Atlas Copco AB (PNK:ATLKY) Q1 2023 Earnings Call Transcript

Atlas Copco AB (PNK:ATLKY) Q1 2023 Earnings Call Transcript April 28, 2023

Peter Kinnart: Good afternoon, everybody, on the call, and a very warm welcome to this Quarterly Earnings Call for the First Quarter 2023 for the Atlas Copco Group. Together with me is Mats Rahmström, our CEO. But before I hand over the words and of course, you have heard me say this many times, and I will continue to repeat it. We will also be a little bit severe on the number of questions, considering that we really have this one hour to go through the call and try to answer all of your questions as we also have the Annual General Meeting of Shareholders taking place today, and we are a little bit on a tight schedule. With that being said, I would like to now hand over to Mats Rahmström, who will guide you through the first part of the presentation.

Mats Rahmström: Thank you, Peter. On the first page, this time, we have a picture of a gas and process machine from that division. And it’s part of the explanation why we have such a strong orders received. There were very strong orders received from this type of machines, both for liquid natural gas and carbon capture. So very proud to show this picture to you all. Then we can go to Slide number two. And I’m confirming then the orders received that was close to SEK 48 billion, 5% growth. But if you break it down per business area. It took quite much more impressive that Compressor Technique. They were up 19% organically, and that was a record for them. In Vacuum Technique, they were down 27%, still related to the semi industry.

But interesting enough, that both the scientific and the industrial vacuum continues to grow. And Industrial Technique with tailwind from the electric vehicle market were up 20%. That’s also a record for them and then a fantastic record for Power Technique that were up 11%. Of course, in Power Technique, you see that there is seasonality, but they also outperformed what we expected. And then we can see that the CT gas and process was very strong and the big machine in oil free as well. And at the same time that industrial techniques have tailwind in, as I said, from the electrification and battery manufacturing. Also happy to see because we also need to understand when we were at the Capital Markets Day, it took quite some time to explain the new growth platforms for the group, how we have invested both organically and also through acquisition.

And we can see a significant part of growth is actually coming from the new areas now. And at the same time, I can see that the sustainable segment, if I can define them like that, like wind, solar, batteries is also a significant part of orders received in invoicing. So very happy with the orders received development. And then if you look at the revenues, we can see that it was close to SEK 40 billion, 18% up. And of course, there is still a gap between orders received and invoicing. On the other side, the 18% up, we are quite pleased with that. And in terms of deliveries and the challenges we see there. I think we can summarize the picture that the Compressor Technique and Power Technique, they see at least a light in the tunnel. It’s an improved situation for them, but we still see challenges with vacuum technique and industrial technique, and that’s mainly electronic supply.

If you then change Slide to Slide number three and take position number three, you can see the operating profit at close to SEK 8.7 billion with a margin at SEK 21.8. So the profit is up 29%. It’s supported by volumes, of course, both in terms of volume and pricing, currency also positive for us. But we still have, as I said supply chain challenges. And also worth mentioning is that we continue to invest in new generation of products. So we continue to invest in R&D. And we also invest in the customer relationships in terms of where in the world we should be and of course, competence. We think that’s really, really important. And I think looking at the graph, at least internally here, we are very proud of the significant growth we have seen for this quarter.

And if you look at the geographical map on Slide four, we can see that we have green numbers in the – what we call the powerhouse around the world. So in Asia, then at 37%. It’s also Oceania 37% and sometimes you can see a slightly higher number there, but we have double-digit growth in Compressor Technique and Industrial Technique and the change here is, of course, in the semiconductors in the Vacuum Technique. So very pleased with that. That goes also for Americas, that we see double-digit growth for all business areas with the exception of Vacuum Technique. And in Europe then, we have two compressor technique in industry that standout with very strong vacuum down and PT flattish, I can say. So happy to see that there are so many customers in different continents that see us as a very competitive alternative, helping them to generate value for their operations.

Slide five. Yes, yes, the confirmation then on the organic 5% growth and then have in mind that we had a negative 27 on vacuum. on Slide six, you can see the sales bridge. The structural changes we did 30 acquisitions last year. And that you can see in that line, and they can see that we still have help from the currency, 7% on orders received and 8% on revenue. And Peter will then, little bit later try to guide you on the currency for the coming quarter. Slide seven shows the split between the different business areas, of course, with high profitability and high growth rate is very positive for me to see the compressor technique growth rate of 19%. One other thing that I recognized internally was also that on the orders received, actually Power Technique this quarter is bigger than the Industrial Technique, although that Industrial Technique is growing 20%.

