Atlas Copco AB

STO:ATCO A

Earnings Call Transcript 2019-Q2

[Operator]

Ladies and gentlemen, welcome to Atlas Copco Q2 Report 2019. Today, I am pleased to present CEO, Mats Rahmström; and CFO, Hans Ola Meyer. [Operator Instructions] Speakers, please begin.

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Thank you very much, and a very warm welcome to everybody on this conference call regarding the second quarter report 2019 from Atlas Copco. We will follow the usual format and that means that in a few minutes or in few seconds, Mats will make his own comments. You can follow, of course, on what is the slides that are on the web, and he will try to keep you updated on where he speaks, what he speaks about on that. After that, we will have a question-and-answer session, and I repeat as we normally do, that we would like all the questions to be restricted to one at a time to allow as many people as possible to come in the queue line for questions. I think that's all for now, and then I hand it over to you, Mats.

[Mats Rahmström, President, CEO & Director]

Thank you, Hans Ola, and I will start on Slide #2, which is -- the heading is Q2 in brief. Order growth for the quarter SEK 26 billion, up 2% organic, we are quite pleased with that.And then the next is mixed equipment demand, and I think we can -- distinction between big and long-term investments and maybe small and more operations then. And if I start with the big and more futuristic investment, we still see those coming through. And then we can talk about technology, investment in semi, we can see, for example, electrification in auto and also some of the bigger compressor for more futuristic CapEx investment. So that, we have not seen a change in demand there at all.On smaller, more short-term operational spend, there we can see that there are uncertainties in the market and sometimes they push out orders a little bit or it takes some time to get to a decision. Let's clear it up and we have seen that in Q1 and we are also seeing that in Q2.I'm very happy to see that the customer appreciates our service, product portfolio, you can see that we continue to grow in all areas, although at the lower relative growth rates. We see growth in all regions except Asia. You can see that U.S. was strong for us, also Mexico and Canada was included there, and you could see strong growth there as well. And some changes in Europe, where we have seen a more flattish development from the different business areas. And Asia, we might be tough on ourself [ on this industry's ] decrease when it's down 1%. But there we can also see that in the past quarter, we have seen more of the decrease coming out of our Vacuum and this, we can see that it's spread throughout the business areas principally and therefore certainly see on the shorter demand on operational spend that it takes more time to get decisions.Profitability, SEK 5.6 billion, the adjusted was 22% and it's mainly 2 things that being the long-term in terms of the reevaluation of options and then we have the onetime cost for adjustments in the auto sector in industrial segment.So despite then the trade discussions, the Brexit, the different sanctions we have around the world, maybe not helping but some slower demand in semi and auto, I think the quarter was really strong and solid for us.Over the year, and now this Q2 -- first 2 quarters, we have 16 acquisitions that are announced, some of them related to CT, and we can talk about that a little bit later. But we can also see that we have now completed the Brooks' acquisition, which gives us the cryo and the chillers. And there you can see Eurochiller and also Powerhouse, a little bit new platform for us to grow from as well.So we then change to Slide #3, which then confirms that the finalized acquisition of Brooks. And it's 2 things that I see it then, to get the new platform for cryogenic technologies, but also for chillers. And cryogenic is mainly for [ semi ] the toolmakers, and the chillers is a little bit broader used in different applications. We also get including in that is the 50% ownership of the Ulvac Cryogenics. We have decided there to announce that we will start a new division with a very clear focus on the toolmakers, so then they will have the -- some of our pumps, mainly turbo pumps and also the cryogenic pumps to really make sure that we are the best partners for the toolmakers in that industry. And normally, when we focus we are very successful, so we have just announced that internally as well.The run rate for the company right now is around USD 150 million on the cryo part and then on top of that you have the 50% on Ulvac. And as we can see down let's say the slightly dilutive effect and that's included in the [ TBA ] and of course, the base for revenue was slightly higher than when we announced the acquisitions from the beginning.We go to Slide #4, and maybe starting on the graph. You can see it's quite solid orders received, it's the second best that we have had, although supported by currency, of course. And it's actually the record for us in terms of revenue. Hans Ola will talk you through a little bit of the cash flow later on, so I will leave that to him.We'll go to the geographic markets on Slide #5. Very pleased with the development in North America and South America 6 -- 11% growth. We can see it's coming from in principally all the business areas in those 2 regions, there's 1 negative in America and 1 in South America. But it's a little bit up and down, but that's -- it's actually very strong growth.Europe, there can be seen -- still positive of most of the BAs, but we can see it's on the lower levels, I will call it more of a flattish scenario right now. And if you take Africa, Middle East, CT has a really strong quarter in that region as well. And then I said in the beginning we might be tough on ourselves and we said to have decline in Asia. Year-on-year was down 4%, and now it's down minus 1% for the quarter. But the difference as I see is that we have -- in the past, we have had 3 positive BAs, and then we've been down in Vacuum. But now we face more of a flat scenario