Atlas Copco AB

STO:ATCO A

Earnings Call Analysis

Atlas Copco's Q3 2024 Snapshot: Stable Orders Amid Mixed Market Dynamics

In Q3 2024, Atlas Copco reported stable orders at SEK 42 billion with a 1% organic growth, though revenues declined by 1%, totaling SEK 43.1 billion. The operating margin slipped to 21.7% from 22.7% last year, impacted by restructuring costs of SEK 83 million. Compressor Technique showed robust performance with a margin increase to 26.1%, driven by positive revenue effects. Meanwhile, Vacuum Technique's margin decreased to 19.3% amid weaker demand and restructuring. The company completed 10 acquisitions this quarter. Looking ahead, customer activity is expected to weaken somewhat, yet there's no indication of a severe downturn.

Navigating Mixed Market Demand

In the third quarter of 2024, Atlas Copco expressed a challenging yet stable environment characterized by mixed end-market demand. Orders received totaled approximately SEK 42 billion, reflecting a modest organic growth of 1%. However, revenues saw a slight decline of 1%, amounting to SEK 43.1 billion. This indicates that while the company managed to secure new orders, translating these into revenue has proven more complex in the current economic climate. Notably, the overall performance of their service segment remained robust, contributing positively across all business areas, thus showcasing the company's resilience amidst industry fluctuations.

Segment Performance Overview

The quarter revealed a varied performance across different business segments. Compressor Technique shone brightly with an organic growth of 1%, achieving a noteworthy operating margin increase from 24.9% to 26.1%. This was substantiated by a combination of higher revenues and effective cost management. Conversely, Vacuum Technique faced headwinds, with margins declining from 22.8% to 19.3%, driven largely by restructuring costs and adverse currency impacts. Nonetheless, Vacuum managed an organic growth of 10%, primarily fueled by demand from the semiconductor market, particularly in Asia. In contrast, Industrial Technique saw a concerning organic decline of 7%, attributed to weak performances in the automotive sector and other industrial areas.

Financial Highlights and Profitability

Atlas Copco reported a healthy operating profit margin of 21.7%, albeit a dip from 22.7% in the previous year. The profit for the period reached SEK 7.1 billion, equating to basic earnings per share of SEK 1.47. One crucial aspect worth noting is the adjusted return on capital employed, which remained solid at approximately 28%. This highlights the effective utilization of capital despite the prevailing market challenges. Additionally, the company experienced substantial operating cash flow amounting to SEK 7.5 billion, marking a positive financial throughput amidst operational adjustments and investments in strategic areas.

Acquisitions Fuel Growth Strategies

The company has been actively pursuing growth through acquisitions, having completed ten during the quarter. This strategic approach not only serves to enhance their product offerings but also helps in expanding their market reach. The acquisitions, however, bring about integration challenges and short-term dilution to margins. Executives emphasized that acquisitions will play a pivotal role in driving future revenue even as they adapt to current market conditions.

Guidance and Market Outlook

Looking forward, Atlas Copco expressed cautious optimism about the near-term outlook. Vagner Rego, the CEO, indicated that while they anticipate a slight weakening in customer activity levels, particularly in sectors influenced by broader macroeconomic uncertainties, there isn’t an expectation of a drastic downturn. Specific guidance suggests a stabilization in orders received, but the absence of large transaction volumes may affect overall revenue projections. The effective guidance for the upcoming quarter anticipates maintaining robust activity levels in the semiconductor segment while preparing for potential seasonal fluctuations in demand.

Conclusion: Strategic Adjustments Amid Challenges

In summary, Atlas Copco's Q3 2024 performance encapsulates the firm’s adaptability in a mixed market landscape. Although certain segments have seen declines, strategic acquisitions and a strong service offering provide a solid foundation for navigating the evolving landscape. Investors should note the company’s strong cash flow and profitability metrics as indicators of its resilience, while closely observing upcoming trends in semiconductor demand and broader market dynamics as they influence future performance.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Atlas Copco Group Q3 2024 Report Presentation. [Operator Instructions]. Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead.

[Peter Kinnart, executive]

Thank you, operator. First of all, a very warm welcome to all of you attending this quarter 3 earnings call for the Atlas Copco Group. Together with me is Vagner Rego, and I will, together with, Vagner, guide you through the presentation in the coming minutes. But before we start, I would first already now like to remind you, as usual, that once we open up, I would like to ask you just to ask 1 question at a time in order to make sure that all of the participants have an opportunity to raise their most burning question. And of course, we have time left and there's always the opportunity to come back with the second and follow-up questions. So thank you already for that before we start. But with that, I would like to hand over now to Vagner Rego, our CEO, who will guide you through the presentation.

[Vagner Rego, executive]

Thank you, Peter, and welcome to this conference call. This time, we have decided to start with the Service picture. The Service is an important part of our business has performed quite well. And for sure, people is a very important part of that business.

Going to Page #2. Q3, overall, stable orders received coming from mixed end-market demand. If we look more in details on our different market segments, Industrial Compressors, for instance, had flat orders received and Gas and Process compressors, had lower orders received than what we have had before. Good growth in Vacuum coming from the semi market, while industrial assembly and vision solutions were down driven by the automotive industry. We also had a weaker demand in power and flow equipment compensated by acquisitions. And like I said at the beginning, the service business continued to perform very well, and we had growth in all service -- in all business areas.

So -- and we end up with a healthy operating profit followed by solid operating cash flow. And it's also important to highlight, this quarter, we have completed 10 acquisitions.