That’s also, of course, part of the acquisitions that we are seeing. We change to Slide eight is the Compressor Technique. And they had the record orders received, organic SEK 18 billion to SEK 22 billion. And as I said on my first slide, a lot of the bigger orders has come from gas and process, but we have also seen strong orders on the bigger machines. And that goes a lot into the newer segments. They could be EVs, battery, hydrogen LNG, even lubrication of ships is becoming an interesting application for a sustainable segment for us. And then very happy to see that the already strong service performance continues and they are growing. And then they also manage them to deliver on record revenues, although that we are pushing them even harder to see if you can bounce that number up even further.

And an operating margin outstanding 24.1%. And return on capital employed 82% and somewhat diluted from the acquisitions that we have done last year. And here, you can – I mentioned it earlier, the growth platforms that we discussed is, of course, filters, the chillers, low pressure, high pressure and industrial gases. And we can see that this is a strong development for us and a lot of the development is into these sustainable segments. So that’s part of the explanation prove that’s sustainable over time, they continue to perform. And then we go to Vacuum Technique on Slide number nine. And of course, it’s a negative development. But if you look at the graph, you can see that we had a SEK 9.5 billion quarter. And yes, it’s below what we have seen over the last 2 years.

But if you compare with 2020 or 2019, you can see still a very strong quarter from that perspective. And we see, of course, that semi is down memory first, and we have also seen cancellations in this quarter. But the level is still up there, and we still believe it will be probably the – from a CapEx perspective, I think it will probably be the third best year anyway. And I think the growth drivers for semi is simply the number of devices that we are using that need semiconductors that could be AI, 5G, cloud computing, gaming, medical, supercomputing, automotive and industrial is very strong as well. And we will see some cyclicality, although that we think that, that becomes less and less over time. And as you recall, when we acquired this from a strategic point of view, we also said that we will focus on the industrial vacuum, the scientific vacuum and the two service division.

And I think that strategy is really proving to work out for us in a good way. Operating margin at SEK 22.7. You can say it’s a quite quick turnaround from Q4, but they have also had some help here from currency, clearly. And here, if you look at the performing new growth platform to cryo, the liquid ring pump is doing well as well. And process diagnostics is also lot small, but they’re also stepping into these new areas, which is paying off. And of course, I think it’s once again then interesting to see that Scientific and Industrial continue to grow. Industrial Technique, once again, the record orders. They were up 20%, SEK 7.7 billion. We can see that the auto sector have done really well. The main part of that is two new projects in electric vehicles, the transformation, both in Europe but also very, very strong in Asia.

We can also see that on the industrial vision part, strong orders received there as well. So we are now combining the vision with automation or not fully automation, maybe but the flexible automation that we offer station by station. And of course, our sales is mainly driven by CapEx and you can follow OpEx more on the service level and service also continued to have a strong delivery. On revenues, up 19%, but we still have challenges with power electronics, about SEK 6.5 billion there and an operating margin then on SEK 21.1 billion. Group segments that we have talked about before. Electronic dispensing is doing very well. We are combining that to offer the dispensing part together with the screwdriver as a package, we get better and better penetration in the electronic industry.

Machine vision and in-line quality control and flexible automation is also growing. And I think they are in a very good position for some of the bigger macro trends, EV, battery and automation. And Power Technique, they surprised us with a fantastic orders received and also then a record at SEK 8.9 billion. Of course, there are seasonality in these numbers that you all know. It’s a strong demand from rental companies in the U.S. on equipment. And I also mentioned before that this is the business that we will have most difficulty to get the full traction on service. But now I think the combined growth with improved margins, and I think that looks promising for the future. And they also had record revenues and they see less of problems when they have dual sourcing now on engines and an operating margin at SEK 19.1. It’s very interesting to look at the new product here, I think.

More than 90% of our products we sell to the market is electrified already. The surface pump tradition has been driven by diesel engines, but now we are starting to introduce also the pumps that are electrified and the steam rental is doing well and the newly required so far, industrial pumps is also doing very well. I think it’s a strong development for a business that traditionally was mainly in construction, and now we are transforming it into more industrial applications. And then on Slide number 12, we have the profit and loss. Yes, we give you the EBIDTA. And in our case, then it’s the amortization of the intangibles and the acquisitions. And that will be at SEK 23.1. I should highlight when we drive the company its own operating profit and that is SEK 21.8. Maybe this is good – to hand over to you, Peter.

