Atlas Copco AB

for the Atlas Copco Group. My name is Peter Kienert and I'm here together with Wagner Rego. And we have the pleasure of guiding you through this hour. We will start as usual with a short presentation on the results and to give a little bit of color to more details on the underlying orders, revenues, and so forth. I will, before handing over to Wagner to start the presentation, already now, as usual, you know the drill. I will ask you to please make sure that when the time comes to ask questions, that you only ask one question at a time. Especially today, it's very important because we are really tight uh have a tight schedule today as we need to uh run off to the agm right after this call so uh i would uh appreciate a lot if you could help us a little bit with uh that discipline um so now no with no further ado i uh then like to hand over to wagner rigo

Thank you, Peter, and welcome to this conference call. As you can see in the first slide, we saw a picture of a gas and process compressors, and we had a good development in Q1 for gas and process compressors, and we showed one example of one of the machines that they produce. Now, talking about the Q1 result, we saw a strong development in terms of orders received. We are happy with the order level that we have had. Then we also had the continued growth in service. Our growth journey in the service business continues, and we are also quite happy with that. Overall orders in equipment were flat. I already mentioned about the gas and process order that was significantly higher compared to previous periods. And we saw vacuum flat. We have yet to see a recovery in the vacuum business, but it was also good to see that they had a flat development. Industrial assembly and vision solutions were down, and here the automotive sector is the main reason. And power, air and flow in power technique equipment were down. Those are the highlights of the order development in the quarter. And then we had a lower operating profit driven mainly by negative revenue volumes development, but not only, also mix and functional costs played a role there. And in the quarter when we saw the development of our revenues as well in vacuum, we have decided to further reorganize or right-size the vacuum organization for the revenue volumes. And then we booked also a provision for that reorganization. So positive flat cash flow, but a solid cash flow, even with lower revenues and lower profit levels, the cash flow remain at the same level, which is quite positive. And we have completed 10 acquisitions in the quarter. then if we move to slide number three uh the order levels at 46.6 billion swedish kronan is quite a high level it was the second best quarter ever behind q1 2023 in terms of orders received revenues we had a decline in the organic growth of two percent positive we will see a bit more in details but positive in compressor technique but negative in the other three business areas so I have mentioned already about the orders received about the profit and the periods and also good cash flow development driven mainly by the reduction in our inventory levels that we have worked to make sure we believe we can operate with lower inventory levels. It was good to see the development in Q1 this year. So going then to the next slide, slide number four, where you can see our development in the different regions. If I can start with South America and Africa and Middle East, they had a very positive development. South America, as you can see, 22% growth. Africa and Middle East, 18% growth. If we then move to, and I think it's important, in those two regions, South America and Africa and Middle East, we saw positive development based on business areas. In those two regions, our business areas performed quite well. Then when it comes to Asia, we saw with Plus7, we saw positive development in CT and VT. Power technique was significantly up with very good orders in portable air, but not only, also industrial flow was quite strong in the region. And we have industrial technique down, mainly because of the automotive sector. So three business areas performed quite well in Asia in Q1. Now, moving more into the regions that were more negative, we had Europe. in europe ct was flat equipment in compressor technique was slightly down and then the service business continues to grow and compensate allowing compressor technique to have a flat quarter in europe and then vacuum technique power technique and industrial technique had a negative development i think there we see several market segments with negative development in terms of orders when we move to north america there we see if i start as well with ct orders for industrial compressors were somewhat down in north america vt it's a different or vacuum technique is a different dynamic we saw industrial vacuum developing Well, together with scientific vacuum, but a negative development in semiconductor vacuum in North America. Power technique, in the other hand, we normally have quite high orders received in Q1 coming from the rental companies. And I would say that we didn't see that development in Q1 this year. It was notably down in portable layer. uh so and that impacted the overall power technique result and in the on the positive note the industrial technique had quite a solid growth in north america supported by the acquisitions that the acquisitions we have done of airway last year it's performing quite well and allow them to have a good growth without the acquisition they were flat so that is that development in the different region and regions and then if we have we put all the results together on slide number five you can see our organic development flat in the group supported by the acquisitions two percent so with the structural changes so when we end up at 46.6 billion revenues in the other hand on the other hand had the negative development of minus two and then we had a compensation coming from the acquisition that allow us to have a flat month compared to the previous quarter. So if we look to the split among the business areas, we see now that compressor technique is 47% of our orders received in the last 12 months. And we continue to have our organic growth development. This quarter was plus 3%. Definitely supported by the gas and process order development. then vacuum technique had the order is now 21 of our business um one percent organic growth is good to see a positive figure there then power technique now less in the last 12 months orders received this is slightly higher than industrial technique and the order development was minus four percent followed now by industrial technique where the order development was minus eight percent organically Then, if we go more in details in the business areas, we first talk about compressor technique with a 3% organic growth and industrial compressors somewhat down, and that we see that in the small compressors and large compressors, mainly, like I