Atlas Copco AB (publ) (ATCOA) Earnings Call Transcript & Summary

Welcome to the Atlas Copco Q2 2026 report presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead.

Thank you, operator, and a very warm summery welcome to all of you to this second quarter earnings call for the Atlas Copco Group. Very happy to have you all on board. Before I hand over to Vagner to start giving more comments on the results, I will already now, as usual, implore you to not ask more than one question at a time when the Q&A session starts so all of the callers have the possibility to raise their question. If there is more time available at the end, we can, of course, take more follow-up questions. And also that we have a tight deadline so we will finish the call sharply at the end of the hour. But that being said, I will hand over to Vagner. So Vagner, I guess we can say that we are, overall, quite happy with this second quarter report.

Yes, indeed, Peter, and welcome to this conference call. We are quite happy to report a record order intake coming from several market segments, I would say. Of course, the highlight is the semiconductor, definitely a very nice growth. But not only, I think we saw our industrial compressor, this is developing well. Our industrial vacuum, scientific vacuum, our industrial assembly tools and also power equipment did very well. And I should also mention that our garden process compressors also have a quite good growth in the quarter, with a lot of decisions being taken in the quarter where they were very well positioned to get the orders. So also good to see our service business continued to grow in all divisions and in all regions. I think we are quite happy with the development as well, that is part of our strategy to capture the aftermarket potential. Our revenue, as a consequence, also grew organically. That we see a good development there. Our profit margin was stable year-on-year, and we saw a sequential improvement that we are also quite happy to see. If we look a little bit deeper in our adjusted profit, I think we see a good year-on-year improvement and sequential improvement as well. And while we ramp the production that has requirements for stock and a bit of receivable, we still delivered solid cash flow. And we continue to roll out our acquisition strategy. This time, 5 companies were acquired in the quarter, one to highlight is LACO Technologies that will enable us to supply equipment for leak detection that are important in several market segments, including the space business. So then translated this level of activity, good orders. If we look to the consolidated picture for the group, we had a good improvement in our orders received year-on-year. So basically, we have added more than SEK 10 billion in our order book. So that was really, really good development, organic growth of 26%. Our revenues grew 8% organically. Good part of the growth came from Vacuum Technique. But the others, all the business areas had a positive development when it comes to revenue. And like I mentioned, the adjusted profit increased in absolute terms, 12%, with a margin of 21%. So good profit development and also earnings per share, good development, cash flow. And the return on capital employed at 24%, that was a decrease year-on-year, but we also see a sequential improvement when it comes to capital employed. So then when you look to the orders received, we see that we basically have grown in all regions, very strong development in most of the regions. The only negative development we have is in the Middle East, Africa and Middle East, but the driver is the Middle East. Not too many decisions being taken there during the situation. But even in the Middle East, we have a solid platform. We are now supporting our customers to restore production. And there are a lot of projects in the pipeline. The environment does not allow our customers to take decision. But even in the Middle East, we are very well positioned with good project pipeline. But then talking about middle -- Asia, very nice development, 47%, basically coming from all business areas. CT had a very nice development. Vacuum Technique, very strong development. A little bit lower but still positive in Industrial Technique. And Power Technique, also positive development. Basically, our business areas have grown in Asia in Q2. So quite happy. China as well, we had positive developments in most of our product lines. The highlight was mainly in the semi business, but not only Compressors, Power and also Industrial Technique in some specific markets doing very well in China. So then we go all the way to the Americas. You see North America, 49% growth. And also there, very strong in all business areas and also very strong in Industrial Technique, to start with, very good growth. We saw new projects -- some projects in automotive. And mainly connected to production relocation where we are very well positioned with the latest developments where we create new capabilities of automation and also new capability when it comes to flexible production lines, our customers, they need more flexibility, and then we manage to benefit. Power Technique, solid growth inorganically and organically. So very strong growth. VT as well, we saw very nice growth in the semiconductor market. But again, not only in North America, but also some investment in metallurgy, so -- and other segments doing well. And Compressor Technique also did very well in North America, where the main driver was gas and process compressors connected to LNG, but not only industrial gas is also doing quite well. South America, 16%, also doing quite well basically in all product lines that we have. And Europe, I would say I'm very proud about the development in Europe, it's 7%, not comparable with Asia and North America. But on the other hand, considering the situation, I think we are quite happy with that achievement. And also most of our business areas has grown organically in Europe, which we are quite happy about. Then that has -- if we add up this result, it's translated then in a good organic growth. When it comes to orders received, 8% in revenues organically. Also, our acquisitions are doing quite well. You see 5%. We have then one acquisition in the semi market that is doing quite well, quite happy with the development. You see the orders, plus 5; revenues, plus 4. They also are building a nice order book that they can work in the coming quarters as well with the [ endpoint ]. We still see currency headwinds in the quarter. So -- and that brings us to a year-to-date orders received of [ SEK 96 billion ], orders invoice of [ SEK 85 billion ]. So going to the split of our organic growth, we see now all the BAs doing quite well. It's good to see as well a bigger contribution coming from Vacuum Technique, now 25% of the orders received in the last 12 months with 59% organic growth, [ 19% ] in Compressor Technique, but also quite happy