Peter Kinnart: Thank you, Mark. I will continue. Then of course, we have the small amount of net financial items, which have dropped in spite of our lower or higher net indebtedness, but that is mainly linked to the fact that the interest rates on our cash have gone up. And therefore, it’s a little bit lower cost than before. Profit before taxes then at SEK 8.7 billion compared to SEK 6.7 billion last year. And then the taxes are SEK 2.1 billion, which is an effective tax rate of 24.6%. And that, of course, as you recognize, is a significantly higher ratio than we have seen in the last many quarters. The reason for this high effective tax rate is, you could say, a shift in the geographical mix of our business. We have grown quite substantially from a revenue perspective in countries and regions with higher nominal tax rates.

And as a result of that, we end up with this higher rate. There is no other main reason for this shift. When it comes to then, of course, the forward-looking view on the tax, then given this development, it is likely that the effective tax rate will remain on a higher level than we have been used to. We are, of course, trying to find ways to mitigate that by making use of measures given to us by different governments to support, for example, R&D initiatives, et cetera. But it’s likely that going forward, this will be rather close to the 94% as it looks now compared to the past. That gives us then the profit of the period of SEK 6.5 billion, which is a 25% increase compared to last quarter – or the same quarter last year, sorry, with basic earnings per share SEK 1.34, a return on capital employed of 29% and return on equity of 32%.

If I then move to Slide number 13 and look at the profit bridge for the group, then you see that we comparably went from 22.4% a year ago for the first quarter to 21.8%. There is, on the one hand, the negative impact of the share-based LTI programs, as well as a dilutive effect from acquisitions. That is then partly compensated by a positive currency impact as you can see here. When it comes to the outlook for the currency impact, there, we would rather assume that it will continue to go down gradually as we have already seen from last quarter to this quarter and is likely to end, let’s say, probably still slightly positive, but rather close to zero, we expect. And then we have volume price mix and others which are showing a positive drop through, let’s say, the same level in fact as we had in quarter one, 2022.

So the margin doesn’t really improve, neither deteriorate from volume price mix and other impacts. On the next Slide, number 14, we dive a little bit deeper into the respective business areas. Because you do remember, of course, that when we reported Q4, we had two business areas that were performing less strongly than we have been expecting. And we indicated that different measures have been taken to try to bend that trend. While at the same time, we also said that some of these measures might take some time to really materialize. I think that is also, in fact, visible in the detailed bridge by business area. If I focus immediately to Vacuum Technique and Industrial Technique, which were the two business areas I was talking about, then the 22.7% for Vacuum Technique remained flat on 22.7%.

And in fact, the drop through is positive, but is lower than the 22.7% from last year. And so in fact, there is still a dilutive effect from volume, price mix and other effects also from the acquisitions, while in fact, the currency compensates for those two effects still. But as you will notice, if you compare to the figures from Q4, the negative impact, let’s say, is much, much lower than it was in the last quarter. So we are very happy to see that some of the measures already started to have some contribution, but we are not fully there yet, and we need to continue to work further on the drop-through here. For Industrial Technique, it’s more or less a similar picture, one might say. There is, in this case, no diluted effect from acquisitions.

But – and the currency for Industrial Technique is in fact slightly negative on the margin with – while then the measures that have been taken across Industrial Technique have proven to be contributive and to the operating margin. And there we see a better drop-through than actually the comparable period last year. Then of course, we have two business areas lifts, starting with Compressor Technique, moving from 23.8 to 24.1, which is partly diluted by acquisitions, but then a positive impact from volume price mix and other items will end a slightly smaller positive impact from the currency there as well. And then last but not least, definitely a valid statement in this particular case, a very strong development from Power Technique from 17.9 to 19.1 with some dilution from the acquisitions that are nonetheless performing as planned and in a very good way, but also some positive impact from currency, but a rather solid improvement also there from volume price mix and other items.

And with that, I move to the next slide, Slide number 15, which explains a little bit more on the balance sheet. In fact, I would say the balance sheet comparing first quarter 2022 to ’23 is not very eventful. Of course, on the intangible assets, we see mainly the impact from the acquisitions that we have done over these 12 months. Otherwise, we also recognize, I would say, the impact from the strong investments that we are rolling out mostly in Vacuum Technique and also to a slightly lesser extent in Compressor Technique to increase our manufacturing footprint partly as a part of the strategy also for the locals for local. And then the other two main areas here are inventories and receivables. Receivables are perfectly in line with the volume growth that we have seen.

