Atlas Copco AB

Thank you very much, and very welcome to everybody on this conference call. This time, of course, more than ever due to ever due to the fact that we cannot have it in another way.

As you all know, we have here Mats Rahmström, my CEO here, with me. That was a coincidentally, sorry about that.

And we will carry out this presentation of the first quarter results from Atlas Copco in the normal way, which means that I will soon hand over to Mats and then we will have a questions-and-answer session after that. We have reserved one hour, and we try to stick to that.

So again, I hope that the question-and-answer session would be in the form of one question at the time and that would be much appreciated. With that, I think I'll hand over to you, Matt right away.

Thank you, Hans Ola. We start with Slide number 2, Q1 in brief.

Orders received came in at SEK 28 billion, we think that's in regards that that's a very strong amount for us. And Vacuum technique did very well, riding on the wave of digitalization in our society.

CT, flattish, and then tougher market environment for Power Technique, minus 11% and also Industrial Technique still related to IT, but also extended to of course, aerospace at this time is minus 11% as well. We thought we should give you a little bit more insight to the quarter when it comes to orders received.

January started off with a record level for Atlas Copco and it was strong in most business areas. February, of course, came in softer, and then we started to see the impact on corona in Asia, specifically China.

Somewhat recovery in China in March, but if I take out CT that continue to be strong also in March. You take Compressor Technique, Industrial Technique and Power Technique organically, they were down 15% to 20% in March.

The service business continue to grow, it's normally something that is very good for our resilience. It's not as efficient and when we see that we cannot get access to customers, of course, and in some parts of the world, of course, there had been a complete shutdown.

Margin came in about 20%, happy about that, considering the business environment that we work in. We have open factories some closed factories, some – we see that we are not as efficient as normal, especially under-absorption in both field engineers and also in our production.

Looking at the dividend for the year. I think you have already seen that we've deferred down the second installment, which is SEK 3.50 to close down the extraordinary General meeting later on this year.

The quarter, of course, is shadowed a little bit by – not a little bit a lot by the COVID-19. And the truth that we have had is to secure the environment where we work for our own people, but also take a very active role in society to make sure that we are not part of spreading the virus.

And to protect lives with first. On the other side, we see that the best way of doing that for us has been to try to keep our manufacturing units open.

And in most cases, I would say that still, this been quite good success with that. Right now, Italy has been an issue, and of course, India, but in most cases, we're still running our factories around the world.

There is a life after the COVID-19 as well. And quite early into this truth that we felt that how do we protect livelihood and the success of our company.

So we have defined a number of activities where we have no intention to cutting costs, that being research and development. We can also see that the efforts that we have made in digitalization with all the connected products being the Compressor Technique and in Industrial Technique, for example and how beneficial that is now when we cannot always access the customers’ facilities.

We can also see that we try to use this type of short-term week to maintain employment for the very important resources with a lot of competence about our customer testing service and then in sales, of course. So intentionally it's – often it's the come out as a stronger company.

Take Slide number 3, which confirms a little bit the numbers, the SEK 28 billion was supported by currency, mainly the U.S. dollar, 3% and then acquisition was also positive of 4%.

Talked about the margin at SEK 5 billion and above 20%, happy with that. And you can see that, that had a restructuring cost in Industrial Technique still mainly related to the auto sector.

And then we had a positive on the reevaluation of the option through those. Return on capital employed, it's a bridge stepped with main things are the two latest acquisitions that we have Brooks and Scheugenpflug, and then you also have the new rules or IFRS in terms of lease.

Go to Slide number 4. Of course, it changes a little bit this time.

The business climate has changed dramatically moved from geography to geography. Of course, the influence first for the COVID was in Asia for us.

And we had an extended shutdown of the New Year celebration in China. And principally, all our factories are up and running again in China.

And then we have not yet fully seen the impact on the virus in Europe and Americas and rest of the world, but we expect that will come in Q2. There are a few segments, this have take the positives here, you can see Asia is driven by in principally flattish in many areas, but the one turns out is the semi division of semi equipment and semi service.

That's been very strong. Globally, as well, we've seen a strong medical business and some of those.

North America is come in a flattish and we see strong America, strong in Paris as well. And actually, Industrial Technique also had a positive effect in the auto sector, but that was mainly related to a weak Q1 last year.