to see 14% in Power Technique and also 11% in Industrial Technique, considering their exposure to automotive is also very good. Now going more in details in the business areas, starting with Compressor Technique. Quite happy to report organic growth into industrial compressors and we see good development in most of our regions when it comes to industrial compressors. Sharp growth in gas and process. And there, the main drivers were LNG vessels and on-site LNG. So those are the main markets. But not only, we also got quite major orders for industrial gases. We continue as well to create opportunities for the future. We just yesterday evening, we have announced another acquisition, [ Euroklimat ], that will continue to help us to deliver on our strategy. When it comes to optimized utility room, we see that -- we see that there are quite a lot of potential. We are very strong in the utility room, compressor room or utility room. They need cooling, they need heat and heat bank. I think that will create opportunity to upgrade utility rooms in the future. So that is the main reason for the acquisition, and give us R&D and production capabilities. It's important also to mention that we had quite a lot of decisions taken in gas and process. Gas and process, where orders received were above 15% of orders received from CT. So it was good to be well positioned with a very good quotation pipeline when customers feel more comfortable to decide. I think we were quite well positioned there. So revenues continue to grow organically 3%. Profitability was lower than previous year, but 24.1%. It's a good level. We believe the most important for CT is to keep their focus on organic growth. We have the inorganic strategy, but organic growth is extremely important to continue. They had some effects coming from the acquired entities when it comes to profitability, but that's a good level. And we will continue our focus on organic growth. We continue our focus on innovation. Here is another example of industrial gases, on-site generation of industrial gases, nitrogen or oxygen. And here is a new product. And this is also another segment that has helped us to continue to grow organically and we continue the product development there. Good to see organic growth in Compressor Technique. Now going to Vacuum Technique, was very strong demand, 59% organic growth. And there we see -- when it comes to the semi market, basically, orders came from all the markets, all the major markets. Orders came from advanced nodes but also from mature nodes. China was also very strong. Quite happy to see the development there. But not only, I think it's worth mentioning that our industrial and scientific vacuum are doing very well. There, we see in advanced batteries, investment battery storage systems. So that required quite a lot of vacuums. We saw good investment there. But not only metallurgy is also an important segment in regions, in some regions where they need to invest in special alloys that they don't want to depend from one country or another or even for defense. So -- and we were very well positioned to get orders. We also see more investments in R&D space that were scientific vacuum benefits from that. I mean, research in general, and that we see an increased investment that our scientific vacuum is positioned to do very well in that market. Solid growth in service in both divisions, industrial and also semiconductor service. Happy with the -- with the way we start to scale up production now 90% organic growth. We believe that is not enough for the order book we have. We will continue to scale up production. The same when it comes to operating profit, 21%, Peter will go more in details, but we will see continued gradual improvement as we improve further the volume. Return, also good to see now a bend in the trend when it comes to return on capital employed. And we also have a nice pipeline of projects of new of innovation for the semiconductor. That's another example on abatement systems where we come with a new product that has better efficiency, extended mean time between services that's pretty much aligned with what our customers in that market segment need requires. So going to Industrial Technique, so -- we're quite happy to report 11% organic growth. And I think a good part of that is because of the investments we have done in the last 2 years in 5 acquisitions that create the capability to do more automation within Industrial Technique for the automotive market. But not only, we also have invested in R&D to support our customers to have more flexible production line. And this time that they need to do consolidation, move production from one place to another, mix different products. I think that technology, I think, is very well perceived by our customers. And I think we got quite good orders in that market segment. But not only, also general industry did quite well. I think we have built some -- also developed some dedicated products for some market segments that are doing quite well. I could mention electronics. I could mention defense. I could mention, if you need -- in the data centers, you have to assemble a lot of components into racks. And I think that we are -- we managed to capture part of that business as well. Revenues also went up, a good profit development driven by the 11% organic growth and a stable return on capital employed. So -- and as you can see, they keep on investing in innovation. And this product is specific for the -- when you need to assemble a lot of electric components. So I think they had also -- they did quite well in the quarter. Power Technique, also notable growth in -- for equipment, 14% organic growth. Most of product lines developed very well. Main driver here is the -- for sure, the U.S., where we saw quite a lot of order for portable compressors and also for generators as well for rental companies. And if there are investment in the infrastructure, they definitely capture part of that investment. Really good to see specialty rental growth. Also in new market segments like we have invested in the pump rental business, we also see good development there. So good growth. And also their service business, revenues also going up. And when it comes to profit, also good to report a bend in the trend because over the quarters, the profit was declined because of acquisitions and some investments, but now is the second quarter now in a row that we see that improvement in the profitability, in the profit margin. And I think that's a good -- we are happy with that trajectory. Return on capital employed, lower, because there, we have done a major acquisition last year that is still growing to that cycle. So then they continue to invest as well in R&D. Here is a clear -- is an example of a dedicated product for the American market product that is utilizing water well drilling. So with that perhaps I move to you Peter, please, that you can take over.

