Atlas Copco AB (PNK:ATLKY) Q1 2024 Earnings Call Transcript

Atlas Copco AB (PNK:ATLKY) Q1 2024 Earnings Call Transcript April 24, 2024

Atlas Copco AB isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Welcome to the Atlas Copco Q1 2024 Report Presentation. For the first part of the presentation participants will be in listen-only mode. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead.

Peter Kinnart: Thank you, Operator. Good morning, good afternoon, good evening for all of you on the call today. I’m happy to welcome you to our first quarter earnings call for 2024. Together with me is Mats Rahmström. But before I hand over the word to Mats, I would like already now to ask you that once we start with the Q&A session that you please refrain yourself to only asking one question at a time in order to make sure that all people that have a question are able to bring their question forward and we can provide them with an answer. Once we get to the queue then of course you’re more than welcome to ask additional questions. So thank you for that already now, and with that, I hand over to Mats.

Mats Rahmström: Thank you, Peter. We have a tradition that we honor one of the business areas with the picture and I just want to shortly describe what it is. This is a self-piercing rivet machine. So you can see the aluminum panel and it’s important that it’s aluminum. It’s very difficult to weld and then many of the car customers then use the self-pierce riveting and between the rivet it could be dispense equipment and you can also use vision for these types of applications. So that was the training for today. So we go to Slide #2 and I start by looking at the graph and if you can look at the Q4 orders received in dark blue then — and then the orange in Q1 you can see the sequential growth for orders received. It came in better than we expected and when we guided you earlier.

A construction worker using a mechanical tool for maintenance on a large industrial machine.

So we came in at SEK45 billion, which was minus 4%, but it’s still the second best quarter we have had, and of course, we are building a little bit on orders on hand as well since invoicing was slightly slower down. So, Compressor Technique, SEK21 billion, minus 1%, so pretty flattish, Vacuum Technique at SEK9.1 billion and slight positive development in semi. On the other side then a little bit negative development for Industrial and Scientific. Industrial Technique as they were honored with the first page, you can see they were plus 3% and SEK7.8 billion and then on Power Technique there was SEK8 billion, down 17% which was expected versus the very tough comps from last year. Very promising as well that we can see continued growth for service in all business areas.

Looking at the revenues SEK43 billion plus 7%, positive for Compressor Technique up 8%, Vacuum Technique minus 3%, Industrial Technique plus 19% and Power Technique plus 9%. And you can see at this stage that we are back at a normal delivery for all business areas. We always have problems, but I would say, it’s a fairly normal state. And orders on hand then, still strong orders on hand for Compressor Technique, Industrial Technique and Power Technique, and a very normalized situation for Vacuum Technique, so that we need to bring in some new orders. We go to Slide #3 and the first points are the confirmation of what I just said and then we have the operating profit at SEK9.3 billion, which is 7.5% growth versus last year at a very healthy margin 21.8%.

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Q&A Session

Still diluted a little bit by the acquisitions. Adjusted operating margin is the adjustment for the long-term incentive option and then it was at SEK9.5 billion and the margin at 22.1%. Continued strong return on capital employed at 30%. You can go to Slide #4. The geographic map and if we start with North America, you can see minus 12%. CT did okay. Industrial compressors were flattish. We had lower on the gas and process. Still though on a very high level, so the comparisons was very strong. So, we still see gas and process as strong. Positive for Vacuum Technique, especially from some of the key accounts in semi. Industrial Technique also positive and the big negative actually came from Power Technique and we could not repeat the huge orders we had last year for the rental company and mainly equipment.

If you go to South America plus 8%, Compressor Technique very positive and Power Technique very positive. Same for Africa and Middle East, very positive for Compressor Technique and Power Technique, and the main part of those orders come from the Middle East. A positive surprise I must say in Europe with plus 4%. Slight positive for Compressor Technique. Vacuum a little bit flat. But then positive for Industrial Technique and we can see that that’s come from aerospace, energy transition and also some that we get more scope of the supply with the automation specialty, screw feeding, et cetera, et cetera. And then very positive on Power Technique where industrial pumps continue to deliver good growth for us. Maybe the areas of concern is Asia.