Middle East, in reference to oil and gas, we can see the utilization of our rental fleet being a less as well. Slide 5 indicates the organic growth per quarter and you can see it was minus 2% this quarter.

Minus – Slide 6, you can see the sales bridge. Talk about the structural acquisition, 4%, the currency was positive and then on the organic, I think I repeat myself a little bit there.

Then I thought I will give you a little bit more detail on Slide number 7. Some positives and some challenges then.

If I start with Vacuum, which is now then 23% of the group and growing. In semi, we have seen technology investments and this time, we also spend a little bit of capacity investment and that's mainly in memory.

We can also see strong business for the coating applications but also in scientific, where we can see medical, pharma and food, for example. In Compressor Technique, there are a number of products that plays an important role in society.

In general, you can say that the small compressors, medium-size compressors, and big compressors, all of it came down, the demand is reduced. But there are some segments and that we are present in that's pharma, it's medical, it's water treatment, food and beverage, for example.

But in general, it was somewhat slower. Industrial Technique, auto is still negative.

And we can see a lot of shutdowns, of course in Europe. Aerospace, considering the development of that industry, also challenged off rule and also general industry.

So they have a tougher time there with some of the key segments being down. The one thing that's positive is that with the mix of technology that we offer now, you can see great success in key strategic electric vehicle programs.

Power Technique, we could see our own rental fleet, the utilization came down. I assume that is the same for the generally rental companies because we can see that they have postponing the investment in CapEx and we have had even one or two cancellations as well.

Compressor Technique on Slide 8. An organic line of minus 3%, we kept up fairly well anyway.

Looking at the profit level there, positive for currency, but you can clearly see they are under-absorption in both service and manufacturing. And in the compressor case, Antwerp is our main hub and that we had the shutdown for two weeks when the governments are introduced social distancing.

It was difficult to run the line in the same way as we had in the past. So we closed the line, also the factory and for two weeks and made sure that we change the processes, and then we reopened after two weeks, and now it's up and running, although not to the same level as before.

But I'm happy with the team there of this fantastic job there then to get going again. Italy has been shut down for quite some time.

This week, we have been able to open up product that are critical to society and those are some of the ones I've mentioned before. So it's running with a lower utilization, at least it's up and running and we can try it again.

One of the challenges for us is the service business in Compressor Technique, although that we have with this 120,000 connected compressors, it has been very difficult to be on site. And of course, many customers don't want to see us during this corona time.

So that's a little bit of a challenge for us there. Vacuum Technique had a record quarter, fantastic to see the orders received.

All the factories that they have are up and running and principally running on max capacity. So that's positive.

Yes, nothing more to add there I think. Industrial Technique.

As I started out with probably the three of the more important segment are challenges with demand. So to be able then to deliver that 20% was pleased to see that.

From a operational standpoint, I would say that there are, of course, a number of challenges. But going forward, looking forward, I would say, more the demand picture is more challenged for industrial than anything else.

The completed acquisition of Scheugenpflug, and that’s the new platform for us was this span into smaller applications like electronics for different industries as well. Not in this quarter but ongoing then that we have secured 76% of the shares ISRA Vision as well.

Power Technique, what should I mention here maybe the drop there in margin. And you can see then that the rental was down and also service was down and that was the main explanation for the gap there on profit margins.

Same thing here now, Antwerp is up and running. China is up and running.

Rockhill is up and running, where we have the operations. So it’s more the demand picture here that is a challenge going forward here.

So summarizing, happy with the orders received, happy with the revenues. And I think we gapped a little bit the understanding of the operating profit margin.

We continue then to invest to come out as a stronger company. In R&D, the digital initiatives, working very close with our suppliers to be sure that we are first in line with this turns around again.

And I think I hand over to Hans Ola.

Thank you, Mats. This is the more complete income statement, as you see on the slide now.

Mats has made all the comments on the operating profit. I think we just take a look further down on the net financials.

You’ve seen in the report that the underlying interest net that we have, and we actually expect to be at that level going forward as well is about SEK 65 million negative, that’s the run rate. So the extra SEK 50 million negative, roughly in Q1 is related to exchange losses on foreign exchange loans in certain subsidiaries around the world.