mentioned before, in Europe and US. Then we had a significant development in gas and process compressors. It was about LNG orders in Asia, but not only. They had a good development as well in other market segments like fuel gas boosters for power generation, air separation equipment as well. So it's a bit more diverse and quite expressive in the LNG market. so we continue our growth journey in compressor technique service supported more and more from the for by the digital solutions we have there very good to see continued growth revenues increased three percent organically and solid profit margin around 24.4 it's a good we are happy with the profit margin So supported by increase in volume and currency. And then we have a negative effect coming from mix the acquisitions that we are doing also higher R&D. We keep on the same pace when it comes to R&D, because I think as you can see below this solution, this new compressor or your free compressors is key because of a machine at this size. This size when you can come with higher efficient that can activate during difficult times replacement market as well. I think we will keep the pace on R&D. We had higher functional costs as well. I think here I would say we have decided as well to be more focused in application driven products and we decided to create a division for that. We consolidated one division, professional air division is now consolidated into industrial air that allowed us to create a new division that we are investing. And we believe that we will bring results as well, the combination of the R&D that we are making around these products. and the creation of this new division will bring results over time. If you look at the profitability, it has been quite stable over time, very solid development there. If we go to vacuum technique, we see the one percent organic glow uh like i mentioned before we have yet to see the recovery uh in the semi-vacuum part of the business ai is strong we we get quite a lot of orders around the ai but it's not strong enough to make a growth to bend the trend in terms of growth for the entire semi-vacuum part of the business or even the vacuum business area. But it's good to see a positive figure there. Industrial vacuum and scientific vacuum flat, we see more positive in scientific vacuum. I think that was a good development that we saw in the quarter. uh industrial vacuum is a little bit more um more negative so but good the combination of both uh we had a flat but it was we were quite happy to see the scientific vacuum picking up again and then we continue a very good growth in the service business mainly driven by the semi side of the service driven that of the service business, we see quite a lot of activity. Of course, there are there were quite a lot of fabs come into place. And now the requirements to do maintenance is coming. I think it was good. On the negative side, the revenues were down 5%. And of course, that drove us to further adjust the organization. But it's important to highlight as well. I think we are happy if we look to the profit levels we have now. of course we are not happy with the level we have now but we are very happy with the activity level to adjust the profitability i think that we could say they they they came with this organization that we we still don't see all the the benefits from that organization because we decided in q1 and then we started the execution in q1 we see a little bit of benefit in q1 but it will come in the coming quarters um all the benefits we also benefit in q1 from previous restructuring costs that we we are finalizing now the ones that we have announced about germany so and that means that the underlying profitability at 19.6 was a good development in our view. And the activity level to adjust the profitability is quite good. And we are happy with the activity level. to bend the trend. And they also continue, despite of the focus on some cost measure, they continue the focus on innovation. That's an area that we cannot slow down innovation. So as you can see, a new plasma wet abatement system that we have released. So we will continue to come with new products to support the different market segments they have. Then on industrial technique, we had the order decline of 80%, mainly driven by automotive, but not only now. We saw also a slowdown in the general industry, but it's also fair to say we had a very strong Q1 2024 when it comes to general industry. Then they have a tough comparison, but quarter on quarter, it was negative. We continue to grow our service business there. I think we are also happy with the development there. Revenues were down 9% organically. And if you look to the table on our right, you see that they had record revenue quarter in Q4 last year. Now it's lower. That has an impact. And they came out with a profitability of 20%, definitely affected by lower revenues and currency. And also there, they continue to invest in innovation. Here is about the micro torque that they can sell to the electronic business, the assembly line of smartphones, for instance, we can use this type of product. Now, going to power technique, we saw orders development down organically. Equipment orders were down, mainly coming from rental companies in the US, but not only. Also, Europe is low in terms of rental companies' orders. Also industrial flow in Europe was weaker compared to last year. Our specialty rental business continued to grow and our service business was somewhat down, mainly driven by the US. Revenues was down organically. And there we see they do have orders that they can invoice. We see rental companies getting equipment in a lower pace. And that has an impact. And the profitability was affected by lower revenue volumes. But not only. We saw capital cost increase from the rental assets. We have our own rental company. I think we were investing for growth. We didn't see The growth that we would like to see, we still see growth, but we didn't see the growth we would like to have. There we will go through some adjustments as well in the rental fees to bring profitability down. We also have the functional cost increase, and that is coming also because we have acquired several assets around the pump technology and we have decided to create a new division. I think we have communicated on that. will have a division for portable power and flow meaning the watering products portable the watering products and we will have another division only for industrial flow and that focus will bring dividends over time but now we have to do the investments on customer on the customer face functions to make sure we can sell all the products that we have worldwide so and we still don't harvest on that one and then you see this decline in the order in the profitability then uh here you can see the consolidated picture when it comes to profitability but i think i will hand over now to you peter you can further elaborate below the okra opiate line