Of course, you know that around 20% of our business is in China. We had less demand in Compressor Technique on the bigger compressors. Vacuum was a little bit negative. IT, Industrial Technique was flattish and there you can see China being a little bit softer on battery, EV and solar compensated by business in Southeast Asia. And also India for the whole group did really, really well as well and Power Technique helped up the number with strong development on the acquisitions, but taking that away it was actually a slightly more negative. You have to take away the acquisitions down. So in this quarter then we have seen a softer China specifically. And if we take that to Slide #5 and you can see then the organic growth was negative. Although it might sound strange but we saw that little negative as something fairly positive for this quarter.

If you go to Slide #6, you have the bridge. You can see that we have some help from the acquisition 2%. Currency negative on 2%. So the organic came down to minus 4% then. But still then 45.5% which was good and Peter will continue as he always does on the guidance for the currency later on in the presentation. We change to Slide #7. Of course, it’s important for the Group that Compressor Technique continues to deliver which they have had on a growth path for many years now and now it’s a little flat. Vacuum, you can see that it’s been on semi specifically that there’s a lot of interest around that. There’s a number of months on the bottom up a little bit and a little bit more positive signals right now. Industrial Technique with a slight growth which was a constant from the broadening the scope of supply and Power Technique at 15 — minus 17%, but 15% of the Group.

Short-term if you — this is 12-month ruling, if you just look at the quarter we actually saw the Power Technique was slightly bigger than Industrial Technique in this quarter. Then we take the specific business areas. So orders down. One of the areas that we saw softer demand was China and it’s linked to the battery and solar. We read it as an overcapacity. But we still — we have no concern about the long-term trend in these segments. It’s really moving forward and taking the lead in EV cars for example which we also see in Industrial Technique. But we also could see the gas and process compressors down. But that is on an exceptionally high level last year. So no concerns there either. Solid performance by service again. They are really developing the digital presence, how they run analytics and also take advantage of AI today, which I’m sure you’re going to see on the Capital Markets Day how we do that.

Revenues continue growth at 8%, and once again a fantastic operating margin at 24.8% with 9% growth and this is when we still go full ahead with R&D and building up capacity and a slight dilution from acquisitions. You could see five acquisitions in the quarter. I think the one from high comp, high pressure is interesting for us. A little bit new competence into the Group. I also see the valves. Energy helps us with energy efficiency, but we stepped into two smaller companies, but interesting technology that they can really build on and then another three distributors that we signed up and now own. I get some kind of questions that if you are taking this business more direct then maybe as a reminder that yes, we buy a few distributors. On the other side we are signing up more distributors than that.

So that is not that we are changing the growth market strategy. We take Slide #9 which is Vacuum Technique and if you look at the graph then you can see sequentially that come back a little bit on the growth path again. And for semi specifically then you can see at our customers that there is a positive development on price. Inventories are coming down and utilization is up and also see the confirmed by our own numbers that we get more pump returns for repair which means that they are really utilizing the factors a little bit more. And we can also see that chamber solution which is a little bit early into this had a positive development. So a few positive signs for semi and that does not mean that the next quarter is going to be fantastic or anything like that.

But the AI starts to drive and there’s a lot of things that are happening in this segment. And on the other side as I said that the Industrial and Scientific were down for the quarter. And also confirming then that the growth for service continues for us. It also confirms the trends that we are seeing. Revenues down, and as I said, orders on hand have normalized now. So there is no backlog to invoice from. And operating profit at 21.8% and we have not held back on next-generation of products for semi, for abatements, we go full speed ahead and we’re also building on the local — for local strategy in terms of capacity and agility for the big globalization in this industry that we see. You can also see the Polycold, a new cooler with very good data on energy efficiency.

We go to Slide #10 which is an Industrial Technique and as we honor them with the first page, there you can see that they’re up 3%. What we do see is that the strategy surrounding the tools with automation is paying off. We see more product order for when we get screw feeding, we get vision, we get software. So the supply from us is greater than before. So sometimes I think we are gaining market shares in these areas. In the quarter aerospace did really well. It actually did really well in electronics as well. I don’t think that market is specifically strong, but I think we gained a little bit of market share there. And also here then continued solid growth for service and in this case also the record revenues with 19% growth and an operating profit model at 21.9%.