for most BAs. But they need also to confirm that this is still on the very high level for us, and it's about the level, of course, we had in Q3 and Q4 last year. To summarize this, North America, positive, good development, more flattish in Europe and then slightly negative in Asia. And I think they are impacted more and more by the trade discussions that they have with the U.S., specifically China though. Slide 6, I would say, just a confirmation on the organic growth. We have had 1% down for this quarter, then it's 2% organic. Number 7 is the sales bridge. And you can see that we still have support from the currency and Hans Ola will later guide you for Q3 when we come to currency.Slide 8, looking at the group. I think I called the Power Technique the superstar of Q1. They continue to grow 10%, is strong I think. And they become a slightly bigger part of the group, of course. Operating profits right now about 17% but if I trade a little bit Power Technique growth versus the decline in Vacuum for the mix, of course, that's not positive, but we are very happy with the development of Power Technique. Compressors had 3 records, and I will come back to that. Vacuum, as you can see, they were down 7% on revenue, 7% on orders, but still delivered close to 25% operating profit. So I think they have shown that they can act in an agile way. I was positively surprised by Industrial Technique, where some 50%, 60% is auto-related, and they're only down 1%. And considering what they have seen in the industry over the last 6 months, I think they're holding up really well. I go to Slide #9, that's the Compressor Technique. And I think you can say that they have the triple record for the quarter. They had record orders, record revenues and had record profit. And then, of course, I'm quite happy with the return on capital employed, that's 100%. If you look at the machine on the corner there, it's a new blower. This is for the low-pressure segment, so step-by-step it will act more and more active in the low pressure, which is actually one with the market segments where we're not the leader. But I think they're building a quite a good product portfolio and quite certain that that will continue to grow.They have found a really good concept on acquiring distributors. I would say that the value creation is very quick in those cases. I'm very happy to see that they have acquired as many of them, although they are quite small. Vacuum Technique, on Slide 10, down 7%, both orders, and revenue still strong, operating margin. And they continuously bring new product to the markets. This one is an oil-free, focusing on the food segment, which we have identified as a good opportunity for us as well. And if you look at the level in the graph, [ Mika ] talked about the swings in the industry. But even this Q2, we can see it's quite on a good level if you compare all the way back to 2017. So quite okay with that performance, and at that level, of course, gave us quite good operating margins. And industrial, I mentioned it before, considering what's going on in this industry, it's a little bit of a balance between the sales -- the daily sales and production output is coming down. At the same time, you're building capacity and competencies on electrification on the new models. And of course, we are more driven by the CapEx spend, new models, new power chains, things like that. That's a little bit what keeps this up. We can clearly see that daily spend here as well is taking more time. Although that's a lot of growth out there, but to close on the growth, and that's a little bit of an indication, of course, for us. There is normally a correlation between the MBI stage and the general industry that we haven't seen in the past. But there are Tier 1 to Tier 2s in the general industry segment that will be impacted by the decisions in the auto industry as well.We continue to develop the service business, quite okay, and here is one where we had to add on the operations margin, you can see, and there we had the onetime cost of SEK 30 million for the adjustment to the auto sector. The innovation there that we bring is new battery tools for the aerospace industry mainly. It's quite a unique product that, I think, they will be supplying into the aerospace industry as well. And there you can see on the graph as well that orders received was on a very good level for the quarter. Slide #12. Power Technique, strong development, specifically in North America. The specialty rental business is really delivering good results, good value to our customers. They continue to grow. And this is one of the areas where we find most difficult to develop service, but now we have had a couple of quarters where I see that service also coming along in a good way. And we have changed a little bit organic -- we have changed a little bit from a structure perspective there. And they also had record revenues for the quarter and the record operating margin at 17.4% then.The innovation here, you are well aware on the compressor side that we have the variable speed technologies that was utilized that in our vacuum pumps. And now we take advantage of that in the VSG, but it's a valuable speed generator. In line with the environmental expectation on us, some -- up to 40% reduction of fuel. So this, we think, it could be a very interesting product for us. We come to Slide #13 then, and that's the confirmation on the numbers. And you can also see in the graph then for the group, it's a very strong and solid quarter for us in Q2. Hans Ola?