Atlas (NYSE:ATCO) Copco Group (ATCO-A.ST), a leading industrial company, held its Q2 2024 earnings call, where CEO Vagner Rego reviewed the company's performance.
The call revealed a mixed financial landscape, with significant order growth in the gas and process compressor segment but flat performance in industrial compressors and vacuum equipment.
The service business showed robust performance across all regions and divisions. Orders received totaled SEK 43.6 billion, marking a 1% organic decline, while revenues reached SEK 44.8 billion, a 2% organic decrease.
Profitability held steady at 21.1%. The US and Europe experienced positive growth, contrasting with most business areas in Asia, which saw negative growth. The company's balance sheet displayed increased investment in rental equipment and property, with a solid cash flow surplus of SEK 11 billion.
Key Takeaways
- Atlas Copco Group's Q2 2024 orders received were SEK 43.6 billion, with a 1% organic decline.
- Revenues were SEK 44.8 billion, a 2% organic decrease, while profitability remained stable at 21.1%.
- Positive growth was reported in the US and Europe, while Asia, particularly China, experienced negative growth.
- Compressor Technique business area saw 6% organic growth, but Power Technique faced an 11% organic decline.
- The company's effective tax rate was low at 17.6%, due to the release of a provision related to tax incentives.
- Operating profit margin stood at 19%, with a return on capital employed of 20%.
- Near-term outlook suggests customer activity is expected to stay at current levels, with negative currency effects anticipated next quarter.
Company Outlook
- Atlas Copco anticipates customer activity levels to maintain their current pace.
- All regions, except China, are expected to grow, despite the forecast of negative currency impacts in the upcoming quarter.
Bearish Highlights
- Asia's negative growth, especially in China, has impacted the company's performance.
- The Vacuum Technique and Industrial Technique divisions have seen a drop in profitability due to volume impact, negative mix, and project business.
- Lower electric vehicle adoption in Europe and the US, coupled with overcapacity in Asia, has led to a slowdown in the automotive sector.
Bullish Highlights
- The service business performed well across all regions and divisions.
- Portable Compressors, Rental business, and service within Power Technique reported an 8% organic revenue growth.
- The Compressor Technique division experienced solid order growth, particularly in gas and process compressors.
- Positive momentum in China, with the expansion of Chinese companies and the establishment of new factories.
Misses
- The company did not provide specific figures on the semiconductor business or Vacuum Technique sales in China.
- A decline in vacuum technique orders and industrial assembly was reported.
Q&A Highlights
- The company is taking measures, including restructuring in the Vacuum Technique division, to protect profitability.
- The mix of business and divisions is affecting profitability, with the semiconductor and service businesses being less profitable.
- Despite restructuring efforts, there will not be significant changes in the EBIT margin development.
Atlas Copco Group's Q2 2024 earnings call presented a complex picture of the company's financial health, with both challenges and successes across its diverse portfolio. While the company faces headwinds in Asia and certain business segments, its strong service business and solid order growth in other areas provide a balanced outlook for the near term.
InvestingPro Insights
Atlas Copco Group (ATCO-A.ST) demonstrated resilience in its Q2 2024 earnings call, despite facing a challenging market environment. The company's financial health and strategic positioning can be further understood through key metrics and insights from InvestingPro.
InvestingPro Data reveals a market capitalization of $80.29 billion, underscoring the company's significant presence in the industry. The company's Price to Earnings (P/E) ratio stands at 30.34, indicating investors' expectations of future earnings. Additionally, the P/E ratio adjusted for the last twelve months as of Q2 2024 is slightly lower at 29.06, reflecting adjustments that may include one-time items or market conditions. The revenue growth for the same period is 9.77%, showcasing the company's ability to increase sales amid economic fluctuations.
An InvestingPro Tip highlights that Atlas Copco has maintained dividend payments for 45 consecutive years, which may appeal to income-focused investors seeking stability in their investments. Moreover, the company's liquid assets exceed short-term obligations, providing financial flexibility and a cushion against market volatility.
For readers interested in a comprehensive analysis, there are additional InvestingPro Tips available. These tips delve into the company's valuation multiples, debt levels, and profitability forecasts. To access these valuable insights, readers can visit https://www.investing.com/pro/ATLKY and use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. Currently, InvestingPro lists 14 additional tips that can aid investors in making informed decisions about Atlas Copco Group.
Atlas Copco's performance, coupled with the insights provided by InvestingPro, paints a picture of a company that is navigating industry challenges while maintaining its financial strength and rewarding shareholder loyalty through consistent dividends.
Full transcript - Atlas Copco AB (ATLKY) Q2 2024:
Operator: Welcome to the Atlas Copco Q2 2024 Report Presentation. For the first part of the presentation, participants will be in listen-only mode. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead.