We move to the last business area which is the Power Technique. I would not read too much into the decline that was expected, especially if you take a look at the graph. You have one quarter that really stands out and that was the rental companies when we had long lead times but they placed more orders. So this is the second best, even though it’s down somewhat. And still this year then it’s the change, if you would compare those two graphs, it would be the U.S. rental companies mainly that placed less orders. And acquisitions continue to do really well. I mentioned the Industrial accounts before. They have had a solid quarter. They also continue to grow in service and I always said that it’s fairly tricky with the portable equipment to be good in service, but we are doing a good job there.

We’re also industrializing the pump service as we know how to do it. So I think that will continue to be a positive development for us and the margin at — operating margin is 19.3%. Maybe I should highlight the product here. You can see it’s a portable compressor. It’s under the Chicago Pneumatic brand and it’s a study that we’ve been working for a couple of years. It’s starting to get good traction now. It’s a clearly differentiated product for the mainly for stock into the U.S. market, but we can implement this study and it’s a really good study for us. Premium product, Atlas Copco, CT, more basic, old functionality and it’s a good price and good quality, and if you want the highest efficiency, you will go with this yellow [ph] product.

In the month also we closed on the Kracht external gear pump company, added SEK750 million. They’re really strong into wind power. So we are learning more about the external gear pumps as well. So adding to our portfolio industrial pumps. So then go to the profit and loss. Yeah, we guide you on the EBITA and the A is the amortization on the intangibles on the acquisitions we have done. And then you can see that we were at the margin at 23.1% and on EBIT level we reported 21.8%. So, to summarize, it was orders received wise the second best order for us, second best for CT, IT and PT, and we can see that there is a strong acceptance for our new products and the concept and the services continuing to grow. And by that I hand over to you Peter.

Peter Kinnart: Thank you, Mats. If we then continue after the line profit, operating profit, then we have the net financial items, which are, I would say, overall in the total, in the bigger scheme of things, insignificant and mostly supported by higher interest on our also growing cash, as you will see on the balance sheet as well. The profit before tax is the SEK9.4 billion, compared to SEK8.7 billion. The income tax expense is almost on the same level as last year, with an effective tax rate now of 23.4%, compared to 24.6% last year. We say that 24.6% last year was a bit of an exception due to the fact that we had some higher taxes in the U.K. The withholding tax for China, we needed to provide for due to the fact that we did more business there and also we had somewhat lower Belgian and U.K. innovation incentives.

So 23.4% is more of the normalized level and it’s also the level we should think about when we look forward towards the whole year, in fact, that we will probably land around 23.5%. And that gives us then a profit for the period of SEK7.2 billion, compared to SEK6.5 billion, basic earnings per share of SEK1.47, return capital employed of 30%. If I then move on to the next slide, the profit bridge, say, of course, the margin at face value is on exactly the same level, 21.8%. The LTI programs have a dilutive effect and reduce the margin a bit, so do the acquisition in roughly similar terms. The currency was, in fact, you could say neutral, was a very minor impact and only slightly contributed to the net margin. When it comes to currency, what is the outlook for the second quarter?

We think it will probably develop in a slightly more favorable way and we would end up, let’s say, on a similar absolute number, but of course, a different sign. So maybe somewhere around plus SEK100 million, plus SEK140 million, we expect all things being equal. Then, of course, the heart of the matter is then the drop-through here, which was very favorable, I think well above the existing margin from last year, and therefore, that contributed then to an improvement of the margin if we look at the organic development. If we then move on to the next slide to dig a little bit more into the different business areas when it comes to the profitability development, I would say, the picture tends to be quite similar across all the business areas.

The acquisitions tend to be slightly dilutive, as usual, considering that we have the integration costs in the beginning of the project, et cetera, so quite a normal development. The currency differs a little bit, but overall, for the Group, of course, as I already said, basically not a really dramatic impact and then the drop-through tends to be quite solid across most of the business areas with the exception of Vacuum Technique, and in Vacuum Technique, we’ve been suffering a bit from the lower revenues, the volumes that have dropped a bit there as we are eating through the orders on hand and the order book has normalized, while we also had a small impact from, let’s say, unfavorable mix across the different categories that we invoice to our customers.