And we also feel quite comfortable with that level. In relative terms, there is no increase. And also from a health perspective, I would add, the situation is quite good. The inventories continue to grow a bit more as we will also see in the cash flow. And that is maybe, let’s say, the one pain point a little bit on the balance sheet, where we’re also working with the different business areas to see how we can manage that in an even better way, I would say. And of course, as a result of all of the above and then also the fact that we had the redemption last year and the different acquisitions, we see, of course, a reduction of our cash balance compared to the same quarter of 2022. On the liability side, I would say on the interest-bearing liabilities, we have increased slightly our short-term funding to bridge some – the upcoming dividend payments, for example.

So also no drama in those numbers and the noninterest-bearing liabilities are mostly linked to an increase in payables that go hand-in-hand with the increase of the business as well. And then quite a diversified list of many small other effects that add up to this difference for the noninterest-bearing liabilities or, I would say, in line with the business growth. And then going to Slide number 16, on the cash flow, no records here. But I would say, nonetheless, a very solid development. We have a very strong operating cash surplus close to SEK 11 billion. The taxes paid are, of course, standing out a little bit based on what I explained earlier. And we also see here the continued negative effect from the change in working capital, which in this case is almost entirely allocatable to the inventory development still.

And – which I mentioned is one of our working points in the organization. Then the investments of property, plant and equipment also here reflect our continued development of the different manufacturing sites across different parts of the world now mainly focusing on the United States, I would say, as well as China for Compressor Technique, which then leads to the operating cash flow of close to SEK 5 billion, which is slightly north of doubling the operating cash flow from 2022 Q1. And then we also see the impact from the couple of acquisitions we have done this year so far of between SEK 500 million and SEK 600 million. And with that, we come close to the end of the presentation. And I would like to hand back to Mats to briefly comment on our near-term outlook.

Mats Rahmström: Okay. So here, we are trying then to guide on our customers’ activity level, and we go internally through each business. I have to check with them what they see. And from that, we have then concluded that Atlas Copco expected underlying, which we actually always talk about. Customer activity level will remain at the current level. On the negative side, I guess you can take into – if you look at where we operate, the PMI in those countries have a negative trend and I guess, also some of the GDP trend for some of those countries are slightly negative. The protection isn’t positive anyway that we can see. And of course, we have semi, although sequentially, it was slightly better than we operate in a world where we see quite a bit of uncertainty.

And I think it’s better to be a little bit humble and I’m ready for different scenarios. We cannot see in the future either. On the other side, I think despite the gloomy outlook for some of our markets, still think that companies that will outperform many others will be the ones that have tailwinds from the mega trends. And as we have seen in this report and we build our product portfolio, if you follow the growth strategy that we have in terms of organic and acquired, I think the energy transition is in our favor. We can see the digitalization, of course, with the semis is very positive. The electrification is positive for many of our businesses, specifically for the EV transformation and battery manufacturing and also that we are quite present and close to our customer, both in West and the East.

So I believe that we have a very good position. On the other side, then we – of course, we don’t know how the quarter will look like, but we can see that there’s still a lot of activities going on. And we cannot guarantee that some of these bigger orders will be repeated. Of course, we hope that we get many of them as well, but we cannot guarantee that. So I think that’s a little bit how we see the market at this time. Should we then open up for questions, Peter?

Peter Kinnart: Yes, Mats. So I think that’s a very good idea. So with this, I would like to hand back to the operator to lead us through the question-and-answer session.

Q&A Session

Operator: The next question comes from Andrew Wilson from JPMorgan. Please go ahead.

Andrew Wilson: Hi, good afternoon. Thanks for taking my question. I wanted to, I guess, probably pick up on the last comment you made, Mats, and around the Q2 demand commentary. Obviously, you always do talk about underlying demand, but you specifically added that word to the outlook comment this time. And I guess that’s to try and stop us from making an SEK 48 billion of orders for the Q2 in terms of unchanged activity. Can you just try and help us in that context, sort of how much of the strength in the Q1 was a result of timing of orders, large orders, you talk about significant orders, just to try and help us get a quantum of what maybe you’re trying to allude to in terms of underlying activity, appreciating there are a lot of moving parts. Thanks.