okay thank you wagner so then i will continue with net financial items you see that from basically a value close to zero last year we went to minus 135 in fact we are having lower net interest costs but on the other hand we incurred some higher financial exchange differences partly linked to the hyperinflation in turkey for example but not a very big item in the income statement Then when we go further, profit before tax, 8.47 billion Swedish krona, or 19.8% of revenues, an income tax expense of 1.9 billion approximately, which is an effective tax rate of 22.1%. would say currently on the lower side also if you compare to last year same quarter that is mostly linked to a number of continued release of provisions related to our high-tech innovation incentive that we benefit from for next quarter we rather expect a somewhat higher effective tax rate of about 23 percent and I would also like to remind you at this point that if you compare to Q2 last year you will notice a very very low effective tax rate of 17.6 percent so of course overall on a 12-month rolling basis we will go back to a higher effective tax rate again and that gives the profit of for the period of just two million shy of 6.6 billion swedish krona a basic earnings per share of 1.35 swedish krona and return on capital employed close to the return capital of equity on capital equity of 28 there then i would like to go to the next page and dig in a little bit more into the profitability into the profit bridge First of all, if I go from right to left, we have our, let's say, almost usual component of share-based LTI programs, in this case, adding 0.3%. The items affecting comparability are referring to the restructuring efforts we are doing in vacuum technique business area, roughly two-thirds linked to our semi-business, one-third roughly to the general vacuum business, in order, as Wagner already indicated, to, let's say, adjust the size of the suit to the size of the body, given the fact that we are faced with these lower revenues for the moment. The acquisitions also had a slightly dilutive effect, even though they did generate some profit on the top line. The currency, on the other hand, was accretive and added a bit to the profitability, but then the drop through, unfortunately, was not positive. um and what are the main contributing factors for this on the total group level if we summarize then i would say the volume of course had a big impact so wagner referred a couple of times already to lower revenue volumes for the different business areas the mix was quite important we will show that in the next slide in more detail and then the continued investments that we do in r d as well as the functional costs that was then mostly referring to the fact that we have two new divisions that we want to fund in order to make sure that we get the right speed to execute on that strategy. When it comes to the currency expectations for next quarter, to be honest, this is probably the most difficult quarter ever to try to predict anything, including foreign exchange rates. But we do believe that looking at the latest developments, the currency effect will turn negative. potentially up to almost a billion negative one billion swedish krona negative potentially of course all things being equal and i wouldn't want to commit to all things remaining equal in the coming three months to be honest If I then move to page number 13, then we dig in a little bit more into each of the business areas because there are quite a few differences. And I will actually focus now entirely on the organic development. Happy to take any other questions with regard to the bridges. But I think the organic development is the most important point to comment on. We see across all the business areas, in fact, a negative impact on the margin. But the reason why differs a little bit between certain divisions or business areas. First of all, if we look at compressor technique, then there we see a positive impact from revenue volumes. Also positive impact from currency, by the way. But in compressor technique specifically, there is quite a significant negative mix effect. And that has to do with the fact, on the one hand, for example, gas and process is a fairly big contributor. We have sold quite a lot more equipment. The margin of equipment in gas and process is obviously lower than what we see in service business, for example. And we also see that the businesses or the divisions that have been contributing most to the revenue volume improvement are actually having a lower profitability in general, while the ones that have, on the other hand, maybe have a bit more struggles. were normally contributing with higher profitability so quite a significant mix effect in compressor technique for this quarter and then also notable in the bridge the acquisition impact which is also somewhat negative and as i already mentioned r d and functional costs considering that we have created a new division air and gas applications and the continued investments in the product portfolio on vacuum technique then also a negative impact on the margin Also, in this case, however, there is a negative impact from revenue volumes to begin with, and that is by far the biggest impact we see. That basically explains, I would say, the negative drop through that we note in vacuum technique. On the other hand, also currency has a negative impact on vacuum technique for this quarter. Industrial technique. also here revenue volumes the main contributor by far when it comes to the margin development meaning the revenues are down and the cost structure is not following exactly with the same speed and as a result we see a bit of a deterioration of the margin here and then last but not least power technique And actually here, the answer is broadly the same revenue volumes having quite a big impact. But there is more in power technique, because if it was only revenue volumes, then I think the impact on the operating profit would have been lower. but Wagner already mentioned before as well the impact from the rental fleet. You have noted in the previous quarters that we have repeatedly mentioned in the cash flow continued investments in the rental fleet, partly related to the fact that during COVID we kind of stopped investments, so we needed to catch up, but additionally we've also been working on building up new segments within specialty rental. and that of course requires fleet now for the moment with revenue volumes not really boost booming knowing that the new investments are also at a significant higher cost after the high inflation that we have seen, the impact of this rental fleet is affecting the margin negatively. And there we will make certain adjustments and be more selective and make sure that the rental fleet is fit for purpose. And then last but not least, as Wagner mentioned, the new division for industrial flows, splitting it out of the portable power and flow division in order to make sure it gets the best opportunities in the market. Then I move to page number 14 on the balance sheet. To be honest, I don't think too many comments to give here. There is, of course, the impact of acquisitions on the one hand. I think the one thing which I would really like to highlight a little bit is the inventory development, because that is after a long time of seeing an increase, we are finally able to bring down the inventories to somewhat at least. I don't think we are at the end of that journey yet. We believe that there is more potential still, but at least we are seeing that we are making some good progress here. And I think that is very rewarding for the organization to note these positive results. Then my last point to mention here before I hand over to Wagner again is then on the cash flow. We believe that the cash flow for the current quarter was actually quite solid. It's on par, you could say, with the same quarter last year. But the difference, of course, at the operating profit in absolute terms is a little bit lower. But on the other hand, the change in working capital is basically more than compensating for that. So I think that, again, is a positive note with regard to the working capital. that we see the positive development there. With that, I think I have given all my comments to the financials and then I would like to hand over back to Wagner.