Of course, our customers decide what they want to order, so that’s something that is not really so easy to control, so that contributed then to the slightly negative drop-through we have seen in Vacuum Technique s. If I then move on to the balance sheet on Page 15, I would say, if you compare year-over-year, March 31, 2023 to March 31, 2024, the total assets have grown by about SEK23 billion. That’s a significant amount and it’s a bit scattered across different categories. First of all, the intangible assets, growing by about SEK5 billion, which is basically attributable to the acquisitions. Then when we look at rental equipment, also there we see an increase, you could say, kind of equally split between acquisitions. As you remember, the NPE acquisition in Australia was quite substantial, and at the same time, we also invest quite strongly into rental fleet, considering that we have lowered a little bit our investment base during the COVID period and that needs to be adjusted, and we are also trying to attack new segments, so therefore we also need a bit more equipment there.

Also, on the other property plant and equipment, we see an increase of about SEK2.6 billion, which is purely related to all the investments that we have announced and that we’ve spoken about in earlier calls, not only in Vacuum Technique, also in Compressor Technique, also in Industrial Technique, we’ve seen a number of investments, so it’s a bit across the different business areas, you could say. The next category that is worthwhile to give some special comment to is, of course, the inventories. We have indicated that our inventory levels have been on a fairly high level and we have been working hard to try to reduce them, which looked quite good when we remembered the fourth quarter of last year, then we managed to have a good improvement there.

Now we see an increase of the inventories. If we look at this balance sheet and that is mostly related to the fact that customers across different business areas tend to be pushing out a bit those deliveries, it’s in Power Technique, for example, on the rental companies that are still having the orders in our order book, but not necessarily demanding the equipment to be delivered right now. The same is valid for Compressor Technique in China, for example, where customers are pushing back a little bit, given the current situation there. And then also in Vacuum Technique, where the utilization of the fabs is not maybe at the exact level the big OEMs want to have it. We also see a bit of those pushouts for the equipment in their new fabs that they are building in different locations.

That being said, we are not concerned about the quality of the order book in any way and we haven’t seen any relevant number of cancellations, neither in quantity nor in volume, so nothing that we are specifically concerned about. The next category that increased substantially is the receivables, but also they’re purely linked to the volume of invoicing that we have generated across the past quarters and when it comes to the risks that we see that is associated with these receivables, also there we don’t see any deterioration basically, so that’s on a healthy level still. And then last but not least on the asset side, the cash, which of course, is increasing, thanks to the positive cash flow that we’ve been generating. If I then turn to the equity and liabilities, I think, the only thing to really mention is then, of course, the equity, and the equity increase of by SEK18.6 billion is simply put split into two, based on net profit improvement and at the same time also translation differences when we consolidate all of our subsidiaries.

That I think when it comes to the balance sheet, moving on to the cash flow, just like in previous quarters, I would say that we’ve been able to see a quite healthy development of the cash flow, with a continued high operating cash surplus from our operations. Net financial items are basically on a similar level from a cash flow perspective as last year. The taxes paid are going up and that is partly linked to the fact that we are invoicing more in territories, geographies where there is a higher nominal tax rate, but also of course, the mere fact that we are generating more absolute profitability means that we are paying somewhat more tax. Then the change in working capital on the cash flow side is actually not attributable to receivables nor to the inventories, but almost entirely linked to the slight deterioration we have seen in the supplier payables and also in some additional accrued accounts.

The supplier payables have deteriorated because of two reasons. On the one hand, we have been using quite extensively supply chain finance and with the current interest rates, the bigger multinational companies that have stepped into the supply chain finance are no longer participating because the cost is too high to compare, considering that they have a good funding base of their own. Secondly, what we have also seen is that considering that we are trying to reduce our inventory levels also on the product company side, buying components from our suppliers, we are of course buying less volume and that also results in lower payables on our balance sheet and therefore also on our cash flow statement. The next thing you see on the cash flow is then the increase in rental equipment.

