say, Graham. 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.
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, et cetera. The difference with Compressor Technique 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.
The sharp drop between the first and second quarter from 52% down to the 33%, was that caused specifically by things like cost price mix or a step up in R&D? When we're thinking into the future, the extreme ultraviolet that we learned when we visited the facility in the U.K. 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, 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 drop-through for the next quarter, et cetera. You heard about how this was an interesting, talking about EUV systems, but it's not a reflection that we can predict even the number of orders growing very steadily over each quarter. 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.
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. It's impossible to say that now the next quarter we report now with this outlook, we will look for 12 or 13. It's absolutely impossible. 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%-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, Graham.
I can also comment a little bit on what we see and the interest for us in semi in general. I understand that you might want to focus on the quarter sequentially, what's going to happen. When we look at it, we still see the underlying demand for this type of products increasing over time one year or two years or five years, doesn't really matter that much. Even when I see our own factories, I can see how we work with the connected products. They work with edge computing, fog computing, and even cloud then. I see that's how we gather all this data. You can see that, how Compressor Technique is working with the digitalization, our Industrial Technique too is do the same thing. 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. I would say especially if you look at the new Chinese models, you can see that they are very digitally in the way they look at it. Of course, everything else we do with our electronic gadgets, this is the real reason why we want to be in this business and invest in this business. To have a up and down in quarters, I think we've flagged for that, and you know the industry as well, but this is the reason why we think this is important.
Okay. Thanks, Hans.
Thank you.
The next question comes from the line of Sebastian Kuenne from Redburn. Please go ahead, your line is now open.
Hi, good afternoon. One question on trade tariff. Do you face any impact on your product components or supply chain? I think Vacuum Technique has two facilities in China. Do they export to the U.S.? Thank you.
First, maybe I should comment that we are really in favor of free trade. We do not think there is much of winners in this, what is going on right now. We have looked at what we do manufacture in the U.S. and what we import in terms of, I think you have the aluminum tariffs, you have the steel tariffs, you also have these 800 Chinese products that have been identified as getting a little bit higher than tariffs on those as well. If we apply a price increase between 10% and 15% to the components that we use in the U.S., if that is a good scenario or not, you can debate, but that is the best one we have. The direct impact would be less than $10 million. That, of course, we try to counter with price increases, efficiency, changes suppliers as well.
It is more of a risk of the economy, I would say, that some of these things just take an industry down, and they get nervous in terms of investments. In general, the direct impact is not significant.
Okay. Quite good. Thank you.
The next question comes from the line of Peder Holven 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. If you look at deliveries and your order book, you saw deliveries increasing very sharply year-over-year, but also quarter-over-quarter with 5% or so. Here you have talked about you need to invest in capacity to order to meet demand. Is it fair to assume that deliveries will continue to sort of grow sequentially despite the maybe orders at least on the semi part seems to be coming down? That's my first question. Secondly, regarding your outlook statement on demand, you're very clear to talk about the other parts within the Vacuum Technique doing fine.
In order to try to sort of get the key account part out of that, and assuming that semis on the equipment side may be just shy of 50% of the Vacuum business, will the others compensate that you could have flat demand for the entire Vacuum Technique? I think I stop and get back in line.
On the revenue side, as you point to, we have built up quite an order book in Vacuum, and particularly on the semi side, of course. 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. The previous comment, as you understood, I know that, Peder, it was on the order situation and the new intro. 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 composition.
On the semi a little bit, the semi part, the business ASI, we can obviously see fairly easily. You know that 60% of that business is related to semi, 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 exactly how much it will be. At least we can say we can see indeed some key accounts that we will see less business in the coming quarter. I am sorry if you want more, but that is where we are.
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.
Again, when your deliveries goes out, the order book is a lot of semi equipment in there, and hence the leverage questions get even more interesting.
She is still delivering a healthy products in terms of mix when you produce. My question is really how much of increased investments have you actually seen affecting your cost base in the quarter? 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? I do not see the actual deliveries being that much of a change in the mix between semis and industrials.
I just come back to my previous question. Actually, we don't see the drama that you seem to see. We have talked for three, four 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, are coming on gradually. It's not that it didn't come at all in Q1 and everything comes in Q2. The reason why these famous flow through varies is because we are cutting every quarter. 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.