Mats Rahmström: Yes. No, but sure, you read me correctly. And if we look sequentially from Q4 to Q1, of course, you all know that we don’t talk about the seasonality, but that, of course, adds – expect the gap between, let’s say, it’s SEK 11 billion, something like that between the quarters. And then you have the seasonality might be around SEK 2 billion down that we get. And the remaining part there, I would say, approximately half of that is coming from Compressor Technique. And then you have very, very strong on gas and process, but also the bigger machines seen mainly in oil free but we should also remember then that the industrial smaller compressors are rather flat. And then the remaining part is the fantastic performance from PT that we can see. And part of the remaining part is also then the Industrial Technique tailwind from more electric vehicle products than we expected. So that’s a little bit of a bridge of how we see this has been built up from Q4 to Q1.

Andrew Wilson: Thank you.

Mats Rahmström: Thank you, Andrew.

Operator: The next question comes from Guillermo Peigneux from UBS. Please go ahead.

Guillermo Peigneux: Thank you for taking my question, thank you. My question is regarding Compressor Technique. And notwithstanding the current and existing backlog at hand. How are you expecting to close the gap between orders and revenues? Maybe actually, the question is also do you need extra capacity, you need to build capacity? And then adjacent to that question is, could we assume that the operating leverage that you were commenting on is a normalized one? Or are we going to see any fluctuations as we go through 2023 on operating leverage for Compressor Technique and in which direction? Thank you.

Mats Rahmström: No. But if I look at the capacity that we have in Compressor Technique, I’m – I mean I cannot blame the team for such a fantastic development year-on-year, but of course, it’s not enough. And in gas and process, we are developing our capacity close to customers, and it’s mainly how we do the packaging of elements and to make it to a customer product. And then we are pushing, and we have done for quite some time to see if we can bounce up our capacity. But I still believe even though that they say – that they see the light in the tunnel, and it can be slightly better, but I think it will be difficult to catch up quickly on that. And the leverage, I hand over to you, Peter.

Peter Kinnart: Yes. I think on the leverage, of course, we are getting close to what we generally referred to in the past that’s kind of drop-through that we would on average see. So I guess this is close to the best level that we have achieved. Sometimes, of course, it can be higher. But in general, I think we talk about 30%, 35% on average. And we are not very far away from that. So from that point of view. And I think considering the fact that there’s still a lot of uncertainties, the supply chain is indeed somewhat better, but it is not always – it is not something one can fully rely on yet today. There’s always things that might pop up a bit unexpectedly. And then given the capacity we have, we will hopefully be able to continue to invoice and produce and invoice more whether then the operating leverage will increase further. That, of course, remains to be seen, but it’s currently already at quite a healthy level from our perspective.

Guillermo Peigneux: Thank you.

Operator: The next question comes from Sebastian Kuenne from RBC Capital. Please go ahead.

Sebastian Kuenne: Yes. Hi, gentlemen. Yes, my question relates to the price mix and volume growth in your orders. I can imagine if you are touching your capacities now, then you can maybe turn the wheel of pricing a little bit more these days. Could you maybe give us an indication for – especially for the strong divisions, PT, IT, PT, how the pricing was in the volume growth in Q1? Thank you very much.

Mats Rahmström: I think we don’t talk so much about it, but I try to give some color to it at least. As we have said before, Compressor Technique have been quite good at compensate themselves for if that has been inflation in salaries or inflation in cost in terms of components. And I think they’ve done a fantastic job. And when I look at the gross margin, I think they come a long way. And then of course, we can see that there is more inflation to come. So I think we need to be on our toes and manage that as well. Then Power Technique has been extremely successful with that. And of course, there have been a shortage of capacity and we have quoted higher prices for that as well. So I think they’ve done a good job. And it’s more complicated in the semi industry, but we have more long-term contract.

But I think some of those have also been challenged, and I think this is the time to do that. And I’m also happy, even though it’s on a lower level. The result of those that we can see a little bit more traction there. And the same goes a little bit for the auto sector, where it’s more long-term agreements. But with the new products coming in, we can put new pricing on that. And I think that’s the main opportunity for us still is to generate more innovation, new products and to come with that is new pricing. But so far, I’m very happy with the outcome of what we have managed on pricing.

Sebastian Kuenne: Thank you very much.

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

Max Yates: Thank you. My question was just around compressors. If I look at your compressor orders, they were sort of $13 billion – kind of before we went into COVID, you’ve just done sort of 22 now. So I guess what I wanted to understand is when you talk about these sort of these end markets or these orders from things like clean energy, battery kind of some of the carbon capture, some of these markets that are maybe newer, how much of your order intake today are these sort of new markets accounting for where maybe you didn’t do so much business if we compare it to sort of pre-COVID levels. It’d be great to understand kind of how big those sort of newer clean tech carbon capture are within that SEK 22 billion number?