I already indicated there we are boosting a little bit the investments that are needed, both in replacing older equipment to run the existing business, but also in some new equipment like following, for example, the acquisition of Climorent in Spain, where we are addressing now also industrial cooling with rental solutions. I think investments of property, plant and equipment have been a highlight in the past couple of quarters, but not so much this time. Now we could say that the level is stable on a high level of SEK900 million roughly, almost the same as a year ago. Actually, if I look at the main investments, if I look at the top 10 investments over the last 12 months, then we have spent about SEK2 billion on the top 10 investments with the Atlas Copco Group and like I said, mainly Vacuum Technique, but also Compressor Technique and then also specific investments in the other business areas that contribute to this number.

So all of this together leads us to an improved cash flow of SEK6.7 billion, compared to SEK5 billion just a year ago, and that is, of course, then what triggers also the improvement on the cash account, on the balance sheet. You can also note from the overview here that we have acquired companies for an amount of about SEK2.2 billion, where we last year spent in the same quarter about SEK0.5 billion. So with that, we’ve come to the end of the, let’s say, analysis of our different financial statements and I would like then to hand over back to Mats to comment a little bit on the near-term outlook.

Mats Rahmström: So, in the near-term outlook, we are trying then to guide you a little bit on the activity level at our customers between Q1 and Q2. It’s not so scientific. We are looking into the number of quotes and the activity level among our customers. And what we have seen on the positive side, of course, that sequentially it came in significantly better than we expected them. So there were more activity in most areas. Slightly then positive on semi. At the same time, we see that our new product offers, if you will, we spend quite a significant amount on R&D and we are launching a new product that creates lots of activity as well, we created ourselves. On the negative side, I think, you can see that we have discussed it before that in China, we can see battery, solar and EV are more hesitant to invest at this time, and that has an impact on both Vacuum, Industrial and Compressor Technique.

There is uncertainty, but we don’t have a clear view that things are going to be significantly better in Q2. On the other side, we have no reason to be negative either, so that it will go down dramatically and that’s why we ended up in remain at the current level. I think that’s the best outlook we can give at this point.

Peter Kinnart: Thank you, Mats. With that, we have come to the end of our presentation. And I would like to hand over back to the Operator to start the Q&A session.

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

Daniela Costa: Hi. Good afternoon. Hope you can hear me. My question is regarding whether you can give a more granular color on the underlying industries contributing to the strength on compressors. Specific to the point, so you mentioned positive signs in Europe. If you could give us some clue of which countries, which industries are causing this. And also given Europe has some high dependency on China on the general industrial side outside of solar and EVs. Can you comment about the sustainability going forward that you see on these European better signs? Thank you.

Mats Rahmström: I’ll start with CT at least. The Industrial Compressors held up better than expected in North America and it was so achieved growth in South America and in the Middle East. The Middle East is, of course, related to oil and gas. We see continued strong gas and process, although we didn’t reach the level we had last year, but the demand is still there, and that are still application within fuel gas, booster, liquid natural gas, for example. So that’s what we have seen for compressors in general. And then you said specifically on Europe, was that correct?

Daniela Costa: I think you mentioned earlier that you had been positively surprised in Europe, but maybe I misheard you.

Mats Rahmström: No. You’re absolutely right. So, year-on-year, of course, then Europe was up 4%, if I remember correctly, and it was same here, overall weaker demand for Industrial Compressors. But on the other side, a bit softer in Middle Europe, Germany, Italy, France, Turkey. But then VT was flat, which I think was good and ITB was even up, where we can see automotive being approximately the same level, but very good development on general industry, aerospace being one of them. And then Power Technique came in better. We thought that the rental business would be slow, but the comeback here was mainly in the industrial pump side, where they did really well, I must say. I think that summarizes a little bit Europe for us. I don’t know if Peter wants to add something on Europe.

Peter Kinnart: Yeah. Maybe on Germany, one of the things that we have seen is that there have been incentives in the past for energy efficient solutions and they have been kind of postponed or suspended for a while and it has been unclear for the customers, whether this would be back in place and at what level they would be back in place, and that has held back most likely some investments that otherwise would have happened. It seems now that the German authorities will reintroduce this so called BAFA incentives and that might be maybe some something that creates a little bit of extra tailwind in the near future when that happens. Gas and process overall was, I think, flattish in Europe, with the carbon capture type of application, also fuel gas boosting. And then, of course, overall, also contributing to the strength in Europe for CT was also the service that continued to grow.