That is very clear.
There will be lots of variations in each quarter, also in the future, I'm sure.
Yeah. That's very clear. Thank you so much for that. I get back in line.
Thank you. Thanks.
The next question comes from the line of Ben Uglow from Morgan Stanley. Please go ahead. Your line is now open.
Well, good afternoon, and thanks for taking the question. I had a couple. I wanted to come back to Klas' question at the beginning. Mats, 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? 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? 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 six to 12 months? A very final question, just on tariffs. I appreciate that your direct exposure is limited. Are you hearing in the market, and I am not necessarily referring to Atlas Copco, but are you hearing anything about component shortages and/or stockpiling? 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. Already in Q2, I think there was a little bit of lagging for the smartphone, both for the major brands, so to say. Maybe that is one of the reasons why you say, do we have enough capacity at this point? Do we continue to invest? 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 they say, we take a pause here, and we look at our investments. Of course, when the investments come, together with maybe a couple of competitors, we are up there to quote on this.
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. Of course, the second one-
Activity in China specifically from-
I think 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. When they are back, I don't have the details on that, actually, so I skip a little bit on that one.
On the tariffs, shortages of components. If we see anything.
If we.
If we hear something.
In Vacuum specific?
No, that was general, I think, Ben.
Can you repeat it, Mats? Yeah. Just in terms of components across all the businesses, are you seeing any evidence at all or hearing just in the market, in the channel, that there is a sort of stockpiling or an inventory build in components?
No, I think in CT, it's still the foundry goods that is the number 1 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.
It's more that we are trying to get more than 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
That will put strain on inventory going forward, but we have had to buy a lot of those this year already. It's insignificant for the group, of course, so.
You guys are fine in terms of your own sourcing, there's no issue at all?
We are doing better and better, but the team is doing a fantastic job. 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. There is a lot of activity and a huge commitment to deliver products on time from our teams over here we are not out of it. I'm just saying that step by step we are getting better, and I don't see any of our competitor being better. I think our lead times are competitive.
Okay. Thank you very much.
The next question comes from the line of Gael de Bray 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 one quarter, how do you judge your ability to protect margins? Four years ago, the margins at Vacuum Technique were probably 700 bps lower. 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? That's question number one. The second question is for Power Technique. I think you mentioned primarily a seasonal effect this quarter, to explain the lower performance.
It seems there has also been a sudden change in demand for Power Technique in Q2 versus Q1, at least, with the order growth falling from 16% to 5%. It seems there is a bit more than just seasonality. If you could elaborate on this. Thank you.
We take it together on the down in semi. You're about the long term down in semi. We won't comment on that. What is the margin impact? We've 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. 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. If I back it up a little bit in the profit and loss, one of the key characteristics of the segments and the product that we like to be in, are products that are important to the customer's process, and maybe a little bit smaller in terms of the peak CapEx. When you understand the process, if we can continue to bring innovation to our customers, to pay a premium for the better product, the impact is huge for them. To exchange something, where we have the process understanding and the right product for that application is unlikely. We kind of the strategy starts by protecting that we do something that is important to customers.
In other words, we stress a lot to be in the right segment of the business in order to limit the exposure of dramatic price cuts, let's say, from the customers.
It's important that we continue with the innovation.
Absolutely. Innovation, then agility. As I said, 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. Of course, that remains to be proven, in the case of Vacuum, but you have seen it in Atlas Copco in previous times. On the Power Technique orders, was it more than seasonality? 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 16 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, Gael.
Over two quarters, you could also phrase it that we have grown by 10%, roughly. Yeah, we think that is pretty okay.
Basically, there was no change in the underlying demand, for example, in China, something like this?
No.
Thanks very much.
Thank you.
The next question comes from the line of Matthew Spur from Exane. Please go ahead. Your line is now open.
Good afternoon. Thanks for taking my question. I wanted to ask one on Industrial Technique and incremental margin there, whether you could square a couple of things for me. Quite low drop through, but you talked about R&D, which sounds obvious. Then you talked about market presence. I wonder if you could explain what you mean by that. Are you talking investment in more sales or a little bit of giving away pricing to take share? Then on the R&D, can you just square it with, if I look in the income statement, the percentage of R&D versus sales looks about the same to me for the group as a whole.