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Thank you, Mats. Yes, just continuing a little bit on that operating profit. Mats commented it already. If we go down below that. Of course, what you see in this table, as you know, is the reported numbers of margin, and we think it's fair to say that the operating profit adjusted was 22%. And last year, the same adjustment led to a margin of 22.4%, but that has been commented. Financial net, before we come to profit before taxes, is much less negative this year, only SEK 64 million, which reflects that we borrow less, we borrow cheaper. And it's not so much that the run rate of interest rates have changed so dramatically that we have left some old loans last year, that is now affecting our borrowing rate, the effective borrowing rate is coming down -- has come down, I should say, and last year was also affected by some onetime costs in the financial net. When we look at the tax expense, also debt relative performance of 23.1% compared to an effective tax rate of 25.5% last year. These numbers, as always, will oscillate a little bit between the quarters. We still believe that 24% is the right expected level for the near-term future on that one. And then further down, you can see the development of return on capital employed and, perhaps, only to mention the return on equity that seems a little bit out of order in an increase from 26% to 41%. But we should remember that last year when it comes to return on equity, it's fully including the discontinued operations, and hence, specifically, the equity of last year was still quite different than from this year. When it comes to return on capital employed, we are able to do continuing operations for both quarters. So that's the reason why it looks a little bit strange. But 33% on ROCE and 41% on equity, should be the actual run rate situation of this year at least. If we turn to the next Page #14. The profit bridge there, first for the Group as a whole, you can see that the most interesting column is of course the one where we have taken out currency, we have taken out onetime items, and we have taken out the revaluation effects of long-term incentive programs due to the share price movement, et cetera. We come to a negative impact on operating profit, whilst having a slight positive impact on revenues. This is, of course, as anyone would understand, should be compared with the numbers for each of the quarters, SEK 25-ish billion on revenue and operating profit, almost SEK 5.5 billion. So these numbers are very, very small, that's what I'm trying to say. So don't build too much into the flow-through of this particular quarter. We will come to the components on the next page. On the FX, SEK 250-roughly million in positive effect on EBIT. We expect that to be roughly the same or in the same neighborhood at least for Q3 compared to Q3 2018. So more or less the same. When it comes to the sequential impact of currencies compared to Q2, we expect it to be fairly similar to Q2 this year.So if we then move on to the next, we see the different business areas, a bit of a messy outcome in some ways, you could say. When you look at the Compressor Technique, for example, again, we have a negative on the operating profit, but there is some volume and price addition to revenue. I think the comment is already made in the quarterly report. We have a negative effect from seeing most of the growth in the parts where the profitability for various regions is not exactly the same as for the full business area, meaning there is -- on the large compressors, et cetera, there is a certain difference there. At the same time, I would say, for all business areas, the -- when we are in a relatively low-growth environment, what we continue to do is invest heavily in R&D. And we also continue to invest in our market presence to support the service growth, et cetera. So that's a little bit a comment on that. And just seeing the column of acquisitions in Compressor Technique, it might seem a bit strange knowing what Mats commented about that we really want to see a lot of distributor acquisitions, et cetera, that they are very value-accretive. And here we see that in this bridge, it looks a little bit different. But I would stress that this is a one first-year bridge, which includes in amortization of intangibles effects, et cetera, which, of course, is quite significant in the first year. And that, I would say, is the reason why it looks a little bit different from what Mats commented before.Vacuum Technique, of course, when we drop like we also see in Industrial Technique, when we have this drop in the short perspective, this is what I expect to see, a little bit more drop-through percentage than if we would grow by the same amount. And the reason basically is that we keep doing R&D investments, we keep investing in the market presence, et cetera. So the adjustments to the new lower revenue level is never 100%. And there, we can also see the same when it comes to Industrial Technique, basically. Obviously, they have a restructuring cost in the right-hand column, as you know, of SEK 30 million roughly in this quarter. And not much to say on Power Technique, very good results, very good flow-through of profit.If we then move on to the next page, which is #16, a balance sheet. Not offering too much of extra comments there, we've said most of it. And I think the comment there on including effects of the new leasing accounting recommendation IFRS 16 explains why the fixed assets have gone up quite significantly compared to a year ago. Otherwise, it's a pretty, pretty normal thing. We have growth, if we turn to the next page instead, #17. Cash flow, you see that there is a lower cash flow compared to last year. I want to repeat that as we follow the IFRS rules, we have to include discontinued operations cash flow until it's out, this would be basically the last quarter that I mention that. But last year, if we adjust for the effect of discontinued operations, the cash flow would've been slightly better even, SEK 3.2 billion, the operating cash flow versus the SEK 2.4 billion. And the explanation to it, and when I compare apples to apples so to speak, continuing operations, you would find in change in working capital, that would explain more than that difference on operating cash flow. It's a bit confusing as you cannot see that really in these numbers. But in other words, Epiroc had quite a negative working capital change last year. And actually a slightly negative contribution on operating cash flow compared to the rest of Atlas Copco. So that's basically most of that explanation on that.Then I turn the next page and leave it back for a short comment on the outlook by Mats.