Mats Rahmström: That’s true. That was good enough.

Daniela Costa: Very helpful. Thank you.

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

Klas Bergelind: Hi, Mats and Peter. Klas at Citi. So my question is on gas and process. I mean, we all know by now that this business can be lumpy, but I’m just trying to figure out more around the order mix in the quarter and the order pipeline. I understand that the strength here quarter on quarter wasn’t only linked to LNG. So, what else drove it was the carbon capture, I guess, but other color would be great. And if you look at the pipeline, Mats, in gas and process, is there any vertical in that pipeline that is growing stronger more than others? I’ll stop there.

Mats Rahmström: No. But as you know then, gas and process, we normally say it’s around 10% of CT’s business. It’s a little bit more right now with the activity we have seen there. And I don’t think there’s any specific area or segment that is standing out. But it is, as you say, we get this quarter we had a number of orders for liquid natural gas. But some of the other applications as well that I mentioned to Daniela just before your question. So I cannot read. But the pipeline is strong. The orders on hand is strong. If you want a new product, you have to wait a significant amount of months for that and I’m sure that we even walk away from some orders because either low margins or that the lead time is too long.

So we’re also building capacity for that type of business. But I think many of these we have, I think, the most positive is that Vagner and the team, Robert, they have really taken us out away from this low margin business and we are spreading our competences among many more applications today. So I don’t expect it to fall off a cliff again when one of the applications disappear. So we have presence in many more. I don’t think we can define that there’s one that is significantly stronger. Of course, liquid natural gas gets the boost of trying to get away from some other gas from a specific region. But maybe we can give you more guidance when we meet, but that’s where I am right now.

Klas Bergelind: Perfect. Thank you. And a very quick follow up just on the battery side in China and zooming in a bit on automotive and IT. You obviously have exposure both in CT and IT, but focusing a bit on IT. Some concerns here into the quarter that orders in IT would be much weaker led by China. You’re saying that equipment orders in automotive were flat. Can we talk about what you saw in China in the quarter? You’re talking about your own offering increasing, of course, more project orders working as an offset or did you see any regions that offset the decline in China? Thank you.

Mats Rahmström: Yeah. Specifically offset is that we see more activity than in Southeast Asia. Some parts was in India, but I would say, Southeast Asia is close by. But I also like to clarify that the EV trend is very, very strong in general. We believe in that trend. We can see a lot of investment. We also see that the Chinese manufacturers are way ahead of many of their Western competitors. And although that we have seen in the Western part of the world postponed projects, we don’t think that the trend will go away. But that is clearly, of course, that the cars are good. They are developing new programs. But it’s a hesitation from the consumer at this point to step in mainly to financial reasons, I would believe. But the softer part is China and compensated by some extent to rest of Southeast Asia.

Klas Bergelind: Thank you and it’s your last quarter. So thank you Mats for all great discussions over the years.

Mats Rahmström: Okay. Thank you so much, Klas.

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

Sebastian Kuenne: My question is regarding pricing. We saw in the profit bridge that you have a drop-through of about 32% for volume and pricing and mix, which is still very strong. But I recall that in Q4 it was nearly 50% and I assumed it’s because you have, so that the price increases were quite effective and now we see this drop-off. Can you give us some indication of where pricing is currently where you go this year and whether or not you will offset the cost inflation? Thank you.

Peter Kinnart: Thank you, Sebastian, for your question. Well, I would say, compared to where we were a year ago, where inflationary pressures were really, really high, the possibility to transmit price increases to the market were quite generally accepted, I would say, even though not easy to obtain. That, of course, is to be expected to gradually weaken a bit. But I would not say that we have lost a lot of pricing power. It — I would say, overall, you can say that the pricing is still positive across all the DAs in the first quarter. So I think the drop-through, of course, evolves over time and is not exactly the same each and every quarter. I think it’s still well above the current margin, and of course, we have said in the past as well that a drop-through of 30%, 35% is quite solid.