And of course, that happens when we have such turbulence in the world and some currencies have really taken a beating in this turmoil, but that is the explanation. But since we don’t know anything about that going forward.

That’s why we only talk about interest net going forward, about the same level, 65% as we have. If we go down and look at tax, again, a tax rate that is roughly in line with what I think we have guided you before.

We also think that it’s that roughly that level we expect going forward for a while. And Matt’s already commented on the return on capital employed, so I don’t need to repeat that, that the acquisition and a little bit of negative IFRS 16 effect is the explanation to that drop in return on capital employed.

If we look at the profit bridge then a little bit more in detail, it certainly looks already at the group level a bit unusual. We have sorting out the effect on the revaluation of the provisions for the long-term incentive program to the right.

I’m on Slide 13. If you have lost track.

Then if we look at items affecting comparability and acquisitions, of course, we have a couple of big – well, very recent acquisitions that have yet to come into profitability even due to the relatively heavy weight of amortization of purchase price adjustments and the intangibles. So that’s one of the main reasons there.

Then currency is helping us clearly in the quarter. And then you have the rest, so to speak, call it, the organic development, which looks like we will lose a krona for each krona we lose on revenue which is, of course, dramatic.

We have to remember, though, that this is a bridge between a quarter a year ago and the most recent quarter. It’s not an indication of how the trend as we move forward is, then you can look at the 20.4% and say, well, that’s the best we have as a adjusted number for this year anyway.

So the – on that, I would more just comment that you see that there is a 0.5 percentage point effect from last year to this year. And if you sort out the different columns here.

You see that we have had a help compared to last year, with about 1 percentage point equivalent from currency, and that is perhaps something that you can remember. Then on the organic flow through, you can then turn to the next page and look at if we move one slide forward, there we go.

You see also by business area. And of course, this is a quarter, which even in the quarter has the disruption in itself.

And that means that look at Compressor Technique, for example, or industrial technique, that there is a quite heavy effect all the way down to operating profit when revenues fall quickly and suddenly, even in the quarter, so to speak. Vacuum Technique looks, of course, a bit strange.

I can only repeat again that it’s comparing a single quarter a year ago with this quarter. And that’s why the – it looks a bit extraordinary.

Mats already commented that there are a number of negatives due partly through the COVID and partly to an unfavorable sales mix that exaggerates, let’s say, the negative from there. But again, I say, if we have the currencies that we had at the end of March, then we are already in that currency situation.

It’s not that we expect to lose further on the currency aspect as we see today. If we then move on and the others, I only think I should point out that on Power Technique, you’ve seen the comment in the report also that there is a very negative sales mix there between the more profitable products and the less profitable products.

So that basically explains it. Before I leave you only on the FX effects.

If we look going forward, we don’t expect very much different in Q2 than in Q1, possibly a little bit less positive impact in Swedish krona on the operating profit compared to the same quarter last year. So – and we have SEK 460 million plus in Q1, as you know.

So that’s, at least, some kind of reference. On the balance sheet, I think for anyone that doesn’t live here in Sweden, it looks like we are expanding massively, but SEK 5 billion more than SEK 5 billion of that increase since December is actually due to pure translation into a weaker Swedish krona.

And for the rest, of course, we have the acquisitions that goes into intangible assets that also explains a big portion of the increase, otherwise, nothing much to say. On cash flow, which is Page 16, we have the big difference in the improvement compared to last year is actually in the working capital.

In Q1, we almost always have a little bit of a tying up of more capital that is more seasonal affected than ever. So comparing to last year, we have the same tendency, but it’s much less.

And that reflects that we were already coming into the quarter with a slightly more negative external demand picture, and that was then accentuated by the COVID-19 happening. So if we move on from there, come – I don’t know if we need to comment more on that Mats.

You already said it.

No, you've got it.

Yes, and that’s on Page 17. And then I’ll leave it to you for the most wanted slide.

I don’t know about that. Yes, you have an option this quarter not to give an outlook.

But, at least, we will give it a go see how transparent we can. And we are trying then to talk about activity levels among our customers between the Q1 and Q2.

And, of course, you can see that we believe it’s a very uncertain what will happen, and that’s completely linked to the corona, of course. But what we see is that if you look at March development.