Thank you, Peter. Before we go to near-term outlook, I would like to give some words about the tariff. So we believe there will be a limited impact expected at the current tariff rates. But this is changing so rapidly with new things. coming and going so new information um quite often so what we are doing now is really working on the mitigation actions and perhaps uh the main one is the price management and tariff surcharges I think that's the main mitigation but not only I think we are looking to the production Like we have mentioned in other opportunities, we have 18 production facilities in the US. We analyze what makes sense or not, what has a business case or not to produce in the US. considering the current levels, we already had some business plans ongoing. I think we will continue with our exercise in that area. We also have the ramp up of our production facility for dry vacuum pumps in upstate New York that continues as well. So that analysis are done on the way and some already actions are being implemented. We are reassessing as well supply routes from specific markets, intensifying local sourcing when we see that possibility. quite a lot of activities uh ongoing right now so but we don't have a figure as well to share of how much we believe is going to be limited margin impact Our forward-looking statement then, just to remind a bit, our forward-looking statement is that sequential guidance, of course, is not a straightforward projection of orders received, And it's our best estimation about what is going to happen with the customer activity level. And we see that there are quite a lot of uncertainties now in the market, more than before. We have several things ongoing. I don't need to repeat about tariffs and also quite a lot of hesitation in the market. so and when we look to all these factors and also if we look to the development of our industrial compressor business our industrial vacuum business general industry in industrial technique we see quite a lot of hesitation really because this level of uncertainty does not drive too many decisions. And that level of hesitation is definitely included in our sequential guidance. Also, on the semi-market, there is nothing telling us that there will be a big uptick coming up so i think also we cannot project that so and considering all that that's why our near-term outlook is while the world economic development makes the outlook uncertain atlas copco expects the customer activity level to weaken somewhat And I think this weakens somewhat in the uncertainty. I think those are the two main words of this outlook.