Yes. Thank you, Vagner. So moving from operating profit to the rest of the income statement. We have net financial items that are slightly higher, but no meaningful change, you could say, fundamentally. Profit before tax, SEK 9.1 billion versus SEK 8.4 billion, and income tax expense of SEK 2.1 billion, somewhat higher than the same quarter last year with an effective tax rate of now 22.8. We think that this tax rate will probably remain at around the same level, maybe even be slightly lower in the coming quarters, 22.8. Maybe if all stars align, we will end up at maybe 22.5 going forward. Let's say, small change. This is more or less the level that we see in the near term continuing. If I then move to the next slide and talk a little bit about the profit bridge for the group. Then you could say, nominally, very flat margin, 20.6, 20.6 in the second quarter 2026 as well. But first of all, there is the impact of the LTI programs, where basically part of that profitability is eaten up. The acquisitions are also somewhat dilutive for the overall margin development. The currency, on the other hand, is slightly positive, and that has mainly to do with the fact that last year, we had a very negative operating exchange differences, which basically this year, are not there at all. I would say we have very minor positive operating exchange differences. So basically, the fact that in the bridge, the previous year, negative development comes back as a positive now, resulting in this net improvement of the margin, thanks to currency. But more importantly, I would say, is the fact that we have good drop-through for the margin given the fact, of course, that we have quite a significant volume price improvement. The revenues have gone up quite a bit. Then there are, of course, some elements that partly offset it, but still a higher margin than we had last year, resulting in basically a better adjusted margin this year as well. When it comes to the foreign exchange differences or overall, the currency impact on the income statement, if I look a little bit forward, for the moment, we still have quite negative values on the top line and then a minor negative on the operating profit. When it comes to the next quarters, I would expect that the top line impact of exchange rates will be very, very minor. And also on the operating profit, normally, a very minor impact, of course, depending on how the currencies developed might be somewhat negative, somewhat positive. But let's say, for knowing what we know, we would expect something basically like 0 currency impact in absolute terms on the bottom line. If I then dig into the bridges of the individual business areas, then starting with Compressor Technique, like Vagner already mentioned, so I think organically -- or we end up with 24.1%, somewhat lower than last year at 25%. Of course, 25% is a margin that we really enjoyed for quite a while now being on an absolutely high level. Acquisitions, on the other hand, are eating up a little bit of that very high margin. They are somewhat dilutive. And that, of course, is driven by the fact that in the first year, we had a lot of costs for integration, for IT security, other type of things. And we are not able to fully mobilize all the synergies yet. So it is not illogical, let's say, to have some negative traction from acquisitions in the beginning. The currency for the moment is also slightly negative on the margin. Not that much, a minor impact, but still bringing the margin a little bit lower. And then when it comes to the drop-through, there, of course, we see a little bit lower margin. But again, 24.1%, still the highest margin in the group from all the business areas. And given the fact that we have organic growth, I think we are very pleased to see that development and giving -- realizing that volume at a margin of 24.1%, we are still quite pleased with. As we have always said, organic growth is absolutely the top priority. And then the absolute volume value development of the profitability is then what follows out of that, which is, we think, more important than sticking to this absolute 25% profit margin. Then Vacuum Technique, I would say, first of all, also somewhat dilutive effect from the acquisitions. We have, of course, done quite a few there as well. Vagner already mentioned LACO. We also have the joint venture in China, for example. Developing well from a top line point of view, the margins are still a little bit lower, but also over time, we expect that we are able to develop that further. Also here, we have the initial integration cost. And of course, important to mention, both for CT and VT, but the bottom line is at least positive in absolute terms compared to the revenues. Currency is quite positive for Vacuum Technique. Vacuum Technique has had the biggest impact from these operating exchange differences. And of course, that comes from last year at least. So that comes back this year as a positive. But then the strong development of the Vacuum Technique revenues also results in a reasonable drop through, I would say, adding a decent percentage to the overall margin for Vacuum Technique. We need to consider, of course, that the demands on Vacuum Technique and specifically on semi are very extraordinary, knowing