You can see that we have not seen the full impact yet in Europe, America and rest of the world. And hopefully, the slight turnaround in China will continue.

So that’s on the positive side. But for us, then if it’s a lockdown, we normally can work with products that are critical for society.

But in many cases, we don’t get access to their customers’ facilities and service products. So that’s a little bit on the negative side.

So that’s why it’s so uncertain for us what will happen in each country and what will be allowed to do in [indiscernible]. I can see that we do have a huge favor here with the decentralized organization.

We are very quick to act in each region. And we do that fantastically well.

Right now, we have 20 different setups where we coordinate activity on the daily, on the weekly base to make sure that we act in the best possible way. We said that we want to make sure that our employees stay safe.

And at the same time, we communicate that we would like to be open to maintain the supply chain to make sure that we’re working and help out in society by we can. So the diversified business model, when we are in different geographies, you can see that we have some 36% of our sales in the quarter in Asia, leading products, and have this presence in different segments will, of course, help us quite a lot.

But then we also talked about the livelihood of our employees and the company and so that we like to came from strong to this. So there are a number of things that I mentioned earlier that we are not going to cut back on.

So we will see a drop in demand. At the same time, and there is a certain number in costs that we will not adjust, but then our all other costs, we will adjust to the new market conditions.

Great. Thank you much.

Then we move over to the question-and-answer session. And you please, operator, give the last instructions please.

Thank you. Could – just my first question is on – when you talked about the down 15% to 20% in Compressors in March.

I just wanted to understand whether you had seen any major differentiation between your service business and your equipment business within that number? Because obviously, a feature of Q1 has been that service still grew, and – but obviously, the restrictions have become greater in Europe and the U.S.

So, I just wanted to understand how those two businesses differed within that commentary you gave on March or whether we should assume that Q2 faces similar pressure across both of these businesses?

I have not broken down March myself. I’m looking at how to [indiscernible] in for you guys, and not surprisingly to us, at least when you have these sudden drops, it’s – it is as we have seen before, more accentuated on the on the equipment side.

But you’re right, in certain geographical regions, we saw it also on the service side. We don’t know how long the development will be there.

And Mats commented on China, for example, where we don’t see the same – exactly the similar situation in April as we saw in March, for example, or even in February when it comes to China. But it’s difficult to – it’s an aggregated number that Mats mentioned.

But maybe you can guide a little bit like a lockdown in a country, then it will have the same impact, of course on service as well. So maybe the correlation there, we need to follow in the coming quarters while in principally so if we cannot access that the – It’s very little that we can do online that we can charge for.

We need that physical visit on-site to generate revenue. So, I think the – even if we can guide you exactly then, I think that is the correlation to be dealt for them if we can or cannot trust those customers.

Okay. That’s helpful.

And just my follow-up question is, we’ve heard a lot of other companies sort of talking about such short time working schemes and quantifying cost actions that they’re taking. I’m sure there is lots you’re doing kind of behind the scenes.

But I just wondered do you have any kind of commentary around temporary cost measures, cost actions that you’re taking? And potentially what, if any, quantification you can give around this?

Thank you.

Now, what we have approximately 39,000 employees around the world. And today, we’d like to use this as much as possible because we think it’s such a huge strength to keep them in employment and around just about 8,000 people have some sort of program.

And we take advantage of that. But it’s possible intrinsically.

And if it’s not short term, of course, then we come to another situation where we see that’s a recession and then we need to adjust accordingly as well. And I don’t know if you wish to add.

No, I think that’s accurate.

Okay. That’s helpful.

Thank you.

So just perhaps to be clear, and I’m sorry if you already said that much, but the 8,000 people are the ones affected in some way, they could be from 10% to 80% or 100%. So there is a weighting of that, that is difficult to exactly calculate.

But there is quite a big group affected, at least, in there.

Okay, thanks.

Thank you.

Good afternoon, Guillermo Peigneux from UBS. Thank you everyone for taking my questions.

Actually, I wanted to know a little bit about the margin pressure that you saw during the quarter. And I wanted to get some clarity as to how much of the three key items you mentioned in your press release will be persistent or to what extent they will normalize as we go forward?