Mats Rahmström: Yes. I mean if you look at the quarter then, and I think it’s a very good question, and we are trying to track that segment by sub-segment our self. I wouldn’t say that we have very accurate numbers. But we estimate that in the quarter from this newer sustainable all clean tech segments, it’s probably around 10% of the orders received for the quarter. And for us, that’s huge. And it also shows that the products are really valid for these segments. So we are really happy with that. But around – sorry, 10% for the quarter is into this new segment.

Max Yates: And what would be the biggest part – what would be the biggest part of that? Is it carbon capture? Or is it just split across a number of different things? Is it easy to identify within that exactly? Kind of what a big portion of that is?

Mats Rahmström: I will say that without having the numbers yet gut feeling, battery manufacturing that hits first Compressor Technique, oil-free with big machines, then you have both the vacuum team for many of the assembly processes and for tightening and dispensing, you have Industrial Technique. So batteries, one of the key application. And of course, we see this – it’s growing very quickly around the world, and China is, of course, the leader. But now we can also see more and more both packaging product and cell manufacturing in Europe and in Americas, of course. And this will also be supported by the IRA Act in the U.S., of course, to bring this home. And then on gas and process, if we just look at Compressor Technique, I think the liquid natural gas right now is really strong.

Max Yates: Great. Thank you very much.

Operator: The next question comes from Klas Bergelind from Citi. Please go ahead.

Klas Bergelind: Thank you. Hi, Mats and Peter. So I had a question on carbon capture. And what is interesting is that you’re adding this comment. First, there was more LNG and that you added this comment that this was seen at the end of the quarter. And this is sort of happening before IRA in the U.S. really has started to kick in. So even if you say growth was exceptional in the quarter, it seems like in carbon capture for you is that it has started to sort of drive growth. The reason for asking is that we’re hearing that the demand in the U.S. is still held back until the domestic content requirements are clarified, which we will see in May, and that can sort of unleash a lot of growth around IRAs . I’m curious around the carbon capture outlook, but…

Mats Rahmström: Yes. But that’s – that’s a very relevant question. And of course, I think the first step is not to use the energies. So you don’t need to catch the carbon. And of course, we don’t do the catching ourselves, but we then compress it and move it somewhere where it should be. And I will say that it’s very early stage in this technology. And we mention it more because we think it’s such an interesting technology for us. In relevance to financial numbers now, I don’t think it’s huge. But it could be, just like you say, if this is a technology that is accepted as an energy efficient way of doing things. And I think there is a lot, as you know, tests, how to catch it and where to store it. And of course, there is a huge upside for everyone selling compressor if this is a technology for the future.

So we see that as opportunity. And this is more that, yes, we do have the equipment for this type of technology. But financially, it’s rather small even if we are happy for the orders we get as well.

Klas Bergelind: Can you – just a very quick follow-up. So when we have done on condense and carbon capture LNG and then hydrogen further out, we can see that I can add about 2 percentage points of growth to CT, the division can grow 8% long term. Can you help us a little bit about sort of the medium-term kicker here? How do you, in your assessment as a management team thinks this can sort of improve the long-term growth of Compressor Technique?

Mats Rahmström: As I said, on the Capital Markets Day, if we see many of the clean technologies kicking off, independently what you need to compress and move somewhere and expand, there is a huge market for compressors and it’s new So I think Vagner and I even made a statement that the compressor market as such could double. We don’t know when and if it’s going to happen. But if this comes alive with the commitments we have made to the FM with a 1.5 degree and below 2 degrees. And for the carbon, I think, of course, there is quite a big market outside for many different applications, but it’s early-stage class. So it’s not going to be seen in Q2 or Q3.

Klas Bergelind: Of course, we won’t extrapolate the SEK 48 billion. Thank you.

Mats Rahmström: Thank you, Klas.

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

James Moore: Yes. Good afternoon, everyone, Mats, Peter. I think I’d like to come back to the strong orders in CT, if I could. And just ask about the gas and process business, which I think has been about 10% of sales for the last 4 years or so. But in terms of percentage of orders in the quarter, is it materially bigger than that? Is it sort of 20%, 25% or a very exceptional number. You mentioned the extraordinary growth. Wondered if you could scale GP as a percentage of orders in the quarter? And on the industrial, small and medium-sized compressors, I think you’ve said that it was flat year-on-year, which is pretty impressive given it’s up against the pre-buy of last year, but could you say what that looked like sequentially?