Peter Kinnart: Thank you, Operator, and a very warm welcome to all of you on the line today for the second quarter earnings call for the Atlas Copco Group. I’m very happy to be here today to give a bit more color on second quarter results. And together with me, I’ve Vagner Rego, our CEO, who will of course guide you through the presentation together with me today. Before we start, however, I would like as usual to repeat one request. And that is once we start with the Q&A to please take one question at a time, so that all of the participants in the call have an opportunity to raise the most burning question they have on their mind. And then of course when we get through the whole list and we can go -- follow-up questions. So thank you for that already. And with that being said, I would like to hand over to Vagner Rego, our CEO
Vagner Rego: Thank you, Peter, and welcome to this conference call. Before I start the presentation, you can see the picture of a gas and process compressor. This type of compressor goes mostly in gas processing plants, but also have many other applications. And we have expanded quite a lot the number of applications where this type of equipment can be used. If we move then to the second slide, the Q2 had a mixed demand as you can see, but overall solid order intake and the mix demand coming from we had market segments that performed quite well. But we also had the market segments a bit on the weaker side. If I give a little bit more color, for instance, gas and process compressors with the Compressor Technique performed very well with a significant order increase, while industrial compressors were flat. Vacuum equipment orders were unchanged. But we see slightly positive in the semi-side and negative in the industrial and scientific vacuum. Order have declined as well for industrial assembly and vision solutions more connected to the automotive business, and a decrease as well in order intake for our inflow. On the positive note, we have seen our service business performing very well basically in all regions and all divisions. With growth -- and when it comes to the region growth, we have growth in all regions except Asia. And we had solid revenues and operation cash flow. Then if we move to Slide #3, with a really bit more details on the financials, our orders received were SEK43.6 billion with organic decline of 1%, while the revenues were quite solid at SEK44.8 billion, an organic decrease of 2%. Profitability was 21.1% more or less at the same level of last year. And then if we adjust for one-time items, and here this quarter we have the LTI as one-time, plus the restructuring costs that we had in vacuum technique that was a significant value. But I would like to anticipate already on that restructuring costs that is mostly related to industrial and scientific vacuum that we have seen a slowdown in the orders. For instance, for lithium ion battery production, for solar production, but also the general [technical difficulty], we see weakened in the orders received before we decided to adjust the organization with one-time costs. This is not affecting our semi business that we are very well-positioned for the future, and that's the focus is going to remain on the industrial and scientific vacuum. Profits was SEK7.6 billion positive -- positively affected by one-time of SEK510 million tax provisions and Peter will come back with more details on that one, and basic earnings per share at 1.67, solid operation cash flow and solid as well return on capital employed at 29%. If we then move to Slide #4 with the regional approach. So we see in total orders at -- excluding the currency impact plus 2% worldwide. Of course, this includes acquisitions, but then if we go a little bit more in details, we see the U.S with positive development of plus 2%. If we give a little bit more color with the business area, we see positive development in Compressor Technique and ITBA [ph] as well. And there a little bit more positive environment in aerospace business and of highway when it comes to ITBA and we see a negative development in Vacuum and negative development in Power Technique. When it comes to Europe, Compressor Technique performed quite well. Vacuum was a bit more flattish and Power Technique has solid growth as well. And the only negative business area was Industrial Technique, where we had negative especially coming from Germany, coming from the automotive business. Very solid as well Africa and Middle East. We have seen an increase in activity there and are quite rescored by some big orders there. And we saw a significant increase of 45% coming from all business areas, but mainly Compressor Technique that has a bigger exposure there. South America positive in all business areas. And then Asia on the negative side. Asia performed negatively basically in all business area except from vacuum technique that has a positive development. So Compressor Technique was a slightly negative. Power Technique as well as ITBA that have also a negative development. On a positive note, most of the negative development is coming from China. All the reasons we have very positive, India quite positive as well, Korea that is quite important for us as well. If we then move through the Slides #5, so we see the development of our order growth per quarter. And now we are in a phase that we are a bit more flattish after quite solid growth, very strong growth in 2021 and 2022. If we move to Slide #6, we then see our organic growth development that was minus 1% with 2% is structural growth minus 1% currency and the 2% structural is coming mainly from Power Technique. When it comes to revenues, we had again 2% positive on structuring come in structural growth coming from Power Technique, and 2% organic growth on revenue with the same level of impact in currency. And we end up at SEK44.8 billion. So, going