I guess you mentioned investments and digitalization, and obviously, the goal is trying to do a lot of efforts. So – but I’m trying to get more or less when you will normalize these investments?

Also, you mentioned increased cost on COVID-19, and I guess that has to do with supply chain as well. Have you seen any stabilization of supply chains or should we continue to expect a bigger impact on increased costs?

And then lastly, you mentioned under assumption question, and, I guess, I link the question to biggest goods inventory reduction for the most significant business within the short cycle business you run. Are we now at a good level or should we expect more under-absorption in next few quarters?

Thank you.

Guillermo, just if I missed that in the beginning of the question, you’re referring to the group or a specific business area.

Yes. It’s to the group.

But obviously, I went through these specific business areas. I guess, investments in R&D is present in CT and IT.

You mentioned the increased cost in BT and the absorption also in Power Technique. So, I was linking everything together.

Sure. Okay.

Guillermo, as much said already in the beginning, there were investments in – we call them investments, of course, they end up as costs in the profit and loss, both on R&D and digitalization and so on that are projects that we want to keep. So that, the fact is not sort of an increased cost per se in some cases, even that, but it’s certainly not something that goes away when the revenue drops, and that’s what we have seen in the first quarter, and it will be there in the second quarter as well, obviously.

On the absorption side, no, you can definitely not say that we are already a couple of weeks after or, let’s say, a month or two at level in terms of that. We will not be comparable with the normalized situation compared to last year, for example.

The impact of that is, of course, extremely difficult to say to what wait the – to what grade of under absorption will we continue to see. But it’s like we had commented in earlier days that in the first quarter after a sudden change or a drop, you can’t do so much at all.

But 12 months later, of course, you will see the effects of the more agile business model and the possibility to adapt, et cetera. But we expect that the drop-through of the falling revenues right now will hurt the profit margin, obviously, that’s for sure.

And maybe I’ll give some granularity an example then. Since we take safety first for our employees, if we have a line running somewhere and we detect one employee that is if we suspect could be infected then we will stop that line.

We will clean that lineup, and we will send the people home and make sure that it’s very uncertain in a compound absorption, how that will play out, even per factory today. So – and we’re going to continue to put the safety of our employees first.

Thank you.

Thanks very much. Good afternoon everybody.

The first question I have is about your supply chain. Would it be possible to talk a bit more about this supply chain organization so that I could better understand what next it – so much flexible, so much reactive, if you could talk about to what extent it is, you generally managed or coordinated globally these sort of things and how you’ve been able to mitigate the disruptions, the various supply chain challenges so far?

That’s question number one. The second question is about the Vacuum Technique performance, which was obviously extremely strong this quarter, once again.

But I’d like to understand to what extent there were some pull-in effects in demand for semi in Q1 in anticipation of potential supply disruption? Thank you.

If I will start a little bit on the supply chain. And when it comes to Vacuum, I mentioned that we principally take advantage of all the capacity that we have.

They are more local to the operations in Korea and China and Japan. We believe that they have a strong supply chain that will support demand.

And CT, they make a lot of core components in [indiscernible] and then they supply to other factors around the world for us. And that’s why these two weeks when we restructured the setup of the processes was very important to us.

And when we see that they are up and running there, and they’re doing so in a safe way, we’re happy about that so that helps out quite a lot. And the shutdown in India, that’s not so good because a lot of companies, including ourselves, is sourcing foundry goods from India.

So that is something we look forward to, but that’s still to open up. Industrial Technique, I could say that’s Northern part of Europe supplier base is working quite okay.

It’s more challenging in France than the Southern part in Italy, for example. So there we have challenges, but I think the number one challenge still for Industrial Technique is still the demand from customers.

So Italy and India, I see a little bit of progress during the quarter and to support our supply chain.

I think there was one – second question was is there any element of preordering into the strong VT numbers, I think that was basically the question.

Yes. That could be, of course, I mean, I’m sure that they have the handful of key customers in this segment.

And of course, they look it and will we be able to keep open. So there is some sort of impact on that we don’t know how much we don’t know that actually.

So – but I’m sure there is probably the right conclusion that they have placed some extra orders. We could not predict a record quarter when we started, started this quarter.

Okay. And when you gave us the indication that the business was down 15% to 20% in March, that was excluding VT, right?

