Atlas Copco AB

welcome to the atlas copco q2 2024 report presentation for the first part of the presentation participants will be in listen only mode during the questions and answers session participants are able to ask questions by dialing hash 5 on their telephone keypad now i will hand the conference over to cfo peter kinnett please go ahead

Thank you, operator, and a very warm welcome to all of you on the line today for this second quarter earnings call for the Atlas Copco Group. I'm very happy to be here today to give you a bit more color on our second quarter results. And together with me, I have Wagner Rega, 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, then we can go for questions. So thank you for that already. And with that being said, I would like to hand over to Wagner Rigo, our CEO.

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 has 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 mixed 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 within 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-site and negative in the industrial and scientific vacuum. Orders have declined as well for industrial assembly and vision solution, more connected to the automotive business. and a decrease as well in order intake for power and flow. 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 regional growth, we had growth in all regions except Asia. And we had solid revenues and operation cash flow. Then if we move to slide number three, with a little bit more details on the financials, our orders received were 43.6 billion SEC with the organic decline of 1%, while the revenues were quite solid at 44.8 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 LTIs as one-time items, 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 cost 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 industry vacuum, we see a weaken in the orders received before we decided to adjust the organization with one-time cost. This is not affecting our semi-business that we are very well positioned for the future, and the focus is going to be mainly on the industrial and scientific vacuum. Profit was $7.6 billion, positively affected by one-time item, a $510 million tax provision. And Peter will come back with more details on that one. And basic earnings per share, $1.57. Solid operation cash flow. and solid as well return on capital employed at 29%. If we then move to slide number four with the regional approach, so we see in total orders at excluding the current impact plus 2% worldwide. Of course, this includes acquisitions. But if we go a little bit more in details, we see the US with a 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 as well. And they're a little bit more positive environment in aerospace business and off-highway when it comes to ITBA. And we see a negative development in vacuum and negative development in power techniques. When it comes to Europe, compressor technique performed quite well. Vacuum was a bit more flattish and power technique had a 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 we scored quite 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 had a positive development. So compressor technique was 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. Other regions, we had very positive. India, quite positive as well. Korea, that is quite important for us as well. If we then move to the slide number five, 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 number six, we then see our organic growth. development that was minus 1% with 2% structural growth, minus 1% currency. And the 2% structural is coming mainly from our technique. When it comes to revenues, we had, again, 2% positive on 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 44.8 billion euros. So going to slide number seven, we see now with the organic growth in compressor technique of 6%, we see now in the last 12 months the orders for technique is contributing. 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 number eight to give a little bit more details for business area. Like we mentioned before, we're going to go for compressor technique at 6%. The industrial compressors were basically unchanged with the negative development in China. But basically, when we put all together, 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, they have developed the technology to be able to be deployed in 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 points of minus 40% at any conditions without using electricity, using the heat of compressor. So quite a nice development there. Then on slide number nine, vacuum technique had 2% organic growth. And here, the semi-equipment orders were up. But it's fair to say as well that from a low level, but we 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 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, Q during 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 cost. If we adjust for the restructuring cost we end up at 21.5, and negative affected by volume, of course, because we endorsed 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 an 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 IPBA that we like to call internally, but industrial 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 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 more 20.8, negatively affected by investments in R&D, some digitalization and project business. We have been voiced some project business and that had an impact in the profitability as well. And the automotive industry is also in transformation that requires some 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 investments uh on that area and that had an impact as well and return on capital employed at 22 percent And here we see an innovation or 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 number 11 for power technique, had an organic decline of 11%. And here you see equipment orders down markedly. But here it was more in the industrial power and industrial pump And they also have some large orders, 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 increasing organic revenues and sales mix and negatively affected by the acquisitions. Return on capital employed of 20%. And here another innovation, a new medium-sized energy stock system that can be utilized in combination with our electrical power, electrical portable compressors. Good. If we then move to slide number 12, we reach then 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 reach 22%. which was the same level of last year, and operating margin of 21.1, slightly down from last year, 0.1% 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.