to Slide #7, we see now with the organic growth in Compressor Technique of 6%, we see now in the last 12 months the orders -- technique is contributing to 47% of the business, Vacuum Technique with 2%, organic growth 21% and Industrial Technique with minus 13% with 17% power technique with minus 11% organic growth contributes to 15% of our orders. If we then move to Slide #8 to give a little bit more details per business area. Like we mentioned before, organic growth for Compressor Technique at 6%. The industrial compressors were basically unchanged with the negative development in China, but basically when we put all together with -- it was unchanged and quite strong development like I said before in gas and process compressors and that is coming from several market segments. It's difficult to highlight one market segment, because they have been like I said at the beginning that they have developed the technology to be able to be deploy the different types of applications and now they are harvesting from that. Service business also very solid in Compressor Technique. Revenues were up 9% organically and operating gross margin still -- operating profit, sorry, is still quite solid and quite solid at 24.8%, supported higher volume and currency and negative affected from unfavorable sales mix. Return on capital employed remains quite solid. And as you can see in the bottom left of the slide, a new innovation, a new dryer that we have released that can offer dew point of minus 40% at any condition without using electricity, using the heat of compressor. So, quite nice development there. Then, on Slide #9, Vacuum Technique had 2% organic growth and here the same equipment orders were up. But it's fair to say as well from a low level, but anyhow we are happy to see a positive development there. Industrial technique and scientific vacuum equipment were down, of course affecting the overall growth and we had solid growth in service. And there we have two service divisions and both are performing very well. Revenues were down and here you can see the development of Vacuum Technique Q1. During the end of 2021 beginning of 2022, we have a huge spike in orders received. We delivered those orders. Q2 was quite solid last year. And now we have a very strong comparison base. So, orders were down organically. Operating margin was 20.1%. And here there is the impact of the restructuring costs. If we adjust for the restructuring cost, we end up at 21.5, negative affected by volume, of course, because we invoice [ph] less, especially on the semi divisions, but also in industrial vacuum and also by the sales mix. When it comes to return on capital employed, we had 21%. And here you see innovation a new abatement system that that to be used in the semi business. Also a very good innovation with a very high decrease in the carbon footprint for our customers. If we then move to ITBA that we like to call internally, but in [indiscernible] technique. So they had organic decline of 13%, so markedly weaker equipment demand from the automotive industry and that we saw strong decline in Asia, especially in China and also a decline in Europe. Equipment orders to the general business industry were unchanged, and solid growth for services as well. Revenues increased 4% organic. We still have a good number of orders on hand and operating [technical difficulty] 20.8, negatively affected by investments in R&D, some digitalization and project business. We have invoiced some project business and that has an impact in the profitability as well. And the automotive industry is also in transformation that requires investment for new technologies to be used there. We continue to invest there. Also software is becoming more and more important part of our business in industrial technique. And there we have done quite some investment on that area and that had an impact as well. And return on capital employed at 22%. And here we see an innovation on a new tool that is a cordless tool that can be used in industrial and automotive, but it's a new tool that is where the main focus is to further grow our industrial business -- our general industry business within industrial technique. And if we move to Slide #11, for Power Technique. Had an organic decline of 11%. And here you see equipment orders down markedly. But here this was more in the industrial power and industrial pump business. And they also have some large orders like large system orders, that does not repeat every quarter. There is a timing issue there. But the business remains quite solid. When I look to all the other businesses like Portable Compressors, Rental business and service are quite solid within Power Technique. Revenues were up 8% organically. It was flat, mainly driven by acquisitions. Operating profit margin at 19%, also quite solid. You should remember some years ago, they were running at much lower volume. It's good to see that they have reached this level and they have sustained the profitability at this level. So the profit was supported by increase in organic revenues and sales mix, and negatively affected by the acquisitions. Return on capital employed of 20%. And [indiscernible] the innovation and new medium size energy [technical difficulty] system that can be utilized in combination with our electrical power, electrical cum portable compressors. If we then move to slide #12, we reach them the profitability. So we have been through the orders received, the revenues. And then if we look at the profit, excluding the depreciation of intangibles related to acquisitions, we reached 22.4, which was the same level of last year and operate -- operating margin of 21.1 is likely down from last year, .1% down compared to last year. But I guess now I think we need a little bit more details on the profit. And now I will hand over to Peter. Peter, please.