that in certain locations, certain factories, we need to basically more than double the output of the company to get to the demand from the customers, is not just a slight increase. It is really quite transformative to more than double the output within a short period of time. And that means that we need to invest, first of all, in direct labor to make sure that we can make the product, but also in some other costs that we initially during the restructuring phase, have basically cut down to make sure that we protect the profitability. Now we need to catch up. And that, of course, means we need to put some investments there, which are, to some extent, bringing down the very strong impact of the revenue volume development that we see in semi particularly. Then I will move to Industrial Technique, starting with a margin of 17.1%. Also quite a positive impact from the currency as Industrial Technique had also been quite exposed to the currency development last year, but especially then when it comes to the organic development of the business, a very strong performance with very solid drop-through. And I would say, of course, on the one hand, we had the revenue volumes that are improving, but on the other hand, also really seeing the full impact of the all the restructuring activities that the business area has gone through during the last year. And that, of course, results in a very nice operational efficiency leverage in the margin there. And then last, Power Technique. Also here, as Vagner explained earlier, a nice improvement of the margin. We actually see that the acquisitions we have done in Power Technique are not only accretive from an absolute value point of view in terms of profitability, but are even accretive from a margin perspective, which is, I think, very positive to notice. Currency impact for Power Technique is virtually nothing. They have also had less issues with currency in the last year, I would say. And then finally, organically. Also here, we see an improvement, thanks to volume price development. On the other hand, we've had due to all the investments we have made in the rental fleet in order to push that business forward, also to invest and replace some competitive products, especially on the dewatering side with some own-made products in the fleet. That results in somewhat higher depreciation costs, which has a little bit of a detracting impact and other operational inefficiencies in the rental business, particularly, and also a little bit of an unfavorable mix so that in the end, pulls down a little bit the drop-through, but still adding to the margin quite nicely. If I then move on to the next slide, I will give a few comments on the balance sheet. I think the main impact I would like to highlight is, first of all, if we look year-over-year, the addition of all the acquisitions that added quite a bit of volume to the balance sheet. Secondly, the development of inventories and receivables which goes hand-in-hand with the business development. We have seen the revenue increase and the increased production, we need to push out the factories, have some inventories. The additional invoicing obviously creates more receivables. But good to note that relatively speaking, the working capital, in comparison to revenues, is actually improving gradually over time now. The cash, of course, went down a little bit, given the fact that we have made the first installment of the dividend during the second quarter. And then when I move to the equity liability side, the equity a little bit down compared to December. Mostly because on the one hand, we have taken out the full dividend from the equity. On the other hand, we've added, of course, the profitability over the last 2 quarters. While on the other hand, we see mainly the noninterest-bearing liabilities moving upwards, partly because of payables increasing hand-in-hand with inventories, you could say, while also the second installment of the dividend has been moved from the equity to the noninterest-bearing liabilities. So I think that is, in a nutshell, the main items on the balance sheet. I would say, nothing spectacular there. And cash flow, as we already indicated earlier, despite the fact that we have this steep ramp-up going on in semiconductor, but also all the other business areas doing well on orders and therefore, also having to increase quite a bit on the production side. We see still a quite solid cash flow coming out of the second quarter, mainly based on a very strong operating cash surplus, adding at least SEK 1 billion to that one. And it is slightly offset by somewhat higher tax payments, but mainly then the, let's say, the investments we need to make in working capital, higher receivables, higher inventories somewhat offset or partly offset by the payables that also increased hand-in-hand with the inventories. So that leads us then to overall a cash flow of SEK 6.8 billion, which I think is given the fact that we need to put a lot of money into the operations at this moment, generating quite good efficiency from a working capital perspective. So with that, I've come to the end of the explanations on the different financial statements, and I will hand back now to Vagner to comment a bit on our near-term outlook.