[Mats Rahmström, President, CEO & Director]

Yes. The outlook then after a very solid Q2. What we're trying to do -- give you is a little bit of guidance on the activity level we see in our segments in the market. And I must say, it's based on our view right now at the moment, based a little bit on what we see in terms of, what I call, an operational spend. It takes quite some time for a customer to go from quotation to orders. We can see that some customers have pushed orders a little bit into the future. And we could also see a little bit of shift in North America as that was strong for us; and Europe, a little bit more flattish. But then we could see that, although comparing with a good benchmark from last year but Asia, they -- I believe they are influenced by the trade discussions principally. Most of our customers are in one way or the other international. So I don't think they see this increased protections is more uncertainty in the market as anything positive. And I will say that takes a little bit -- and that's what it's based on in principle that we see that it takes a little bit more time for the customer to make up their mind and order products from us. And -- but that's also why we say somewhat it's a picture that we have just presently.

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Thanks a lot, Mats. Then we're ready and please operator, if you could just repeat the procedures for the questions, please.

[Operator]

[Operator Instructions] Our first question is from Guillermo Peigneux from UBS.

[Guillermo Peigneux-Lojo]

It's Guillermo Peigneux from UBS. I wanted to ask about your feelings around the quarter. I guess a question is, if the quarter got slower as we progressed through quarter, if the entry point was a little bit better than the exit point when it comes to order intake or the assessment of demand as we would progress through the quarter?

[Mats Rahmström, President, CEO & Director]

I think that we calculated also that we were short of 2 to 3 days versus last year. And I don't think you have a different trend that we can communicate the uncertainty that it was any specific trend that we could lead into the quarter right now. I think it's more based on what I said before that we see a customer being hesitant to take decisions, and that we have seen push out in all the business areas. I would say that maybe PT the less, but a little bit in CT and in IT as well, and I think that's more what it's based on the auto.

[Guillermo Peigneux-Lojo]

And when it comes to -- a follow-up actually on operating leverage, when it comes to CT and VT, so compressed technique and vacuum technique. Are we now at the balanced mix when it comes to large compressors versus stationary medium-sized and smaller compressors, i.e., are we seeing now a balanced, let's say, operating leverage as we go through the next few quarters. So there's still negative operating leverage to be accounted for as we go forward? And on VT, maybe just a little bit into previous comments from Hans Ola on the operating leverage, are we now at the load in which we could see now operating leverage normalizing from the current 47%, 50% to more normal levels?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Well, as I stated -- as I made the comments there, I think it's valid both for VT and CT. On calculating percentage flow-through for a quarter is at best a mathematical exercise, it's very difficult to say that it adequately reflects, let's say, the situation, and it's not giving a lot of guidance for the next quarter either, unfortunately. On your first question on CT, now in balance or not, it depends very much on how the quarter plays out and what gets invoiced and what doesn't get invoiced and so on and so forth. So I think I will always refer to that over time, we believe that a flow-through of about 30% is reasonable to expect from a business that is set up the way we are and there is no huge difference between the business areas in that respect. And everything will oscillate around that. Very difficult to pinpoint that it's because of this and that. Apart from the more, very broad comments that I just offered that we keep doing investments in R&D, we keep doing investments in market presence because we don't have any reason not to do it, if I say so. And -- but if the revenues are not there that quarter, it will give a lower effect on profit. And that's what it is.

[Operator]

And our next question is from Sébastien Gruter from Redburn.

[Sébastien Gruter, Research Analyst]

One question on the CT sales in Q2. Like you know, if there was any production issues in the quarter? Or the lead time increase we see in the division is driven by the change in mix with more larger compressors and less small and medium-sized. Any idea you can give on the CT sales?

[Mats Rahmström, President, CEO & Director]

On CT, in terms of delivery, I would say that in most areas, we are back to normal lead times. On the other side, if you have record revenues, record orders received, then you always put a lot of pressure on your supply chain, and no doubt about that. But the main part of the increase is, as you say, it's from the medium gas and process, the bigger oil-free projects, and they normally have a delivery time built into them. So that's the bigger increase we can see.