Thank you, Wagner. Continuing on the income statement with the net financial items, of course, a 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 would say, should clearly note down tax rate of 17.6%. What is the reason for this? Wagner already alluded to that at the beginning. We have released a provision related to a tax incentive. We have that provision in our books because we believe that we were able to qualify for this particular tax incentive, but we were not entirely certain if all of the type of expenditures we are 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 claw 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 this tax incentive. 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, have now been released. And this is a one-time impact of about 500 million Swedish kronor, slightly more even. That, of course, positively affects our effective tax rate 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 a positive effect in the future due to the fact that Provisions we have built in the second half of 2020, 2021, 2022, will, let's say, gradually expire, so to say, as time progresses. And so quarter by quarter, we will release some of these old quarters step by step. How much will the impact be for the future effective tax rate? Well, it is about 1% on the quarter. So that means that when we would normally guide at about 23.2% to 23.5%, effective tax rate it would go down in the coming 10 quarters probably to 22.2 22.5 percent of course all other things being equal and we know that in the tax world that can change over time but anyway that is at least based on today's facts where we stand as a result of that 7.6 billion compared to 6.9 billion last year. And then, as already indicated, return on capital employed of 29%, return on equity of 31%. Then I will move to the next slide, slide number 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 cost we have taken in vacuum technique. And as already indicated, this restructuring cost 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 a dilutive effect, which is, I would say, common almost in the sense that 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, on the margin particularly. That means, of course, that there are a few that the drop through has 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 compressor technique to start with, then we have a small dilutive effect from the acquisitions, quite a positive impact from the currency here as well, and then I would say a minor dilutive effect 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 achieve in compressor technique. In vacuum technique, the picture is a little bit more complicated. We already alluded or talked about the restructuring cost, which of course eats up quite a bit of the margin for the quarters. The acquisitions are here also slightly dilutive. Also here, positive contribution from currency, but then a bigger impact from the drop 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 that profitability for the future. In industrial technique, we have basically no impact from the acquisitions, I would say, but also here positive tailwind 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 is affecting the margin negatively as opposed to selling kind of standard off-the-shelf products, let's say. Secondly, also a continued ramp-up solutions, talking about automation that we like to add, let's say, to the fastening and the dispensing solutions, for example. And that also goes with a lot of competence development for our Salesforce, updating and upgrading of our systems in order to be able to code these more complex type of projects, et cetera. And that is then the digitalization aspect, you could say, that also is requiring a bit of extra effort. we are verifying with the divisions what we can do to protect that 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, a good start, that is really... positive drop-through from the business. The acquisitions are of course a very significant part of their revenue growth and therefore also have a bigger contribution on the margin in a dilutive way. The currency impact is basically a non-existent power technique, but then very positive development on the drop-through due to good organic development offset 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 rental equipment in order to make sure that we have the I think the most important thing I would like to highlight is the improvement if we compare to June last year, the improvement in the inventory, where of course the pushback of customers to not immediately take the inventory off our hands. 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. And we also come back in the cash flow, in fact. 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 dividend that is being taken away. And that is also experiencing are up compared to December because of the fact that we split the dividend in half and there is half of that dividend sitting on those non-interest 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 11 billion, close to 12 even. Slightly improved impact from the net financial item 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 to deliver a solid cash flow here we also see here the continued investments in the rental fleet as well as a 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 Wagner to give you some guidance on the near-term outlook.

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 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... within short. 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 codes and activity level there throughout the organization. And we don't see neither very positive sign or very negative sign. and then we we combine those pictures then is why we come with this near same outlook that we expect that the customer activity will remain at the current level So then, in summary, Q2, we had a mixed demand. So we strong gas and process overall orders. Industrial compressors were flat. Vacuum technique orders unchanged. Order decline in industrial assembly, mainly even by automotive, decrease order intakes in power and flow, but that we have also explained the reason, solid and on a positive note, solid growth for service in all business areas. And when it comes to the regions, we have growth in all regions except China. And solid revenues and operating cash flow. And that is our summary of Q2.

Okay, thank you, Wagner. Maybe one last additional note to give is about the foreign exchange difference, how that will look for the next quarter, also 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, basically. 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 that 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 Fabio and myself.

If you wish to ask a question, please dial £5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial £6 on your telephone keypad. The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

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, Wagner, on orders in Asia being the only region that was down, in China particularly. We have seen actually China PMIs being the only ones, about 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.

Good. Thank you for the question, Daniela. I think first of all, it's 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 Australia. 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. significantly, I must say. The general industry has some impact, but the big orders we see is the driver war in those market segments. And we see a slightly weak demand in the general industry as well. There are some possible upturns there, the installed base, but that is still not materializing. So and then on the positive note, for vacuum technique, especially on semiconductor, we see a positive development, positive growth.

Thank you.

The next question comes from Andrew Wilson from JP Morgan. Please go ahead.

Hi, good afternoon. Thanks for taking my question. It follows very nicely on from the end of that comment with regards to semis in China. I'll kind of leave this deliberately open-ended because I guess there's a reasonable amount to talk about, but just trying to understand in light of some of the speculated, I guess, curves, restrictions, tariffs, etc., around, I guess, the Chinese semi-industry and 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.

I think, first of all, thank you for the question. Nowadays, our localization is quite strong in China. We produce most of the products that we sell in China. There are a few items that we don't produce. It's not a significant part of our revenue. So from that angle, I think we are covert, but we are also investing R&D capabilities in China as well in that area.

Thank you. Sorry, just to try and put a quantum on that. Can you tell us how much of the VTE sales are in China?

We normally don't disclose that figure. I think China is a very important part of our revenues, but we normally don't disclose that figure.

Understood. Thank you.

Thank you, Andy.

The next question comes from Magnus Kruber from Nordia. Please go ahead.

Could you expand a bit on the activity seen in the semiconductor business within VT? I think this is 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.

Yeah, well, thank you for the question. We don't go in that level of detail, but I think it's important to highlight that this is a key account business. 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 recent activity. 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 is 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.

Got it. Thank you so much.