Peter Kinnart: Thank you Vagner. Continuing on the income statement with the net financial items, of course significantly minor item, but the change here is driven by a lower net interest cost. But on the other hand, a higher financial exchange rate difference on our cash positions mostly. Then if we move further we go to the income tax expense. And there you I will say should clearly note down the very low effective tax rate of 17.6%. What is the reason for this? Vagner already alluded to that at the beginning. We have released a provision-related to [technical difficulty]. We have that provision in our books because we believe that we were able to qualify for this particular tax incentives. But we were not entirely certain if all the type of expenditures we're making would be accepted by the tax authorities. So we waited until we passed, the time when no longer tax audits would be possible to do, let's say, [indiscernible] back some of those incentives. Now we have made a reassessment of the situation and have come to the conclusion that we are actually by far reaching the thresholds to qualify for tax incentives. And so this was done on the 2023 numbers. And therefore, the provisions that we have booked in 2023, as well as the provision we booked in Q1 2024, has now been released. And this is a one-time impact of about SEK500 million, slightly more even, that, of course positively affects our effective tax rates in the income statement. It has, however, no cash flow effect considering it is purely a provision we release at this moment in time. Now, this will also continue to have positive effects in the future, due to the fact that provisions we have built in 20 -- second half of 2020, '21, '22 we will, let's say gradually expire, so to say, as time progresses, and so quarter-by-quarter, we will release some of these old [indiscernible] step by step. How much will the impact be for the future effective tax rates? Well, it is about 1% on the quarter. So that means that when we would normally guide up to about 23.2% to 23.5% effective tax rate, it would go down in the coming 10 quarters probably to 22.2% to 22.5%. Of all other things being equal and we know that [indiscernible] change over time. But anyway, that is at least based on today's facts where we stand. As a result of that, we have a profit for the period of SEK7.6 billion compared to SEK6.9 billion last year. And as already indicated, return on capital employed of 29%, return on equity of 31%. Then I will move to the next slide, Slide #13, where I would like to elaborate a little bit more on the profit bridge. Because as we have already indicated, the profit has a little bit weakened slightly compared to the same quarter last year. And I think that deserves a few words. First of all, on the overall picture for the group, we see the positive impact from the share based LTI programs. On the margin, which is basically offset you could say by the restructuring costs we have taken in Vacuum Technique. And as already indicated, this restructuring costs is entirely linked to the downturn, we have noticed over the last several quarters now in industrial vacuum and scientific vacuum. Then the acquisitions have also dilutive effect, which we -- which is obviously common almost in the sense that for the first year is a year where we take a lot of integration costs. So that is explaining that part. And on the other hand, we have quite nice tailwind from the currency this quarter on the bottom line in -- on the margin particularly. That means, of course that there are a few, that’s a [indiscernible] not been very, very strong. And in order to explain that in a bit more detail, I would like to go to the next slide to split up a little bit by business area because it is a little bit different. If you look at the different business areas. If we take Compressive Technique to start with, then we have small dilutive effects from the acquisitions, quite a positive impact from the currency here as well. And then I would say, a minus [technical difficulty] from our volume, price, mix and other items. In fact, volume is quite positive, but then we have a bit of a negative mix that kind of offset this effect and as a result, we have a small drop here. That being said, Of course 24.8%, 24% the comparison are really high and we are overall still quite pleased with the type of margin that we achieved [indiscernible]. The Vacuum Technique, the picture is a little bit more complicated and in fact, your technique, the structure is a little bit more complicated. We already alluded or talked about the restructuring costs which of course eats up a bit of the -- quite a bit of the margin for the quarters. The acquisitions are here also slightly diluted also here positive contribution from currency, but then they impact from the drive through and of course, here you can see that the volume has a negative impact on the one hand, but also the mix as we are growing in for example, the service divisions which contrary to what happens in most other business areas, the profitability is there a little bit lower. So, as a result that has a negative mix effect. So, I think on Vacuum Technique, let's say a clear story, and in those areas where we are struggling a little bit with profitability due to the business environment that is changing, we are already taking the necessary measures to protect our profitability for the future. Industrial Technique, we have basically no impact from the acquisitions I would say, but also we have positive tailwinds from the currency and then a drop through that is not favorable. Here, I would say that the fact that we are doing quite a lot of project work and we are able to invoice quite a lot of them is affecting the margin level negatively as opposed to selling kind of standard off the shelf service. Secondly, also continue to ramp up in R&D expenditures, particularly related to as far as already indicated, software development, but also the integration of vision solutions into our existing product portfolio for assembly solutions. Talking about automation that we like to add with say to the fastening and the dispensing solutions, for example, and that also goes with a lot of competence developments for our sales force updating and upgrading of our systems in order to be able to quote these more complex type of projects et cetera. And that is in the digitalization aspect, you could say that also requiring a bit of extra effort. Also, within industrial technique, we are verifying with the divisions what we can do to protect our bottom line in a good way, so that we of course, safeguard the future going forward. Then last but not least, and that is, let's say in [indiscernible] that is really applicable to Power Technique, it's definitely not the least quite the contrary, because they have a quite positive [indiscernible] through from the business. The acquisitions are of course, a very significant part of their revenue growth and therefore also have a bigger contribution from -- on the margin in a dilutive way. The currency impact is basically [indiscernible] Power Technique. But then very positive development on the [indiscernible] through due to a good organic revenue growth or good organic development, I should say, offset a little bit by the acquisitions. From there, I would like to move to the balance sheet. To be fair, I think there's not so much to comment on the balance sheet. We see a little bit of extra investment in the rental equipment in order to make sure that we have the fleet to answer the growth that we have witnessed there. Also the continued increase a bit of the other property, plant and equipment. I think the most important thing I would like to highlight is the improvement if we compare to June, the improvements in June last year, the improvement in the inventory were of course, the full back of customers to help immediately take the inventory of our hands. We are pushing a lot, we are working hard with the divisions to try to improve that and we see some positive impact there. More to happen, but at least a positive signal. [Indiscernible] you also come back in the cash flow effect. Of course the cash flow is contributing to our cash position. And on the liability and equity side, I would say the equity is changing because of the additional profit and the division -- the dividend that is being taken away. And that is also explaining why the interest -- the noninterest bearing liabilities are up compared to December, because of the fact that we split the dividend in half. And that is half of that dividend sitting on those noninterest bearing liabilities right now. Moving to Page 16, talking about cash flow. As we already said in the headline, solid cash flow for the Group, with some operating cash surplus of more than SEK11 billion close to SEK12 billion even. Slightly improved impacts on the net financial items. But here especially to note is, of course, the big difference between last year and this year's quarter's cash flow is the working capital, which was highly negative last year, and therefore diluted the cash flow very significantly, whereas this year, it is basically flat zero. And I think that's of course helping us to deliver a solid cash flow here. We also see the continued investments in the rental fleet, as well as similar investment as last year in our plant, property and equipment. And maybe as one last comment here is on the year-to-date cash flow we see at the very last line that we spent roughly the same amount of money on acquisitions. And we have actually by the end of June fully closed 12 acquisitions this year, so far. So with that, I think I come to the end of the financial details. And I would like to hand back to Vagner to give you some guidance on the near-term outlook.