[Sébastien Gruter, Research Analyst]

Okay. And I just have a quick follow-up. You comment on the solid growth for VT; in Q1, you said a strong growth. And in this release, you just talk about growth is continuing. So I'm wondering if you see any impact of production cutbacks in the semi industry, especially in memory.

[Mats Rahmström, President, CEO & Director]

On semi, of course, this is still a huge installed-base that we are hunting down to get the service or service contracts, so that I see as positive. If you look a little bit at the utilization on the fabs around the world, when you have taken average, you can see that it's down a little bit. Of course, that will not help over time, but I think the bigger potential for us is to make sure this -- that we service the equipment that we [ sold ] in the last 2, 3 years. That's why I see the bigger potential for service.

[Operator]

And our next question is from Klas Bergelind from Citi.

[Klas Henrik Bergelind, Director]

Klas from Citi. So Europe is getting a bit weaker there on the smaller- and medium-sized compressors. Could you help us with which countries that are weak in Europe. Is it more Germany, which was already weaker? Is Germany getting weaker quarter-on-quarter or other countries as well?

[Mats Rahmström, President, CEO & Director]

Yes, I mean the Germany is, of course, the engine of Europe. But the only market that I can really comment on that is more difficult than the others is of course in the U.K., where we see the impact of Brexit. And that I think goes for most BA, I'm looking at Hans, a lot of the...

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

No, it's true. We don't see huge difference. The only thing is that a couple of quarters -- a couple of countries are not growing at all and that's, for example, Russia and Turkey that stand out a little bit more on the negative side, at least. But otherwise, the overall trends are not dramatically different from one part of Europe to the other. And there's certainly nothing that comes back to us as a strong warning from the operations either. So...

[Mats Rahmström, President, CEO & Director]

And in Russia, it's -- I would say, it's impacted by the sanctions by the European Union and also from [ less trade ].

[Klas Henrik Bergelind, Director]

Okay. A quick follow-up on the larger compressors and also gas in process in China. We must be back at the previous peak there in gas in process, I would have thought. So just checking if that's correct? And also, where are we versus the previous peak on the larger compressors on the industrial side in China? You're obviously benefiting from mix here in new products, and I guess in process, you're benefiting from more LNG. But just to get a sense, Mats, of the relative performance versus, let's say, 2012 levels?

[Mats Rahmström, President, CEO & Director]

But you are correct, we are back on record level. I think the difference we see is that it's more diversified in many more segments. And in some areas I think also the divisions have been very [ tough ] by trying to identify this segment, but defined profitable over time. So I think it gives a little bit of impact right now. And the product portfolio from oil-frees was certainly giving an impact on the hit rate for us versus competition.

[Operator]

And our next question is from Graham Phillips from Jefferies.

[Graham Phillips]

I wanted to understand a little bit more, Mats and Hans, about Industrial Technique, you've given some helpful comment in the release about tools and fasteners in the auto -- in the motor vehicle or auto business. Can you give us a proportion of tools versus fasteners and rivets? And what are the sort of -- the minus 1% in orders, did we actually see an increase in the fastener and rivet side and the tools were clearly down?

[Mats Rahmström, President, CEO & Director]

I mean we don't break it down on that level for you guys. But in principle, the tooling business, I mean the best we can get is a new plant, as you know. If it's a new model, that's fine as well, it's normally after 5, 6 years, we are very happy about that. If it's a remodeling a year-on-year, then it's more on application-based. And the one thing that follows the car sales in principle, it would be the rivet for the Henrob self-pierce riveting equipment. And the main customers in the worldwide is Ford F-150 project. So that's where we go hand-in-hand, and it principally correlates to the production level, otherwise it's more CapEx-driven. And the positive side for this cycle is a little bit of -- okay, the traditional powertrain, diesel, petrol, but it's -- you see a lot of shifts of course in projects that is hybrid, so electrification. And there is tons of new battery suppliers out there and new sub-suppliers that we've been very early to go after and it gave results right now. That's all I can say right now.

[Graham Phillips]

Okay. And just one, perhaps, follow-up for Hans Ola on that. If we look at the comments you make about the impact to margins with the headwinds from higher R&D and mix, you've been saying that now I think probably for good on 3 or 4 quarters, do we start to get into the third quarter, where that comparable bleeds through in terms of those higher R&D costs? And are we at the end of restructuring? Or do you think we've had 2 quarters now of restructuring in this business?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

As you can see, it's not huge restructuring, so of course, it's more related to adjustments to what they see in the automotive demand for the business. But yes, we have done it. We're coming to the end of it, let's say. If there is something, it might be significantly less than what we have seen in this quarter even. So yes, on the R&D spend, yes it's something that has been going on, it's not that we started it at a certain date last year. And of course, we're now gradually comparing with periods that also had that, so to speak, already strong. But if we continue to grow it strongly then it will always be deemed to the margin, unless we really see topline growth coming out of it.