Okay, thank you, Wagner. And with that, we finalize the presentation. I will try to keep my intervention as short as possible now. Again, just repeating that I would like to ask all of you to stick to only asking one question at a time, so everybody has hopefully an opportunity to raise their most important question. Again, we are a little bit tight for time today as we need to run off for the AGM at the end of this hour. With that, I hand back to the operator.

To ask a question, please dial pound key 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Michael Harlow from Morgan Stanley. Please go ahead.

Thank you for the presentation and thank you for taking our questions. Would it be possible for you to share your view on the margin developments that we should take into account for the rest of the year for the vacuum technique division, please, given the restructuring efforts that you've mentioned? Thank you.

Well, I think it's a bit early to give any very specific indication on the margin development. I think what we are saying is that the current margin level that we see, if we take away, of course, the restructuring costs and the currency impact, even though it is better than what we saw last quarter, which I think was quite positive for us to note as well. Of course these activities need to be deployed. We also need to make sure that we respect the process in a good way and that we do the proper process. So of course this will take a little bit of time and as a result it's not very easy to exactly predict when they will come into effect. i think overall however i think it would be probably fair to to expect that in 2026 we should see full benefit from the the impact of these different activities that we have launched both last year as well as this year thank you that was very helpful you're welcome

The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.

Hi. Good afternoon. Thank you for taking my question. I was wondering if you could expand a little bit on how customer segment across regions and industries have evolved, particularly since the beginning of April, given so much change compared to the earlier part of the year.

Thank you. Yeah, normally we stick to the Q1 result. And I think I tried in my presentation to explain what has happened in the different business areas. But if I could give a little bit more information on some segments like industrial compressors, we saw negative development in North America and Europe. and flat in Asia. So then it was compensated by strong gas and process business in North America and also in Asia. So we mentioned about the semi equipment that was quite strong overall in Asia, but weak in North America. and europe and if i look to the again to the industrial vacuum part i think we saw flat development in industrial vacuum plus scientific vacuum flat development in asia and europe but positive development in North America. And automotive, the only bright spot we see is North America. So the other regions are quite negative, I would say.

And this includes China since third.

Overall in Asia, I think the development was quite good. specific in China, we saw a negative development in several product lines that we have. There are some bright spots, but not too many.

Got it. Thank you.

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

Hi, good afternoon. I'm wondering if you could give us some color on what you're seeing in semiconductors right now. I'm particularly interested in the memory side, either on the high bandwidth memory, the DRAM, and the NAND exposures, just in terms of customer velocity, order push-outs, however you want to frame it. Thanks.

So normally we don't disclose between memory and logic, but like I mentioned before, our businesses in Asia is developing quite well. In Q1, we saw quite positive development overall, and you know that it's not too many countries. And I think we are quite pleased with the development in Asia. While North America was weak.

Okay, thank you.

The next question comes from Rory Smith from Rory. Please go ahead.

Hi, good afternoon. It's Rory from Oxcap. Thank you for taking my question. And thank you also for the detail on the sort of divisional bridges. That was really helpful, Peter. Thank you. My question is on gas and process orders. I think you called out marine LNG, air separation and natural gas power plants. I was just hoping you could give a bit more color on those areas, particularly around geographies or customers. Thanks.

Yeah, when it comes to LNG cargo, it's basically Asia, where you see fewer some shipyards with the capability to build that. It's mainly coming from Asia. And then fewer gas booster, you see investments, it's quite spread out.