So what was the order trend for VT in March?

Are you getting into our internal reporting, I think so – but that – the comment was for the three business areas today, CT and IT and PT, that’s correct, as you assumed.

Okay. Thank you.

Thank you.

I hope everyone is well. It’s actually similar to Gael’s question, just about the kind of dynamics in semiconductor.

If we think about the orders in dollar terms, ballpark $700 million. How lumpy was that order intake i.e., did you have some very specific large contracts in one or two guys, or was it more broad-based?

So that’s the first issue. And then secondly, just more generally, in terms of your customer conversations with the semi’s OEMS, in particular, how do you see the year playing out?

What type of dynamic, what type of conversation are you having with them at the moment? Because we see some fairly positive things coming from the likes of TSMC, SD Micro, SNL, et cetera.

And what I wanted to understand is, is that your feeling talking to them?

Well, if I start with your last question, what we hear and see demand is picking up among the big companies, what we pick up is that the coronavirus has accelerated basically the demand for a lot of the products, working from home, it’s one area, of course, today is the thing. And you can also see gaming being a big opportunity for many as well.

So – and so what is a new way of working after this. And I think everyone to think that it will change in the way we operate.

So – but it’s still a key account market, so what it will come and do a little bit. But overall, we stay with the prediction that we have for many years known that this is a very, very interesting in that the [indiscernible] this has accelerated the demand for this type product in the segment.

And just what you probably expect us to say then on the first part of the question, it is a key account market. And if a couple of orders come in the one quarter instead of the other, it makes quite an impact sometimes.

But here, it’s not like, yes, we forgot to tell you, we have a SEK 300 million order in a one-off. No, it’s not like that.

Of course, it’s – but it’s difficult to make the call, because it is a key account market, as I said, and there are big customers. But nothing that stands out in that extraordinary way, then we would have told you.

Understood, that’s helpful. One quick follow-up, Just on China, in terms of the sort of resumption of activity, are you seeing a catch up effect, i.e., for example, in the service market, in the service area, are you seeing a sort of desire to not win back, but increased service as a result of what was lost in, let’s say, February and early March.

Has there been a sort of disproportionate pickup?

So from – maybe Hans Ola has picked something else. But what I’ve seen, and when I talk to the General Manager, it’s more likely breaking and seeing more activity.

It’s not on that level yet. I think we have to give it a couple of months.

It’s sustainable as well. Of course, the industries are also dependent on success of fighting the virus in Europe and Americas of course.

So, I would give it another quarter to see if there is a stable business and the stable markets where they supply. But right now, our GMs are happy to see that they see more activities, and they can move more freely in between this pandemic.

Thank you.

Ben, thanks.

Hi, good afternoon everyone. I just have another question on vacuum, actually.

But on the industrial side. I’m sort of interested by the commentary that demand seems to be going up there as well.

And I know you touched on sort of pharma, medical and the coatings. I guess my starting point would have been assuming that industrial might see similar declines or development to do, seeing some of the industrial compressors.

Can you just sort of, I guess, maybe put me right in terms of that line of thinking? Or just provide a bit more detail on sort of why the industrial side was also good?

Industrial vacuum also good?

Yes, yes.

Yes, please.

No, that’s – it’s is – we could see that when we had less orders as well. There is a correlation between the semi industries and the coating applications.

And there is an overlap there. And I think that has helped the industrial business as well.

If you take more general vacuum to general industry, I would say, probably following the CT demand to break it down.

That’s helpful. And maybe if I can just squeeze in just a very quick second question just to clarify an earlier comment.

When the Antwerp facility was closed in compressor and for the 2 weeks, did you actually lose sales or were sales deferred in that period? Or were you able to make up for the shortfall in some other operations?

I would say that if we – probably we lost something, but that must have been very little, I would also say that we also maintain 50% of the capacity in our distribution centers. So everything that was available from inventory, we could shift to customers as well.

And we also continue to manufacture parts as well. So, it was mainly the final assembly product.

And I think most customer have accepted, and I have not heard anything about specific lost business in compressor technique.

That’s great. Thanks very much, guys.

Hey, guys. Thanks for taking my question.

I hope you are both well. I want to just briefly – Mats, you talk about gas and process compressors.