So, but it’s not that the pricing factor has completely disappeared, not at all. The first quarter has actually shown quite a nice contribution from price into the total drop-through.

Sebastian Kuenne: Thank you. And the cost space?

Mats Rahmström: But…

Sebastian Kuenne: Sorry.

Mats Rahmström: No. I was just thinking that internally, when we look at pricing and the effect of pricing, of course, we follow that. But it was more of the gross margin that the acceptance of price increases in the market and I believe that if you look at the 2019 before COVID, we have been able to compensate fully for the inflation and price increases to us and we are on a slightly higher level even. So I think we have done our part in this.

Sebastian Kuenne: And the cost inflation this year, where do you see that and what are the main points we should look out for?

Peter Kinnart: I think it’s the usual suspects. There’s commodity prices that might go up. Transport cost is, of course, on the radar, given the geopolitical situation that might contribute to that. But, overall, for the time being, we believe that, as Mats already indicated, the gross margin is on a healthy level and has actually improved somewhat compared to the pre-COVID era. And so in that sense, we feel that we have been able so far to compensate all cost increases, structural cost increases, I should say, with price increases to the market.

Mats Rahmström: And I think…

Sebastian Kuenne: Thank you very much.

Mats Rahmström: … the real value driver for us is always new products when we generate more value for customers as well, which we don’t see in a price switch.

Sebastian Kuenne: Thank you very much.

Mats Rahmström: Thank you.

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

Ben Heelan: Thank you. I was hoping if you could expand a little bit on the comments in Vacuum around semiconductors and whether you’ve seen any green shoots going into the second quarter and I remember in the last couple of quarters, you talked about cancellations in Vacuum. If you could give us some color about where you are on cancellations in that business? Thank you.

Mats Rahmström: If I start with cancellations, we haven’t seen any specific cancellations in Vacuum Technique or in any other business areas either. It’s very normalized. What we do see, if we look at our own numbers, we can see that the chamber solutions, which is turbopumps and cryopumps that goes into the machine builders, we can see an upswing in business there. They are normally quite early. So that is a positive sign. We can also see that utilization from our customers is up. That is also confirmed that we get more pump repairs back to our service shop for rebuild, and of course, we can see the memory inventories that customers is coming down. So those are the early KPIs that we can see at this point. I wouldn’t read too much into that.

But at least it is positive. It’s been kind of flat for a year and a half. So I think it’s bottom out. And when the big upswing, we believe that there will be a big upswing and there’s this big demand for AI for a lot of applications. But when that’s going to happen, I don’t want to commit to that at this point. But at least a few positive signs in that one.

Ben Heelan: Okay. Great. Very clear. Thank you.

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

Andrew Wilson: Hi. Good afternoon. Thanks for taking my question. I just wanted to try, and I guess, understand the comments on China a little bit. We’ve kind of heard this reporting season a few times that almost positive signs on China and potential for sequential improvement in terms of the Q2 versus Q1 and this is a kind of a question on the broader industrial landscape, rather than something specific like semis. And just putting that in the context, obviously, you’ve called out some quite specific exposures in the Q1 being weaker. I’m just trying to get a sense of when you think about if we take sort of Industrial Compressors as a good proxy, how you see that China demand and environment developing as we kind of go into the Q2, and then, I guess, as far as you want to look into the year, just trying to get some sense of that?

Mats Rahmström: Yeah. I mean, I could turn it around, of course, and be extremely positive about China, just looking at the sequential growth. But that is more seasonality that we have seen year after year. So we didn’t read too much into that and we don’t have that in our outlook either. But we have experienced in China, less quotations for the bigger machines and they normally go into big process like battery manufacturing. It could be solar as well. We see that there is less activity in China on those areas. There is a hesitation to place orders and close on programs. For us, we can also see some hesitation in semis, that they are building more on the bigger nodes today, instead of the more advanced nodes. On the other side, they are very committed to the strategy of building an independence on semiconductors.