Great, thank you.

The next question comes from Benjamin Healan from Bank of America. Please go ahead.

Yeah, morning, guys. Thank you for the question. Just a quick one to follow up on gas and process. Obviously, it's been strong for a while. Can you talk a bit about the pipeline in gas and process and how sustainable this growth can be? And could you give us a rough estimate of how big Is gas and process now within the compressor business overall? Thank you.

Yeah, if you look into Q1, it was quite significant. It was 15% of the business, while revenues was around 10%. So 15% in orders for Q1, around 10% in terms of revenues. But I think what is important to highlight, those orders are really long lead times. For instance, these orders that we took now, I think we will deliver in the coming years even. So it's going to take a while. It's not that you receive and you can project for this year, for instance. They have a pipeline that they are delivering because they got some orders last year as well. These they are delivering. The ones that are coming now is not for short term.

Okay, thank you. But there is a pipeline of orders and gas and process where the order momentum will continue. Is that fair?

I would not say that there is good activity in that area, but I would not say that every quarter there will be a big order for LNG cargo like we had last quarter. So I wouldn't say that. Because, you know, these are negotiated together. So once you get, you may spend two quarters without an order or even more.

Okay. Very clear. Thank you.

The next question comes from Jonathan Day from HSBC. Please go ahead.

Hi, good afternoon. Thanks for taking my question. I was wondering if you could talk a bit more about power technique and the rental orders in particular. Did they slow down? Was that due to some tariff and general economic uncertainty or was there some other to factor around that, and what about the service orders as well? And then just link to that with the new business areas you're creating. Do you have a rough idea of when that might start to make a positive contribution? Thanks.

Good. When it comes to the rental companies, I think the level of uncertainty might be playing a role. for them to pull more equipment because it's two impacts. We still have an order book from previous year to be delivered for the rental companies that they are not, let's say, so aggressive to take the machines that they have ordered last year. We have that impact. And then normally in Q1, we see quite a big uptick in terms of orders received that we didn't see this quarter. That is the other effect. When it comes to the power, to the industrial flow, I think we have some areas are doing quite okay. We have some project business that are already doing quite okay. especially what is based on the acquisition of Lewa, that is based in Germany, that's performing very well. And then we have acquired many assets, some are German-based, and the idea was they had a strong revenue in Germany, and the idea was to globalize those companies and that is the activity that is ongoing now that we are ramping up competence in the local customer centers all over the world to allow them to sell these technologies that were not globalized really so i think that is the effort that we are doing now great thank you very much

The next question comes from Risk Mighty from Jefferies. Please go ahead.

Well, hi. Thanks for the question. So my question is on tariff, and thanks, Wagner, for your comment earlier about it. So my question is, how are you planning to change your manufacturing flows within CT compressors? I think you source quite a bit from your factory in Antwerp. and how much you believe you need to raise prices slash surcharges if there is a 145% tariff applied to China just to keep margins flat. Thanks.

Yeah, when it comes to the flow from China into the United States, I think that is really limited in our case. So I think the main flow is from Europe into the US. At this point in time, you know the tariffs that they have don't know how that will evolve price component is going to be a very important uh price management is a very important component of that and but of course we will watch competition i think Even the local players, if you have a player that has more local content, local production than I have, it's also a global supply chain. To be competitive, you source from different places and all that will be impacted. We will see what is going to be the next impact, but price management is important. We are already working on it. But of course, we will watch what is going on in the market as well to see how how all that will unfold but i think it's going to be a mix of actions i don't believe there will be a drastic action in terms of moving production uh but we are analyzing by product line what makes sense what does not make sense to to ramp up production in the us

And of course, moving a production to some smaller or larger extent, of course, is a slightly more time consuming effort to take into account. So the short term action are more on the pricing and surcharges.

Thank you, Peter. Thanks.

Okay. Thank you. Well, apparently my, my message has scared everybody away and there are no more questions in this call. So we have a very good time now to enough time to go to the AGM. Thank you all for attending this call. And of course, as always, our IR team is at your disposal should you have any further questions to be answered. So thank you for attending and looking forward to meet you at our next meetings. Thank you. Bye-bye.