Vagner Rego: Thank you, Peter. So as my first time here in the conference call, I would like to first of all highlight that we don't guide on orders received. What we are trying to do that as much as possible is to guide on the customer activity level in the coming quarter. So it is not straight projections of orders received. And then if we have to look to what is happening on the external scenario, and a lot is happening on the external scenario, I must say, in North America, Europe and Asia. But we don't see a change in [technical difficulty]. I think that's the first point. And then when it comes to the customer to our internal analysis, we look as well into our [indiscernible] and activity level there throughout the organization. And we don't see neither very positive sign or very negative sign. And then we combine those pictures that is why we come with this near-term outlook that we expect that the customer activity will remain at the current level. So then in summary, Q2 we had a mix demand. So with strong gas and process overall orders, industrial compressors were flat. Vacuum Technique orders and change order decline in industrial assembly mainly driven by automotive, decrease order intakes in power and flow, but that we have also explained the reasons solid, and on a positive note solid growth for service in all business areas. And when it comes to the reason, we have growth in all regions except China and solid revenues and operating cash flow. And that is our summary of Q2.
Peter Kinnart: Okay. Thank you, Vagner. And maybe one last additional note [technical difficulty] to give is about the foreign exchange difference. How does we look for the next quarter or some guidance there. We expect that the level of the FX, the currency effect would be roughly the same, but negative in absolute terms. So, roughly the same amount but with a negative sign base. So with that final small addition, I would like to hand back to the operators and, of course, would again like to repeat here first, I would like all of you to ask please only ask one question at a time to allow all of you to be able to raise a question to both [indiscernible] and myself.
Operator: The next question comes from Daniela Costa from Goldman Sachs (NYSE:GS). Please go ahead.
Daniela Costa: Hi, good afternoon. Thank you for taking my question. I'll stick to one as you requested. And maybe following up on one of your last points Vagner on orders in Asia being the only region that was down and China particularly we have seen actually China PMI as being the only ones above 50 now for some months. So can you talk through a bit of granularity on what is going specifically on in China for you competitive dynamics and markets? Why there's more negative development in China? Thank you.
Vagner Rego: Good. Thank you for the question, Daniela. I think first of all, is indeed Asia is driven by China, the negative growth, and then I think it's important to highlight we do have a strong position there in automotive. We have a strong position in lithium ion battery production, we have a strong position as well in solar. And all these segments, they are, let's say, relatively weak now. And that has affected our growth significantly, I must say. The general industry has some impact. But the big orders received [indiscernible] were in those market segments. And we see a slightly weak demand in the general industry as well. There are some possible [indiscernible] there, because there is incentive to upgrade the installed base, but that is still not materializing. So -- and then on the positive notes, for Vacuum Technique, especially on semiconductor, we see a positive development, positive growth there.
Daniela Costa: Thank you.
Operator: The next question comes from Andrew Wilson from JPMorgan (NYSE:JPM). Please go ahead.
Andrew Wilson: Hi, good afternoon and thanks for taking my question. Follows very nicely on [indiscernible] of that comment with regard to semis in China. I kind of leave this deliberately open ended, because I guess it's a reasonable month to talk about, but just trying to understand in light of some of the speculated, I guess curves, restrictions, tariffs, et cetera, around, I guess, the Chinese semi industry and then maybe U.S actions around that. I just wanted to try and at least if you could remind us in terms of sort of how you see your business positioned with regards to any potential changes there.
Vagner Rego: Well, I think first of all, thank you for the question. Nowadays our localization is quite strong in China. We produced most of the products that we sell in China. In China, there are few items that we don't produce, it's not a significant part of our revenue. So from that angle, I think we are covered [ph], but we are also investing in R&D capabilities in China as well in that area.