[Operator]

And our next question is from Lars Brorson from Barclays.

[Lars Wauvert Brorson, Director]

Mats and Ola. Mats, could you help us a little bit with your divisional demand outlook into Q3? Or maybe to ask a little bit differently, do you see any of your business areas or end markets deviate from your overall somewhat lower for the Group?

[Mats Rahmström, President, CEO & Director]

Yes, I think if you start with some of the major segments in our market then. If you start with the semi, you can then see that all the big players will continue to invest in technology. That's just a given. You can also say that there has been and is still an overcapacity in memory. And if you can see that the utilization is coming down a little bit as well, so I don't think you will see a turnaround there specifically. I believe that we will continue to invest in technology, and as I have described it before, that market is very key account-driven, it's not more than 20 accounts around the world that we follow. So that's a little bit our view on that. The auto industry, the balance between new CapEx for electrification versus a little bit older technology then it needs to keep up on the electrification and there we see a lot of overactivity. We might see more on the daily spend coming down, that we don't know. But of course, that might be the logic of delaying decisions and pushing out some of the orders that we have. But that's nothing -- that we cannot see into the future. But as for your construction, I think Power Technique seems to continuing in a good way, oil and gas seems to be okay for us, and those are some of the segments that we operate in.

[Lars Wauvert Brorson, Director]

Can I just ask as a follow-up to the earlier question on large gas -- large industry and gas and process. I mean they've decoupled now for 3, 4 quarters relative to your small and medium size. Obviously, gas and process is up significantly this quarter. How sustainable do you think this is? I mean, I guess, one argument is for why larger compressors and gas and process would decouple, is because there is perhaps a more sort of pronounced replacement cycle coming through. Obviously, 10, 15 years ago, we had this very strong cycle in oil free, most of which should be due replacement. Do you see that coming through? Or do you think it's really just lacking the underlying small and medium sized?

[Mats Rahmström, President, CEO & Director]

I can -- I -- very difficult to pinpoint, Lars. And I think the small and medium sized is following, really the big broad economic indicators to a large extent. Whereas, the other stuff, both have a little bit more erratic topline development. And it's what we have commented before, I think still is valid, that we had a few years where there was very few large investment projects. And now it's been for a year you say that we have commented that it's starting to do much better, and that's true. But it comes from a level that was a little -- pretty depressed during '16, '17 and '18. So it's not very easy to predict where it's going. We have LNG investments, we have a couple of these things where we do believe that it will continue because there is a new technology in the applications that demand other or more of the same equipment and so on. Whereas, on the small and medium size, as I said, it's so diverse in its end market exposure. So that it basically follows whatever you can derive from industrial production and general economic growth.

[Operator]

And our next question is from Jack O'Brien from Goldman Sachs.

[Jack O'Brien, Equity Analyst]

First question, just on Power Technique. You've seen record revenues in operating profit there, so I just wanted to understand really the drivers between this -- behind the strength in the U.S. specialty rental business? And then just following on from that, another kind of end market question relating to the Brooks business that you acquired. What sort of growth trends have you seen there? I think I noticed sort of revenues were a fair bit higher recently. So perhaps, if you can talk about the growth trends there as well?

[Mats Rahmström, President, CEO & Director]

If I understood it, Power Technique on specialty rental first. We have seen a strong market in the U.S., and it's mainly down for the oil-free range that we have in the specialty rental offer, and that has been very successful. And then I think we are taking quite some good market shares on pumps and generators with a handful of accounts with that as well. And then on top of that, we have then the Powerhouse steam specialty rental business in this quarter then. So I think that links PT to -- and I think the portables are doing quite okay as well. So we have seen strength in the marketplace, I would assume that competition is also doing well in those areas.

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

On the second part, can you repeat a little bit. I didn't follow exactly the growth and related to Brooks' acquisition, I think, it was.