Thank you, Peter. So just to remind, our near-term outlook is a sequential guidance for the next quarter. And also, it refers to our customer activity, excluding large orders and potential FX and seasonality as well. So -- and based on the information, we saw that the activity has increased from Q2 -- from Q1 to Q2, and we believe that the activity level will remain the same. It has been elevated, and now we believe it will stay at that level, supported by a strong continued strong semi, but also the industrial, the general industrial market remains strong -- will remain strong.

Okay. Thank you, Vagner. With that, we have reached the end of our presentation, and we would like to give you the rest of the time for question and answers. Of course, again, repeating that please stick to a very disciplined approach, not asking more than one question at a time. And we will finish the call shortly at the hour. So with that, I hand over back to the operator to get all the questions.

[Operator Instructions] The next question comes from Daniela Costa from Goldman Sachs.

My question relates to, can you give us a little bit of color by division on how much backlog visibility do you have now that you had such strong orders versus perhaps what you had last quarter? So basically, do you see that backlog supporting these levels of organic growth you're having now in the coming quarter or for how long should this help you maintain this type of growth?

Yes. Good. Thank you, Daniela. We see that we have a strong order book now. When it comes to Vacuum Technique, all hands on deck to increase the output of our factories. That is where management -- is what management is busy with, and I think they are doing a good job. I think the ramp-up is going according to our plan. And I think, like Peter mentioned, in some of our factories, we have to more than double. There are some backlog, but I think we -- with the increase in production in a quite short period of time, we will see a good development. Also in Compressor Technique with the good orders as well. In industrial compressors, we also need to do some ramp up, and that is also going according to plan. So I think we are managing quite well. And I think the most important now for us is to keep competitive lead times in semi because then we can also outperform our competition in that when it comes to that. That's the main focus.

And then when it comes to gas and process, of course, their lead times are much, much longer. So in terms of revenue growth, that will come, of course, at a later stage.

The next question comes from Klas Bergelind from Citi.

Vagner and Peter, this is Klas from Citi. So I had a question on growth and margin. First on the growth in gas and process, we knew from the data coming out from the yards that orders in LNG could be strong. But is still -- is this still a very lumpy business? Or is the order pipeline here strong enough to keep delivering orders at this level the next couple of quarters? And then on the margin in VT, I get that there are costs to ramp here, but we've heard from others in semis that price increases are now likely versus what typically is a deflationary industry. So are you hiking pricing now on the pumps and the abatement systems given the tight supply-demand?

Yes. If I start with the gas and process, I think it's very hard to say that we will repeat in the next quarter because it can be lumpy. We don't know if customers will decide to place order. I think this business remain quite attractive. But gas and process, I always like to repeat, gas and process is not only about the LNG vessels. I think there, we are very well positioned. If customers decide, we will be able to get that opportunity. We are very competitive to get these opportunities in LNG vessels when customers decide. But we also want to highlight the industrial gases, the market is quite favorable for us. We have also LNG onshore, I mean, gas processing plants. We also have invested in the, let's say, large scale heat pumps, and we got the orders as well in the quarter for that. To do things like district heating, you need large -- large heat pumps that we supply the product. So it's several market segment. But we had -- this quarter, we had a concentration of decisions that allows to have this quite nice growth in gas and process. It's very difficult to say it's going to repeat in the next quarter. If you look to the periods where we had very large orders received in gas and process and then you could look back to Q1 2023 and Q1 2025, I think we didn't see that repetition in the next quarter. But then the pipeline, what I can say is the pipeline, we have a lot of projects in the pipeline, but it's very hard to say that it's going to be next quarter. Then on the semi, pricing in general is positive in all the BAs, I would say, including in semi. And I think that's why we mentioned about all hands on deck when it comes to production output to increase because that also gives a bit more power when it comes to price. And I think we also have other things that give a bit of good outlook for the future because we also have new products that are that are quite good in terms of energy consumption. We have shown that in the last Capital Market Day, and that is an ideal moment as well to speed up the introduction of new products.