Andrew Wilson: Thank you. And so just to try and put quantum on that. Can you tell us how much of the VT sales are in China?
Vagner Rego: We normally -- we don't disclose that figure. I think China is a very important part of our revenues. But we normally don't disclose that figure.
Andrew Wilson: Understood. Thank you.
Peter Kinnart: Thank you, Andy.
Operator: The next question comes from Magnus Kruber from Nordea. Please go ahead.
Q - Magnus Kruber: Could you expand a bit on the activity seen in the semiconductor business within VT? I think is this the second quarter running with sequential, improving demand. And with the risk of reading a bit too much into the comments in the report, it appears that you see accelerating growth year-over-year as well compared to Q1. Any chance you could put some numbers around that, that would be very helpful?
Peter Kinnart: Thank you for the question. We normally we don't go in that level of detail. But I think it's much -- it's important to highlight that this is a clear account business. So and sometimes you have some book orders. When we look to our data today, there is no, let's say, our internal activity. We don't have a reason to believe that this business will go down. But we also don't have reasons to believe that we will go significantly up. I think that's important to highlight that due to the key account characteristics, okay, now we have a positive development, but doesn't mean that we are in front of a huge uptick.
Q - Magnus Kruber: Got it. Thank you so much.
Operator: The next question comes from John Kim from Deutsche Bank (ETR:DBKGn). Please go ahead.
John Kim: Hi, good afternoon. Sorry to beat a dead horse here. Can we get a bit more color within semiconductor activity levels? What I'm interested in is perhaps factory utilization rates, or outward signs you're seeing particularly on the memory [ph] side for new products. Thanks.
Vagner Rego: Yes, thank you for the question. What we have seen is a slight increase in the utilization rates. We measure some returns with positive signals, but it's far from the highest levels that we saw in the past when the demand for memory was very high.
John Kim: Thanks, again. Thanks so much.
Operator: The next question comes from Max Yates from Morgan Stanley (NYSE:MS). Please go ahead.
Q - Max Yates: Hi, good afternoon. Could I just ask about the EBIT margin kind of development and maybe a little bit how to think about it over the coming quarters? When I listened to quite a lot of what you've talked about on the EBIT margins, you've talked about some R&D investments in Industrial Technique you've talked about mix in some of the divisions. It maybe stuff that kind of is the right thing to do longer term, but if -- or just a function of the order mix of the backlog. I guess my question is, when we look at the kind of operational leverage or development across the divisions, it sounds to me like this is just a kind of reality of investments that you're making the decisions and the order mix. There's not a huge amount that will fundamentally change in the next couple of quarters. So I guess, is that the right interpretation or when we think about the second half of the year, is that something that will kind of fundamentally improve or change operational leverage? Whether it's kind of price cost or anything else we should be thinking about?
Vagner Rego: Perhaps you can take that one Peter?
Peter Kinnart: Yes, absolutely. So thanks for the question. I would say that overall, I wouldn't say that we should expect very fundamental changes in our overall profitability development in the [indiscernible] levels of above 20%. And our main focus has always been to grow of course. Now, of course, that doesn't exclude the fact that we also need to make sure that we protect our profitability. And if we look at how different business areas, different divisions actually even within the business areas, and even the business lines within the divisions are developing individually, then let's say, almost surgically we are trying to make sure that those are performing a little bit less or actually taking some measures to protect the profitability. In the case of Vacuum Technique, particularly on industrial vacuum and scientific vacuum that has even led to saying that we need to take a slightly bigger step forward and actually initiate some restructuring activities. But we also see for example, in some of the other business areas, including Power Technique, for example, some short-term work being implemented. So we are constantly monitoring the situation of the profitability on a quite detailed level, I should say, granular level and as a result we are adjusting where needed. Then, of course, the measures that we have in the pipeline today, whether they will immediately turn around to the quarter [indiscernible] profitability to a significantly better level that I think is a bit difficult to say because some of these measures also tend a bit -- tend to take a little bit of time to implement. But they certainly have the intention to bring the profitability on a level that we believe is the sustainable level that we would like to aim for, and not the current level of 21.1% that we are delivering this quarter.
Q - Max Yates: Okay, understood. Thank you very much.
Vagner Rego: You're very welcome.
Operator: The next question comes from Sebastian Kuenne from RBC (TSX:RY). Please go ahead.
Sebastian Kuenne: I would like to [technical difficulty] a little bit deeper into the margin developments for Q2. So it goes in line with the previous question here. If I look at the bridge, the margin bridge I see about 100 bps boost from currency. So if I adjust the margin for that year-on-year the margin was 110 bps. [Indiscernible] seem organic growth despite seeing a further rise in the service [indiscernible] about 1.5% of potential points over the year. So could you give us a little bit more detail why and where you see pressure or whether I'm looking maybe at the wrong number here, but it appears like the underlying profitability of equipment and services is slightly dropping. You can elaborate a bit. Thank you.