[Jack O'Brien, Equity Analyst]

Yes, that was the question. So I was just interested in the Brooks business you've just bought, what sort of growth trends they've been seeing year-to-date. I know you mentioned a revenue number of about USD 150 million, I believe it was sort of closer to USD 200 million fairly recently. So just interested to know where that business is versus recent peak and the trends that it is seeing?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

No, no, we had -- exactly, I was just curious when you said growth and what you read into it is actually negative growth. But then I'm with you. Yes, we saw the last annualized number in August last year when we announced the acquisition, just short of $200 million, $195 million. And now we have seen that very similar to many other suppliers through the same semiconductor industry, including ourselves as you know during Q3, Q4, Q1, there has been adjustment to a completely different level. And that I think is basically what we confirm here. Now that we closed the acquisition, we see more an annualized number in the region of $150 million. Of course, we also bought a 50% share of a joint venture of Ulvac Cryogenics and then -- and that is still at an annualized revenue level of about $100 million. So is it a negative trend? I would say compared to where we were a year ago, it's clearly negative, and it's very much the same type of picture if you look at other companies and also including our Vacuum business, that is exposed to semiconductor customers.

[Operator]

And our next question is from Matthew Spurr from Exane BNP Paribas.

[Matthew Spurr, Research Analyst]

I had a question back on semiconductor markets again. So if I look at your order numbers and then compare that to your commentary, it looks as though you've gone down sequentially -- once you adjust for currency, you've gone down sequentially from Q1 with -- you obviously say the technology products stay at a high level; industrial, I think, you've said it's flat sequentially, so was the -- your more run rate semi has declined. Is that pace of decline slowing down from earlier quarters? And I wonder if you could give some color on whether you think we're sort of approaching a bottom in sort of general semi markets, excluding your market share gains in technology wins?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Well if I start and, Mats, you jump in. The -- it's true that if you take first quarter to second quarter where you can see clearly that there is a lower order intake. But we should also see that these oscillations between the individual quarters for Vacuum Technique has been a feature already before, a number of times we've had a Q1 that was very strong in 2017. We never believed it would repeat itself in 2018, but it basically did. And now we had a good Q1 again. I don't pretend to know that there is something of a season in it, but it just happens to be like that. And in contrast, we see basically that from the first half of 2018 level, the semiconductor part of Vacuum Technique really shifted to a new level. And that basically is the level that we have seen since. But in the key account business, you will see Q3 being a little bit weaker in last year than Q4, it looked like a sequential improvement but in fact, it's just where specific orders end up. And I would say the same, so that for Q1, Q2, that it's not signaling any underlying basic demand trend that is very clear, in our books at least.

[Matthew Spurr, Research Analyst]

Okay. I had then...

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

From a sequential point of view that, of course.

[Matthew Spurr, Research Analyst]

Okay. Yes. Understood. Okay. Can I have a quick follow-up on the acquisition there? So the -- you've said about the JV, I think you've said you're not consolidating it. But are you going to report it as part of the EBIT, like some of -- some peers do? Or is that just reported separately lower down the income statement?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

The -- that's what we know for the time being that it will be included in the operating profit, yes.

[Matthew Spurr, Research Analyst]

So you bring the after-tax into the operating profit, yes?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

That's basically the truth of the day, at least. Perhaps, IFRS will guide it differently before 30th of September, but have no doubt that, that's what we will do, yes.

[Operator]

And our next question is from Alexander Virgo from Bank of America Merrill Lynch.

[Alexander Stuart Virgo, Director]

I guess just a quick one really on your guidance. Mats, you've talked in the past about how surprised you have been that the weakness in auto hasn't fed through into a broader industrial malaise. And I'm just wondering when you think about that sequential guidance and demand, how much of it reflects a change in trends of what you're seeing in Q2? How much of the weakness in the small-, medium-size compressors you've seen might reflect some of that transfer or demand, if you like, from auto into industrial? And whether or not, you can just talk a little bit about the complexion of China within that minus -- sorry, somewhat lower demand sequentially?

[Mats Rahmström, President, CEO & Director]

I think if you look at our business and a little bit throughout the industrial compressors, they were logged into general industry accounts. If you take the general industry business then under [ capital oil brands ] for Industrial Technique and this is where we have seen a little bit of slowdown especially in terms of -- what happens is you still get a lot of growth and you still operate it normally. But then you see, it takes time in principle from closing to decision, and that is really in some or many of the divisions today, that this daily business that is, if you are uncertain, this is the easiest thing to stop or at least spend a little bit less on. And this is what we read into these different divisions that it correlates fairly well between the industrial compressors and the general industry demand and industrial vacuum as well. So this is what we have seen -- and this is a little bit based on the comments in the forward-looking statement as well.

[Alexander Stuart Virgo, Director]

Okay. And a quick follow-up on VT. Just wondering, have you -- the key accounts impact in the quarter, how -- any indication of size on that, that we should think what would the underlying decline have been?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Excuse me, I missed that Vacuum one.