Mats Rahmström: I think I will give this one. I’ll try to answer it already, James, but I will give it to Peter specifically.

Peter Kinnart: Yes. I think gas in process, of course, we have managed to get a lot of orders for the quarter, a lot of big ticket items and a bit more, I guess, than we anticipated as it is so difficult to predict when some of these big ticket items drop in a particular month or even a quarter. Of course, we have always indicated as you correctly say, that gas and process has been around 10% of Compressor Technique. But of course, given the current order volume, it is, I would say, clear that it is a more substantial part than it traditionally has been in other quarters in the past. But an exact number, we will not share exactly on that. But of course, you’re right to assume that it’s a more significant share of the total picture.

Then on the comment with regard to the smaller industrial equipment. Indeed, the development quarter-on-quarter or year-on-year, sorry, was indeed flat sequentially. In fact, the development was a little bit down. And as Mats already indicated, we have – in CT, we have seen overall good activities when it comes to price development. So I think if you put two and two together, we can also assume that on the volume side, with pricing continuing to be a contributor at the volume is maybe a little bit softer on the smaller equipment compared to especially, of course, large and in gas and process compressors.

James Moore: Okay, helpful. Thanks.

Peter Kinnart: Welcome, James.

Operator: The next question comes from Ben Heelan from Bank of America. Please go ahead.

Ben Heelan: Hi, guys. Thank you for taking my question. I just wanted to touch upon the Power Technique margin, you highlighted the strength that you saw in the quarter. How should we think about that progressing through the year? Is that level of margin sustainable? Thank you.

Mats Rahmström: I think it very much depends on the mix we will see going forward. We have some businesses that is lower in profit. I mentioned it before, the generator business, for example, is significantly lower, but they have had a good run in the last year, I think, both in terms of volumes and profit. But of course, if that continues to grow that, that will have a diluting effect on the margin. And then we are very pleased with the rental business as to how rental performs. And it’s better that the specialty rental performs. Now we have portables lower margin. On the other side, then we are introducing also the electric portables, where we think over time that we will have higher margin because we have a bigger part of the content there.

So very much depending on how this develops. But I still look positive at this. And I guess it’s not stable at this level. I think there is a downside to it. On the other side, there’s also an upside if we continue to deliver on the mix, as I described it. And the more industrial it is, the better it is for us over time versus construction. We like line production instead of just a simple machine that can be easily replaced. So that’s good for us. I don’t know if I helped you, but that’s a little bit how it looks like.

Ben Heelan: Okay, great. Thank you.

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

Jonathan Day: Hi. Thanks for taking the question. I was wondering if you could talk a little bit about what you’ve seen in China across the divisions over the quarter? And then also just a little bit on the automotive side. Maybe you could talk a little bit about the runway that you see less for the Automotive segment, both on the battery and the EV side, that’s still very much a long-term trend versus, say, the developments that you might see in semi?

Mats Rahmström: Yes, both in terms of semi, of course, China is normally one of top three markets for us. And it seems like this new act coming out of the U.S. limits, of course, the progress somewhat on the smaller nodes. On the other side then, what China is focusing on is normally the higher nodes, the bigger nodes, 14 and upwards. And I would guess that’s probably 70% to 80% of what they do today. So I think it stops them from developing quick, the lower nodes, but that has not been the focus. And I think that has more of an impact of an uncertainty what they can and cannot buy since this has been changing over time. But it seems to be full speed ahead when it comes to the development of the industry as such. And then with the 14 nodes and upwards, and then there is no limitations for us to be a partner to that development.

When it comes to EVs and battery manufacturing. I mean it’s shocking to see the top 10 list of EV manufacturers in the world. I think it’s only on the Western world, I think it’s only Tesla that qualifies on that list. And of course, they developed tremendous speed over this. That is also positive for us, both in terms of the batteries itself, but also then to the EV manufacturing. So that is just positive and Compressor Technique and the benefit, of course, of all these big programs. If they set up a new factory for batteries or whatever it might be, there is a need for Compressor Technique. And I think that the only area where we are not as successful in China is Power Technique. There is a couple of product ranges that we promote there, but there is also a handful that we don’t promote due to profit reasons.

But three out of four business areas is very successful, and the quarter was very strong for us in China.

Jonathan Day: All right. Thank you.