Vagner Rego: Well, I think we've tried to share a little bit business area of why we believe this is happening, I think on a city [ph] level, I would say we have a robust minor drop, doesn't say that we are happy to see it drop, of course, but we are at a very high-level, nonetheless. But you're right, of course, the currency is adding somewhere around 1% overall, a little bit less than that actually for the Group. But I think the two areas where we are facing the biggest challenge in a way is that in Vacuum Technique and Industrial Technique. That of course, we are fully aware of. In Vacuum Technique, it is much more related to the volume, I would say because of the fact that we've eaten into these orders on hand for now quite some time. And of course, as a result, the volume is not only -- or the revenues are not exactly the same level. And then we see a volume impact where the cost is not falling as quickly as the revenues are going down. Secondarily also as I indicated there, the mix has an impact. The mix between the different divisions within the business area is for the moment unfavorable considering that semi has dropped quite a bit over many quarters in a row. Now also industrial and scientific are kind of following a similar path, you could say in two, three quarters in a row now. And then the service business, like I said, opposite to what we see in the other business areas is a bit softer from a profitability point of view compared to the semi equipment business particularly. And so as a result, we see this as a negative mix. Now, I think the mix is not something we can influence too much, except for the fact that we would like to grow semiconductor business faster. But of course, how that market looks like for the moment. And we are ready to be able to benefit from that improvement. But it is not immediately around the corner, it seems. So we will need to kind of sit tight and wait. And while we do that, we try to take all measures necessary to improve and protect the profitability of the respective divisions within Vacuum Technique. And that is also the reason why we decided that it was time to make these restructuring measures to adjust, let's say the size of the suit to the size of the body a little bit more. In industrial Technique, the picture is a little bit different. Because as you know, we can see some volume growth still from the revenue side. We still are able to invoice some of those orders. But there is more the project business that has impacted this particular quarter that is not necessarily going to happen quarter after quarter, but it happened at least this quarter. And let's say the systems business is a little bit less profitable than the more standard business. And then as I already indicated before, these are in the investments, which I don't think are necessarily going to be increasing quarter after quarter. The only fact is that given the drive for automation, we need to combine the Vision Technology that we have acquired a number of years ago with the other technologies like the fastening solutions, like the dispensing solutions, in order to try to make the most of it with our customers and also to increase the competence level of our sales force and provide them with the right tools. So they can offer these more complex type of solutions to the customer. And that is for the moment, dragging down a bit the margin. That being said, also within ITBA, we are discussing with the business area and the divisions within the business area are working on plans to see how they can protect profitability in the coming quarters. Also there, I would not be willing to give you a firm commitment that Q3 will all of a sudden look much different, necessarily. The measures might take a little bit of time to implement, it might take a little bit of negotiation and discussion. But ultimately, we should see a better margin than what we see today.
Sebastian Kuenne: And you don't expect capacity cuts in IT than in Q3?
Vagner Rego: Again, the divisions individually will need to evaluate case by case what are the measures that are necessary in order to adjust also there the size of the suit to the size of the body. If that would be capacity, then that could be on the table. But it could also be of course, it will always start with the kind of mild [technical difficulty] to reduce discretionary spending to the maximum possible to avoid more harsher type of measures. But should the need be there to do something else, then I'm sure that the divisions and the VA will knock out to execute accordingly.
Sebastian Kuenne: Thank you.
Operator: The next question comes from Andreas Koski from BNP Paribas (OTC:BNPQY) Exane. Please go ahead.
Andreas Koski: Thank you and good afternoon. I would like to ask a question about Compressor Technique. Solid order growth of 6% in the quarter, again driven by gas and process compressors. So does gas and process compressors now account for more than 20% of Compressor Technique? What's been the main verticals driving growth recently in gas and process compressors? Is it still [indiscernible]? And how will this impact the margin mix when gas and process compressors starts to account for a higher share of sales? Thank you.
Vagner Rego: Thank you for the question. I think first of all, I think we have published end of last year in our Annual Report 2023 gas and process compressors were about 10% of our revenues. Now this quarter indeed what is slightly higher than that considering the growth in orders received, but this is not a number that we disclose every quarter. But they have performed very well. I think first of all, if I look back some time ago, they were quite -- they had this centrifugal compressor technology was mainly dedicated for the [indiscernible] market segment. And over the course of last maybe 7 or 8 years, they have been adapting and tuning this technology to be used in several market segments. Like gas processing is one of them. We have -- still have reused some of these technologies that we have also for LNG. So they have expanded the technology, the number of applications that they can do with that technology and that allowed them to grow and have an important contribution. Of course in this it is normally type of business book orders and can be a little bit lumpy, but they have -- also have worked on improving the profitability. And I think as we speak, they are also invoicing more and more there is already an impact on that what you mentioned about the mix. But I think the way we are configuring the business now, we don't see huge impact going forward when they start to release the invoice because the ramp up is already happening. And you see the profitability of Compressor Technique remains at a solid level.