We can see that they are in the lean, but have overcapacity in the EV manufacturing. So, overall, long-term, we are very positive. They are a key driver in many of the segments. We are also very fortunate strategically that we have invested in China in the full value chain, both for vacuum pumps, for compressors. Of course, the Chinese customers are demanding more and more that it should be local, and as long as we have innovation, and we build and design our products locally, then we have an opportunity to quote as well. So our position is very strong. Long-term, it is a very important market for us in many of the key segments. Short-term though, in this quarter, we have seen a slowdown in the segment that I mentioned. And we don’t know — we don’t see the quotation picking up at the end of the quarter or anything like that.

So that’s why we are optimistic.

Andrew Wilson: Thank you, Mats. That’s very helpful and best of luck with everything going forward.

Mats Rahmström: Thank you so much.

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

John Kim: Hi. Good afternoon. I was wondering if we could spend a little bit of time on PT. If you could talk us through what you’re seeing at utilization levels for the various aspects of semiconductor manufacturing. Any color you could give us on logic versus memory here and possible expectation of utilization at breaks hitting 90% plus would be helpful? Thank you.

Peter Kinnart: Yeah. I think when it comes to the difference between memory and logic, for us that doesn’t make a huge difference. Of course, demand will be different from different segments, but ultimately, for us, our products are used in both the different applications and we could say we are agnostic to then the application for which it’s going to be used. When it comes to utilization in the fabs, it has been low and I think apparently too low to spark the investments and to launch a lot of orders and that has been going on for a while. We believe that currently the utilization rates are probably going up gradually. As Mats already indicated, we see that in the number of pump returns on the service side, for example, that are somewhat improving.

And so, we in that sense that there’s maybe a little bit of positive news that gradually there is an improvement in the utilization of the fabs with our customers. And of course, there will be a point where they reach a certain level where they feel comfortable enough to expand further their current installations, and that, of course, would then trigger orders for us. The timing of that is very difficult to establish. It’s more guessing than knowing, I think. Some are very optimistic and are talking about the beginning of the second half, Q3, some are talking about Q4 and then the slightly more pessimistic tone is probably spilling into 2025. To be honest, we can only say that we don’t really know. But the best we can do is to try to make sure that we are as prepared as we can and we have done quite a lot of investments over the last several years to make sure the capacity is there, is available, is ready to deliver.

Delivery times have gone down now, of course, with supply chain improving quite substantially. And so as a result, we are looking forward to that moment to come, but we don’t know exactly when that will happen.

Mats Rahmström: We don’t know the insight of our customer, but from experience, when we have seen the uptick again, it’s when they reach utilization between 85% to 90%, then they seem to be interesting to make the next investment. And the good thing is that we have never, ever seen more constructions in semi, but not activated them. But there’s still an opportunity going forward for this.

John Kim: Okay. Thank you.

Operator: The next question comes from Rizk Maidi from Jefferies. Please go ahead.

Rizk Maidi: Yes. Hi, Matt and Peter. Just quickly, can we talk about the equipment delivery pushouts? I think Peter mentioned this when he talked about inventories being up. This has been a theme this quarter for other companies that have reported. Outside of China, where — what areas have you seen this and are you concerned at all about sort of slower invoicing, overcoming quarters now that backlogs are normalizing and equipment delivery times are coming back to normal?

Mats Rahmström: The pushouts that we have seen so far has not turned into cancellation, which I think is good. They just need more time. We have seen it in semi, of course. I also think some of the EV program in the Western world, some have been canceled, some have pushouts as well and we are talking about these bigger programs. Of course, we could force the customer to take the equipment, but that’s not our intention. We like to keep a very solid relationship with them and sometimes we get a little bit exposed in the inventory, but we don’t see a big concern. It’s more of a timing thing for us.

Rizk Maidi: Okay. Thank you very much. Best of luck, Mats.

Mats Rahmström: Thank you, Rizk.

Peter Kinnart: Thank you, Rizk, for that question. With that, I think, we have reached the end of the queue, and I think, we’ve hopefully been able to answer all the questions you have. Of course, should you have more questions, you know where to find us. Our Investor Relations team is very happy to help further with any further topics or questions. As we will need to prepare ourselves for the Annual General Meeting of Shareholders, we will end the call here and look forward to being in touch with you again in the course of this quarter or later. Thank you very much for attending. Wishing you a fine rest of the day. Bye-bye.