The next question comes from John Kim from Deutsche Bank. Please go ahead.

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.

Thank you for the question. What we have seen is a slight increase in the utilization rate. We measure pump returns with positive signals, but it's far from the high levels that we saw in the past when the demand for memory was very high.

Okay, thanks so much.

The next question comes from Max Yates from Morgan Stanley. Please go ahead.

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 listen to quite a lot of what you've talked about on the EBIT margins, you talked about some R&D investments in industrial techniques, you talked about some mix in some of the divisions. It's maybe stuff that is the right thing to do longer term, 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 in the divisions 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 there 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?

Perhaps you can take that one, Peter?

Yeah, 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 sense that we are at levels of, you know, 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 that are performing a little bit less 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 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 That I think is a bit difficult to say because some of these measures also 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.

Okay, understood. Thank you very much.

You're very welcome.

The next question comes from Sebastian Kuen from RBC. Please go ahead.

I would like to drill 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 drops 110 bps. And this is despite seeing organic growth, despite seeing a further rise in the service share by about 1.5% or percentage points over the year. 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. Maybe you can elaborate a bit.

We've tried to share a little bit per business area why we believe this is happening. I think on a CP level, I would say we have a rather minor drop. It doesn't say that we are happy to see a drop, of course, but we are at a very high level nonetheless. But you're right, of course, that the currency is adding somewhere around for the group. But I think the two areas where we are facing the biggest challenge in a way is then 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 revenues are not an as the revenues are going down. Secondly, 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, you know 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 take 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 R&D 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 governing 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.

And you don't expect capacity cuts in IT then in Q3?

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, 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 would always start with the kind of mild type activities to reduce discretionary spending to the maximum possible to avoid more harsh type of measures. But should the need be there to do something else, then I'm sure that the divisions and the BA will not doubt to execute accordingly. Thank you.

The next question comes from Andreas Koski from BNP Paribas Exane. Please go ahead.

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 marine? And how will this impact the margin mix when gas and process compressor starts to account for a higher share of sales? Thank you.

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 was 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 had this centrifugal compressor technology was mainly dedicated for the air separation market segment. And over the course of last maybe seven or eight 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 to have reused some of these technologies that we have also for LNGs 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 also have worked on improving their profitability And I think, and 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 a huge impact going forward when they start to release the invoice because the ramp up is already happening. And you see the profitability of companies Compressor technique remains at a solid level.

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 Pavel mentioned, it's rather 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, the profitability for this type of equipment tends to be on the lower side compared to the industrial range.

Understood, very clear. I was thinking that the book to build was very high, and that's why I asked about the share of the order intake, but very clear. Thank you.

Thank you, Andreas.

The next question comes from James Moore from Redburn Atlantic. Please go ahead.

I wondered if I could 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 from 21.8 to 20.1. Given that the business has been between 21 and 23 percent of five quarters, that's quite a drop. I understand your points about service and equipment. Would it be possible to say whether both the semi-margin on the equipment side and the industrial and scientific margin on the equipment side dropped? Or was it just on the industrial side? And the second aspect of the question is price cost. We know that pricing in this market has been more challenging over 15 years than compressor. Are you seeing the net of price costs move to the point where it's also a drag on the margin or is it simply volume and mix?

Yeah, 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 we only look at the business area from that perspective. But I think Of course, pricing behavior in the different business areas can be different, as you allude to. If you have a more diffuse 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 still 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 level 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 would 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 inputting time is a little bit shorter versus the order. And so those different combinations of factors are contributing to this margin drop. Thank you very much. You're welcome, James.

The next question comes from Ben Helan from Bank of America. Please go ahead.

Yes, thank you. I just wanted to come back to the automotive drop-off in industrial tech. Can you help us understand exactly what drove this? Was this one big project? Was it coming to an end? Just help us get a little bit more color. And how do you see that particular business from an auditor's perspective playing out in the second half of the year? Thank you.

Thank you. There are a couple of points there. In one hand, you see a slow EV adoption in Europe and the US. And that, of course, is driving a little bit the projects to be postponed. That's one area. The second 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 outside China.

Okay, thank you. Thank you.

The next question comes from Gustav Schwen from Handelsbanken. Please go ahead.

Yes, hello, thank you. On the same topic as the last question, I guess this is what the market felt when we had into Q1. And then we actually saw orders in automotive increasing significantly sequentially. So with the big slowdown, maybe rephrasing it a bit differently, were you surprised about the magnitude of the slowdown here? Because it looks to come quite sharply down from Q1. Thank you.

Yeah, I think also there we have different type of business. We have, so in the assembly line, it's a business that's a 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, larger scale. And there we see a stronger slowdown recently, depending on the type of order. But the main point, I think, we saw in Europe a decline, but it was more significant in China.

All right. Thank you. Thank you, Gustav, for that last question, I have to say. Unfortunately, our time is up, but of course, our investor relations team will be at your disposal for any further questions you might have, and we'll try to help you to the best of our ability, as always, of course. With that, I would like to hand back to the operator to close the call for today. Thank you all for participating, and talk to you soon.