Peter Kinnart: Maybe I can just add to underline and to emphasize that the 20% is not at all the ratio for gas and process within Compressor Technique as Vagner mentioned. It's around 10% as published in the 2023 Annual Report. Of course, maybe also on the mix, of course, the fact that gas and process is doing better from a revenue perspective is of course affecting the mix as equipment. profitability for this type of equipment tends to be on the lower side compared to the industrial range.
Andreas Koski: Understood very clear. I was thinking that the book-to-bill was very high and that's why I asked about the share of the order intake, but very clear. Thank you.
Peter Kinnart: Thank you, Andreas.
Operator: The next question comes from James Moore from Redburn Atlantic. Please go ahead.
Q - James Moore: I want in fact to return to the vacuum margin question. I heard everything you said, Peter. I'm just thinking about the drop quarter-on-quarter of 170 basis points with 21.8 to 20.1. Given that the business has been between 21% and 23% five quarters that quite a drop. I understand your points about service equipment. Would it be possible to say whether both the semi margin on the equipment side and the industrial and scientific margin on [indiscernible] dropped? Was it just on the industrial side? And the second aspect of the question is price cost. We know that pricing in this markets been more challenging over 15 years and compressor? Are you seeing the net price cost move to the point where it's also a drag on the margin? Or is it simply volume and mix?
Vagner Rego: James, thanks for your question. With regard to more deep on the profitability on a kind of division by division level, we will not comment further because that we only look at the business area from that perspective. But I think, of course, pricing behavior in different business areas can be different as you allude to. If you have a more diffused customer market, it's generally easier in relative terms to push through price increases to the market, while with a very concentrated key account type of business, like in motor vehicle, but also in semi obviously, it tends to be more difficult. That being said, I can confirm one thing that is that price effects across all the business areas continue to be positive. And that we will continue to see a good contribution from pricing across all the business areas. At the same time when we look back a year or even a little bit more, we all remember that inflation all of a sudden picked up quite significantly at a certain point in time and that urged all businesses basically to quickly take measures to improve the pricing and that is also what we did. And today's pricing levels improvement levels are not exactly at that same level anymore. They are quite a little bit lower than they used to be a year-ago, but I will say that still positive. But again on Vacuum Technique specifically, the volume is the biggest contributor to this particular drop in the margin. And mostly then coming from the fact that we have eaten well into our order book and that there is less to invoice nowadays, and of course now also Industrial Vacuum and Scientific Vacuum are dropping as well where usually I would say that the invoicing [ph] time is a little bit shorter versus the orders. And so that those different combinations of factors are contributing to this margin.
Q - James Moore: Thank you very much.
Vagner Rego: Thanks James.
Operator: The next question comes from Ben Heelan from Bank of America (NYSE:BAC). Please go ahead.
Ben Heelan: Yes, thank you. I just wanted to come back to the automotive drop off in Industrial Tech and can you help us understand exactly what drove this? Was this one big project? Was there coming to an end? Just help us get a little bit more color? And how do you see that particular business from an order prospect is playing out in the second half of the year? Thank you.
Vagner Rego: Thank you. There are a couple of points there. In one hand, you see is low EV adoption in Europe and U.S. And that is of course it's driving a little bit of the projects to be postponed. That's one area. The second area is Asia where we have overcapacity. And then there is the other side of the coin, especially in China. So with a little bit of positive on the automotive, because you also see some Chinese companies going globally, and there are quite a lot of factories coming up as well. And also with our strong position in China, we also support them to grow out -- outside China.
Ben Heelan: Okay, thank you.
Vagner Rego: Thank you.
Operator: The next question comes from Gustaf Schwerin from Handelsbanken. Please go ahead.
Q - Gustaf Schwerin: Yes, hello, thank you. On the same topic as the last question, I guess this is what the market for everyone we had into Q1. Now we actually saw orders in automotive increasing significantly, sequentially. So with the big slow down, maybe rephrasing a bit differently, were you surprised about the magnitude of the slowdown here? Because it looks to come quite [indiscernible] from Q1? Thank you.
Vagner Rego: Yes, I think also there we have different types of business. We have -- so in the assembly line, it's a business that bit more fragmented, and the orders are a bit more constant. And then you have also orders on the body shop with our industrial assembly solutions. And there the orders are a bit more bulky [indiscernible]. And there we see stronger slow down recently depending on the type of orders, but the main point, I think we saw in Europe decline, but it was more significant in China.
Q - Gustaf Schwerin: All right. Thank you.
Vagner Rego: Okay. Thank you Gustaf for that last question, I have to say. Unfortunately, our time is up. But of course our Investor Relations Team disposal for any further questions you might have and we will try to help you to the best of our ability as always, of course. With that, I would like to hand back to the operators to close the call for today. Thank you all for participating and talk to you soon.
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