[Alexander Stuart Virgo, Director]

Sorry, Hans. I was just wondering if you -- you called out key accounts strong in the quarter and weak in Q3 -- or weaker in Q3, I'm just wondering what the underlying decline would have been?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

No. I was saying that due to this -- to the fact that it is dominated by key accounts, it's very difficult to identify by looking at certain core -- each quarter number whether the underlying has improved or not. On the contrary, we think that after the first half of last year 2018, we have from semiconductor, demand have had pretty similar. It's different between key accounts and different between geographies. But it basically has hovered around the same level since. And that's what we expect.

[Mats Rahmström, President, CEO & Director]

I think the only thing that we can see stand out in both Q1 and Q2 is that the China investment that has -- they seem to be very determined to execute on their program. And that business has been good to us over the last 2 quarters.

[Operator]

And our next question is from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

Can I have actually one question from -- for Hans Ola and one for Mats, please? So firstly, could you comment on why it has been such a working capital buildup in Q1 and now Q2 as well, despite much slower revenue growth than a year ago? So that's question number one. Question number 2 is on the growth opportunity in blowers. Could you perhaps give us an idea of the market size, your market share and the various applications for low pressure air, in which you think you have some edge. Is it wastewater treatment, conveying and -- or just other markets?

[Mats Rahmström, President, CEO & Director]

If I start on the inventory part, I think we communicated a couple of times in the quarters that Brexit has an impact on inventories for us that we build stock in Vacuum Technique to make sure that we can meet the expected delivery times for our customers. And as you know we don't know the outcome of this, but we make sure that we have enough of that. We have a similar situation with product a line out of China where we have built up stock in the U.S. in principally for the same reason of the trade. Then in Power Technique, we are then following regulations when it comes to environmentally friendly, to be a -- beefing up our inventory on generation 5 engines as well. To do some of the things that are the onetime effect we also have a little bit of summer vacation-type or impact in Q2. But the bigger one, I would say, you can see is CT, where you have the long-term orders where we build up and deliver on time, but it takes a little bit of inventory and the lead time is longer and the supply chain is longer. Have I missed something Hans Ola on the inventory there?

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

No, I think that's true, it reflects to your comment on the outlook, the hesitance by some customers to take delivery, which then -- until that has leveled out on the inventory side, it has an impact. You follow up on the blowers...

[Mats Rahmström, President, CEO & Director]

No, I think that on the blowers it's something we are expanding into. We, as I said, are not the market leader and normally when we look at an opportunity like that we get the competence, right first and then we get the product portfolio correct and then we really go after the market. I have not any specific numbers on the size or preference there right now. But at least I can share with you that we are not the market leader then. And we look forward to launching new innovative product in the market, which, in the past, has proven to be very successful for us and it's normally, in this case, energy efficiencies that we have been driving for and as we see ways for us to service the customers.

[Operator]

And our next question is from Andrew Wilson from JP Morgan.

[Andrew J. Wilson, Analyst]

I just have a quick question as a follow-up, I guess, on the Vacuum margin. I think the previous commentary you've made has been around the similar kind of 3-cycle margin to Compressor, but perhaps sort of more volatility. And I guess just purely observationally over the last few quarters, despite what's been a big change in volume, you've actually -- could have done a little bit better than that in terms of protecting the margin. Now appreciating that FX has helped -- kind of, do you have sort of any updated, I guess, guides or thoughts or any kind of -- even your own impressions of whether you've been surprised by just how resilient that margin has actually proved to be?

[Mats Rahmström, President, CEO & Director]

No, I think the characteristics of these 2 markets is and we have to live in -- that they are different, it's more a stable demand or supply to the compressor market, and it's much more balanced. We also have a higher share of service in that sense. And what I'm trying to communicate around semis in more or less that it is key account-driven, as long as the key account are placing order with us and we are in a very good position to gaining market share, which we're doing right now. And this is the result but of course the greatest swing in accounts in the greatest swing in operating margin. But over time, we believe it should match in principally, where we are with CT. So I think it's the greatest swings, but we are actually targeting to be up in high operating margin.

[Hans Ola Meyer, CFO and Senior VP of Controlling & Finance]

Thank you, and we have completed the hour. So even if there might be some questions still to be asked, I hope that with the help of our IR department and directly to me or anyone. that we can help you with those questions that we didn't have time for. So with that, I thank everybody for participating, and wish everybody a nice summer. Thank you, and speak to you in October again. Thank you. Bye-bye.