I saw strength in China, but materially lower orders in North America and Europe, you obviously had a very strong run for a couple of years here. Is this quarter down to lumpiness?

Or do you think we are now in, as you would say, more of a sustained slowdown even once the environment starts to normalize post COVID? And I’d be particularly keen to understand how you see China within that regard?

Okay. It is, as I just remind you and you know this, Lars, that, of course, gas and process, we talked about DT being, or semiconductor business being a little bit of a key account.

This is also more singular deals, let’s put it that way. Its weighing much more heavy than for industrial compressors, where it’s more of a flow of serving thousands of different industry segments and so on.

So, I think the comment in the Q1 report is the important one, that it’s not a bad level, has been a good demand, but not exactly to the same level as a very strong period a year ago. And I think we don’t hear anything specific from any region that it follows a different pattern than that in general.

That’s what I picked up. Mats, if you…

But strategically, we have been working on the product portfolio and the number of applications they should be able to handle the downturn in some of the segments in a better way today compared to what they could in the past, but it’s quite complicated and many of these applications are – it takes time to rebuild the portfolio a little bit, but they, for sure, are on their way to enter into more applications, and satisfying more segments in the market. And that’s why we’re heading in this.

It should help the resilience to a certain extent.

Yes.

Can I ask more generally on the business for China? Sorry, I was a bit late on the call, but just as a follow-up finally, on China, generally outside of VT, did I hear you say, Hans Ola not the same trends in April as in March?

I’m just trying to understand the sustainability of the recovery in March. And I know it’s difficult to talk about weekly or monthly order trends here, but I wonder whether you can help us understand how you see China from here sequentially.

Well, my comment was about the service business and how impacted it was. And there, we saw if you call it a comeback or we saw a normalization after the very, very low February, if I call it like that, it stayed into – it affected March as well.

And now as the market has opened up gradually, that’s what I commented on that. In general, I don’t want to stick out my neck in any way regarding what happens in any market for April, May and June, to be honest, at this stage.

But it’s too early to say that's a sign.

Yes.

It's very importantly in the beginning of the next quarter what they do and what we do, but we take it, at least, at a positive sign right now.

Absolutely.

Understood. Thanks, both.

Yes. Not sure if that's the right name.

It's Klas from Citi. Hi, Mats and Hans Ola, I was late on the call, busy day.

I hope you haven't touched on this. Let's see, so on services, I get that there are differences in the service models of BT versus CT.

But why do we see weakness now in IT and PT services but not in CT services? Did you see any weakness at all towards the end of the quarter in CT?

Because obviously, if we have major shutdowns in Europe and parts of America in the second quarter, I'm a little bit scared that CT can take a hit on the service side. So if you could touch on that, that would be very helpful.

Yes, Karl. We have covered that question a little bit earlier.

Sorry and it's mainly what we could say that the best correlation we could do is, of course, if we have access to the accounts or not. And we make very little revenue online.

We still need to go on-site to make an activity that we actually can invoice. So if you when you look at it and say, okay, Italy, right now, very difficult.

France, very difficult, Sweden, a little bit better. And if you break it down like that, you would see that it's the best correlation you could get right now.

And as soon as it opens up, then we can be present on the site to help us with the service again. I mean I think that the industrial technique that we didn't touch on, but many of our customers have had a complete shutdown, of course, so as you can see, and we don't get serviced or equipped.

Yes. Okay.

That’s helpful. My follow-up on this is trying to break down CT services between technicians and spare parts.

So how much of CT is contractual versus spares today? And out of your contractual services, how much is regulated or, what you could call, seen as critical, such as food, beverage and pharma, just so we get a sense a little bit what is naked to the current shutdowns?

We don't have a good distribution of those sectors in that way, at least not available here. But I think I understand your question, but it's a very, very tough one to make – try an answer to it, to be perfectly honest.

The chain – the distribution in general on the services, what we have commented before, basically, and when we had the Capital Markets Day. It's not that we expect that to change in a very dramatic way between what is service contract of shorter, longer duration and what is more breakdown type of service.

I don't even have it in my head, a good distribution on that one right off the top of my head, but we can certainly help you to remind what we have said before in the Capital Markets Day.