And also maybe the reason why we are not -- sorry, Klas, but that we're not so unhappy, let's say, about the fact that the drop-through is maybe not at stellar levels. That we want to take those costs to make sure that we do the ramp up quickly so that ultimately, it will give us -- if we do everything right, more competitive lead times, which means that we should be hopefully favored by our customers when they want to place an order based on the fact that they can get the product faster. And that hopefully can allow us to also have a good discussion on price development for those orders going forward.

So would you say that pricing on orders are higher than in the P&L at the moment? So should the drop-through improve from here as you start to deliver the backlog?

Well, overall, I think the statement is valid that we do expect for Vacuum Technique, an improved margin development in the coming quarters still. So this is not the end of the story, but we prefer to take some of these ramp-up costs at this point in time. And then we will see with increased volumes as we go forward, the margin continuing to improve gradually, maybe more slowly than one would have anticipated, but at least gradual continuous development of the margin.

The next question comes from Max Yates from Morgan Stanley.

I just want to ask about how best we should think about your growth maybe relative to WFE spending? And I guess what I'm getting at is when I hear you say that some of your customers need to double production, that seems a lot faster than there may be kind of 25% to 30% WFE growth that we're getting, and we've obviously come out of a period where you've undergrown WFE for a couple of years. So I guess I'm curious, as we sit here today, we look at your mix, we look at some of your large customers, I've always felt like [ Intel ] was a relatively bigger customer for you. Do you think there is the opportunity to outgrow WFE? And maybe is that what you're indicating when you talk about some of your customers asking you to double?

Yes. I think just to clarify first on that. We have some product lines that we need to double the volume due to the demand. And I think when I see -- I think in our last Capital Markets Day, I think we have explained as well the dynamic that has changed it in the WFE where you have much more advanced packaging. I think there is a quite good component of advanced packaging in WFE. And that occasion, we said we were in a very good position. We didn't see that we were losing our competitive position. We are there. And then now with the demand coming from our customers, we managed to capture demand basically from all regions, all regions that are investing, we managed to capture their investment. But in the WFE, sometimes it's also difficult because there is a component. Even if you take the dedicated -- if you exclude advanced packaging, sometimes they just build what I call the vessel, the premises and the utilities, and they populate in a later stage with machines. For us, we are very well connected. When the machines arrive on site, the machines are installed, then they require the vacuum system. And we have normally shorter lead times than the process tools. So we come into later stage. So it's always difficult to make that comparison. But I think what is important to remind -- and we have said that we are in a strong position. We have several projects to keep our competitive advantage. And I think the quarter shows that we continue to be very well positioned.

And I mean, would you say you're over-indexed to any type within WFE, whether by customer, memory logic as we sit here today? I know you historically never said you were, but has that changed at all versus history?

I think it's a broad-based goal now. We see growth. Like I mentioned before, we see growth in all the players, we see growth in all the regions, including in China.

The next question comes from Alex Jones from BofA.

Just a follow up on that Vacuum Technique point. You've mentioned stronger growth in China a couple of times. And I think it's fair to say over the past few years that your growth there lagged some of the broader semis tool manufacturers. Do you feel you're now seeing a catch-up as domestic fabs install some of the equipment they've already bought and therefore, you're in a stage of sort of outperforming the overall semis market in China? And if so, does that mean that China could remain one of your stronger markets within semis for the next few quarters?

Yes. If they decide to install the tools and to ramp up production capacity, we are positioned to support and we have local production competitive lead times. So I think we are -- but I don't want to say that we had a good quarter because of China. That's not I say. It's a really broad-based, it's China. It's all the major players where semiconductor industry is important, including the U.S., let's say, we also had good quarters there.