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

Andreas Koski: Thank you very much and good afternoon. Could I ask about Vacuum Technique? Could you please quantify the cancellations that you had in the quarter? And what did you see in terms of underlying orders in the semi segment in Q1 versus Q4? And lastly, do you think your benefit from the trade restriction between China and the U.S. as you don’t seem to be particularly impacted by that why some of your competitors can be? Thank you.

Mats Rahmström: Repeat the first one again, because you had two the…

Andreas Koski: Cancellations. Then the underlying order trend in the semi segment in Q1 compared to Q4 last year?

Mats Rahmström: But we haven’t disclosed specifically the cancellations. In Q4, we said it was SEK 1 billion for the group. And the main part of that is within semi, memory, but also some other orders are postponed and canceled. We don’t think we have lost any one of those orders. And in this quarter, that number is around SEK 700 million. So it’s less and we will see them when we come to the next quarter. If it continues, but at least the trend is a little bit less than we saw in Q4. And then the underlying demand I mean, sequentially, it was up. But when I listened to Geert today, he said, well, I don’t read too much into the numbers just yet. And I think we believe that 2023 will be somewhat of a slower year throughout the year, but then that it looks fairly positive actually on 2024, 2025.

And we have in mind and that we haven’t sold on the U.S. and the plan on the U.S. is developing in a positive way. There are more making bigger commitments to plants in the U.S. and that we have in front of us. At the same time, the China, as I said in the earlier comment, is continuing the full speed on the 14 nanometers and above. So for us, yes, we like free trade globally. So I don’t want to put anything positive in protection. But short term, of course, it could be a positive for a group like ours, but we prefer still a free trade but we can make our business in a more traditional way.

Andreas Koski: Thank you.

Operator: The next question comes from Guillermo Peigneux from UBS. Please go ahead.

Guillermo Peigneux: Thanks for taking my question, again. I wanted to follow up on Power Technique. I guess the margin now above 19%. It’s been over there before. But I was wondering whether this belongs to like the rest of the divisions of Atlas Copco to margins above actually 20% at an additional level or this is something that you’ve seen as probably a little bit more of a seasonal or cyclical positive cycle operating leverage help that will, at some point, normalize to a lower level.

Mats Rahmström: Yes. I think we had a similar question just before. If I look at the other business areas, the performance between the different divisions is more equal. And in Power Technique, there is bigger gaps between the really good ones and the ones and normally not so much dependent on how we deliver and perform more or less how competitive is the end market. And as you have listened to me over a number of years now, we are trying to drive this more to an industrial, but it’s more line production, where the value creation is much clearer. So we are doing that and that what you see in the numbers. But it’s still very dependent on the mix from quarter-to-quarter, dependent on the margin then because we have bigger gaps between the divisions, and its difficult Peter on the sales to predict exactly how it will look like.

But as I indicated before, then, if we see generation being very strong, that’s dilutive and also if we see too much of the smaller portables, it’s also dilutive, but more positive with the bigger machines for water wells, for example. I cannot give you more guidance on that, Guillermo.

Guillermo Peigneux: Thank you very much.

Peter Kinnart: Yes, we have time for one.

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

Daniela Costa: Hi, good afternoon. Hopefully, you can hear me. Just wanted to ask, we’re seeing huge investments in terms of tech companies increasing capacity for artificial intelligence and also for quantum computing, and is it far such to think that this would increase materially the density of some of the products you sell in Vacuum Technique and also potentially having an impact on areas like machine vision and quality control in Industrial Technique. Is it too far out? Or do you start to see sort o the where the incoming and the tendering interest for your products on the back of that?

Mats Rahmström: I think I need to read up a little bit on the Quantum Computing myself. But one of the acquisitions that we did in the US for vacuum technologies they are touching on this from a chiller perspective. And of course, all data that will be in any form will collected, transported and run analytics on them is very positive for our vacuum business. So there’s no downside to more AI for us. It’s just upside in terms of memory and logic needed. I don’t know if Peter have a comment on that.

Peter Kinnart: My own reflection was that I think it’s early days and that is just pioneering currently. And that, of course, with some of the products we have, we will be well placed most likely, but it’s hard to assess right now what kind of size of market this might be over time. But in principle, it should be also here positive from the demand side for us, we think.

Mats Rahmström: And yes, with that, I think we have concluded all the questions. I would like to thank everybody for listening to us and providing us with some very good questions to be able to clarify some of the positions in the result of the first quarter 2023. And with that, we are ready to close the call. Thank you very much and talk to you soon.

Peter Kinnart: Thank you.