Thank you.

Thank you.

Yes, hi. Thanks for the call and ask question – opportunity for the question.

I want to understand the incremental margin profile a bit better. I remember that you said initially that do not look at the, for example, the overall group incremental margin in the same way as you have seen in the first quarter.

So – but to give us a bit more color, how should actually we think about this going forward, if not the 91% number we can see for the first quarter? Is it closer to 70%?

Is it closer to 60%? And within that, what is the color – differentiation, let's say, between the various segments, also between VT and IT, for example?

And if you could maybe help, which of these segments actually have the most flexibility in terms of removing cost on very short notice and which ones are more difficult to do that? Thank you.

We – thanks. The difference between the four business areas, if we start there, is not so huge, to be honest.

They follow a fairly similar business model setup, meaning that a very high proportion is related to variable cost in some shape or form. But I do then also remind you what we said before that from one quarter to another, there is not a lot you can do on your cost base.

But if you give it, let's say, within the – within the 12 months period, of course, we have quite some confidence in our ability to reduce the cost, to defend the margins, if not protect them, but defend them at least. So that's not a huge difference.

When you – I think it's correct assumption to say that 91% is not what we expect every quarter. We gave a couple of examples, both in VT and CT and others that – and the corona outbreak per se, of course, accentuated that number.

But when you – when we have contraction, like our outlook now guides, that's our opinion, of course, that we will continue to be in a downturn for a while. It's clearly so that it can – it has historically been at least half of your revenue loss can certainly go away, and it could even be slightly more than that on a short-term basis.

But as I said, 90% was a couple or two – a bit too much. And it's a one year bridge.

Remember that. So it really hinges on what happened exactly in Q1 last year and what happened in Q1 this year.

So it's not only an indication of our sort of our leverage or negative leverage or whatever you say. But I know that in recent years, I've stressed that what is normal in terms of positive flow through when we grow, we talk about some 30-ish percent 35%.

And if we have some positive pricing, and the experience tells us that when it turns the other way around, we have more severe effects. And that's why I talk about 50-plus type of flow through in a situation that we are in right now.

And if I may have a follow-up on the same. But between the equipment side versus the service side, which one would have bigger, let's say, impact or bigger flow through to the margins in case of revenue drop?

The key difference, we believe, and we don't think that it's – I mean, Mats has really said the crucial comments already that it's all hinges on whether we have access to the customers at all. And in some parts of the world, it's not normal, where at least have that access where in some other countries, we don't have.

And then it's more the top line development of the service versus the equipment rather than a big difference in the flow-through, if you see what I mean.

Okay. Thank you very much.

Yes, okay. Yes, thank you.

Hi. I have a follow-up actually, it's more from an end market perspective, and it's on semiconductors industry.

Have you seen China investments in semiconductor subparts for equipment accelerating just to, in a way, to go back to Ben's question in a way, this is important to recovery just to become more competitive on the semiconductor space? Has the activity in China been significantly better than the activity elsewhere in the semiconductor space?

The semiconductor, is that specifically pulling just in China? Or is it more a semiconductor, generally speaking?

What, I mean, it goes to different quarters. Of course, we normally indicate that we talk about the geographical.

In this case, then you can see the virus positive development in Asia, and that was mainly related to then South Korea, China and Japan. And then, I mean, it's – we have a good position in Korea.

We have a good position in China, and strong market share. So in principle, we can't follow them when they launch new factories or launch new products, and you can get, at least, that we are part of those projects going forward as well.

And perhaps linked to it, the previous discussions we've had about the China big bet on building their semiconductor industry is clearly there, and we don't see any difference in that in this moment. But to weight that on a single quarter or to that's impossible, then it's more of a long-term debt that they have on that.

But looking forward, of course, for Chinese start we've had its basic product portfolio, but then they need to ramp up order development as well to be competitive in this segment as well. So it's not like that it's one investment and nothing happens in several years.

But they have a couple of huge investments, and then they will continue to upgrade technology in the coming years as well.

Thank you very much.

Thank you. We have reached the hour.

I thank everybody for participating on the call. And the next time in this mode, we are in the middle of July.

So if we don't see each other until, you are very welcome to participate at that time as well. Thank you very much.

Bye-bye.