Compared to what? Sorry.
The percentage of sales from last year.
We were talking about in Industrial Technique.
It's Industrial Technique, you said you've increased R&D. Obviously, you don't get the percentages by division, but if I go to the group as a whole.
Yeah
take your R&D development costs and look at it as a % of revenue, it's basically the same year-over-year.
Yeah. 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. 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 the technologies that they are investing in. That you can see compared to the rest of the group, they have a pretty high level of spend. It was more a comment that the flow through, the drop through from that revenue growth was not very high, as you say. I leave it also to comment by Mats, I think.
Yeah, I was thinking about the plan that we have for Industrial Technique when we look at this year then, you are right there when we say that we would like to spend a little bit more in R&D, and that is to keep up with the capital trends. Automation is one of them, and 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. That's one of the areas where we spend a little bit more money. If you do automation, you also need more of screw feeding. We see an opportunity to be more in that business as well. We are in there with the hand drill business, for example.
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 uptime, and yes, 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 is China, as you brought up, 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. There we have a couple of parallel tracks, and they say that they supersize a little bit the general industry plan in China.
Those are two areas, one in R&D, one geographic, that we spend a little bit extra money on Industrial Technique this year.
All right. Thanks. 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 for Vacuum build up the same way as it does with Compressor? The reason I ask is because as semi-fab technology moves up, my understanding was a lot of the equipment becomes 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?
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 about 20% so far this year. 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 in principle. We don't think that the potential is as great as it is in CT. Somewhere in between, I would say.
When we say that about a little bit more than 20% is service in VT, 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. It's not a huge portion that can be compared with the just on top of Mats' comment.
In principle, there are fewer moving parts in the vacuum pump.
Yeah
compared to a compressor.
Yeah. I think we are running a little bit out of time. We will have a problem to serve all the questions. I think we can take two quick ones, but please, if you can restrain to one question each. I think the next in line operator is who?
Yes. The next one is Andrew Wilson from J.P. Morgan. Please go ahead. Your line is open.
Hi, good afternoon, everyone. I will keep it very quick with, I'm sorry, a question about the semi side. Are you seeing, as part of the conversations you're having with customers, obviously with this kind of Q3 pocket, as someone described it, are you seeing any sort of push from the customers, these key accounts, on pricing and any change in what either you or your competitors are doing in that space? Just to try and understand, I guess, how the customers are treating this next three months or so.
No, we have not seen a change in those discussions at all. As I said before, if you are an established supplier to a process, talk more about the process, the process efficiency, the service ability. It has not changed in any way over the last quarter or so.
Very clear. Thank you.
Thank you.
The final question for this time, unfortunately. Those of you that have put yourself in line for a question, I hate to say. We need to take your questions after the conference call, unfortunately. 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 third quarter. We are seeing PMIs trending down, and we have some geopolitical uncertainties with potential trade tariffs impacting or potentially impacting demand for your products. I also noted in the report that demand for industrial compressors didn't improve sequentially in the second quarter. As I understood it, reading older reports, it has improved sequentially more or less every quarter since Q4 2016. 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 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, we talk about the order intake, and we're 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 strong order development in the first quarter, which you can almost see in relation to the other quarters, or in the graphs. 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. 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. I must say that 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&D. We do spend a lot of effort 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. We 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 for the American or 10% for the American cars going to Europe, and 2.5% going the other way. It's more of a political uncertainty that we share with all companies. We will just follow and act accordingly when things are a fact, I would say.
May I just, on your group outlook as well, because historically you've given the group outlook saying that we expect demand for Atlas Copco's product 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?
Well, 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. 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. If then one relatively important segment is down, yeah, then we expect that the overall demand is somewhat lower also for the group, because I can't make out that flat, flat plus slightly negative becomes flat, and certainly 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.
From a demand point of view, this is exactly what we try to say. One important segment, we don't expect to keep this level, and the others, we don't see any change.
You don't have any segment that you expect growth?
I mean, we said the current high level is a summary of many segments, correct.
Thank you very much. Have a good weekend.
Okay. Thank you very much for listening in to us. If you have more questions, you can turn to our IR department. Thank you. Have a good weekend, everyone.
A nice summer.
A nice summer.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.