Then if we go further into the information, we see that orders received were around SEK 42 billion, so with organic growth of 1%, while revenues were SEK 43.1 billion, with an organic decline of 1%. The operating margin -- the operating profit was 21.7% compared to 22.7% last year. But we also had some items affecting comparability. This case, this quarter, we had some restructuring costs coming from VT and ITBA, and Peter will come with more details later on. The profit for the period was SEK 7.1 billion, and basic earnings per share were SEK 1.47. And like I mentioned, solid operating cash flow at SEK 7.5 million and good return on capital employed, around 28%.

If you look to the chart on your right, you see our profit level has been quite stable, and with the adjustment we have had, we were at 21.9%, which is a solid level.

Then if we look how we have performed over the regions, if I start with China -- not with China, but with Asia, we see stable orders in Compressor Technique. Vacuum Technique performed quite well in Asia coming from the semiconductor market, and we had weaker IT -- Industrial Technique and Power Technique in Asia. If I look then to Europe with minus 4%, here, also positive vacuum development. We had very good orders received in -- for the semiconductor in Europe, but not only, also the Industrial Vacuum or general vacuum was quite positive.

Compressor Technique was down, mainly due to Gas and Process compressors, while we see a flat development in Industrial Compressors in Europe. And Industrial Technique went down, mainly driven by the automotive segment.

When we look into Europe, we saw a positive development in Power Technique with a quite nice increase in orders received. But of course, with a low comparison base in Q3 last year, a flat Industrial Technique. And opposite to Asia, Vacuum Technique had a negative month, negative development in orders received followed also by a negative development in order to be received by Compressor Technique and there, again, mainly driven by Gas and Process compressors. Solid Africa and Middle East, mainly due to the Middle East, and also solid South America with a plus 10% development. If we then move to the organic order growth per quarter, we see a flat development in the last 2 quarters, but we stay in a good level.

If we then move to Slide #6, we can then see that the structural change has a 2% impact in our orders received in the quarter, mainly coming from acquisitions. Currency, we have suffered. We had quite a lot of headwind with 4% negative impact, 1% positive impact in the organic, like I mentioned before, while in the revenues. It's the same trend, but with minus 1% on the organic side when it comes to revenues. And we ended up at SEK 43.1 billion.

If we look to the year-to-date development, we then have a positive organic development in the revenues, plus 2%, and we are now at minus 2% organic development for our orders received.

Then if we see the contribution from the different business areas, Compressor Technique has a solid contribution for the overall group with 47% of all the orders with plus 1% organic growth. And like I mentioned before, it was flat in Asia, a bit negative in Europe and North America and quite positive in South America and Middle East -- in Africa, Middle East.

Vacuum Technique had a positive organic growth of 10%, coming mainly from positive Asia and Europe, but a negative North America. Industrial Technique had a minus 7% development, mainly driven by automotive and is now 16% of the group orders received. And -- while Power Technique continues as well, 16% of the group revenue and a flat development in terms of orders received.

If we do -- if we then go a little bit more in details, in Compressor Technique with -- like we said, 1% organic development, Industrial Compressors were flat with Gas and Process compressors going down in orders received. Solid growth in service. We continue to capitalize on the base that we have and the latest invoice that we have done in equipment that we continue to capitalize on that. I think it's very important. Revenues increased 2% organically, and a quite solid operating margin of 26.1%, supported by currency and combined with volume price and mix effect.

Return on capital employed went up to 85%. And in the quarter, we have released a new product range for compressing biogas and also to allow upgrading into biomethane for natural gas refueling and gas grid application when you need to do the grid injection after the upgrading of the gas. So continue a good journey and profit went slightly up.

If we then move to the next business area, Vacuum Technique had a solid organic growth of 10%, but here, we had a lower comparison base, but still we are quite happy to see a positive development coming mainly from the semiconductor market and mainly coming from Asia, like I mentioned before. Industrial and scientific vacuum equipment is still in a negative trend while the service business continues to develop quite well. Operating margin at 19%, and we did have some items affecting comparability. At this time, we had restructuring costs booked in the month. We saw that we still have a negative trend in the industrial and scientific vacuum, and we have decided to further adapt the organization to cope with that negative trend.

So we also had a quite relatively big impact coming -- negative impact coming from currency that brought the margin to 19.3%, but again, Peter will come back with more details. Return on capital employed around 20%.

We also here released a new integrated vacuum and abatement system for the semiconductor market, especially designed for safe handling in hazardous production processes.

Then if we move to the next Page #10, we have Industrial Technique with organic decline of 7%, mainly coming from the automotive industry. And we -- I think it's quite visible, I think, quite -- we are all aware about the negative trends in the automotive. The slowed down in EV adoption. So then we have seen less decisions being taken when it comes to new projects. So -- and that had an impact in our orders recently.

Equipment orders for the general industry were basically flat and continued growth in the service business. Revenues were also down 3% organically, and our operating margin ends up at 20% and also here affected by restructuring cost, without restructuring costs at 20.6%. So margins were negatively affected by lower revenues -- lower revenues, volumes and currency as well.

Return on capital employed is slightly up. And we also come up with a new range of robot-guided vision sensor for quality assurance, supporting improved in-line inspections of painting surface for the automotive industry. It's a quite interesting product. We keep on extending our efficient solutions as well to support automation.

So when we go to the Power -- to the next slide, Power Technique had a flat organic development. Weaker demand for equipment and the order growth was basically driven by acquisitions. So -- and also stable demand for specialty rental. Solid growth for service here as well. So we capitalize on the installed base, and revenues were down by 5%. Operating margin at 18%, of course, with a very high comparison base, 20% of -- Q3 2023 was the best quarter when it comes to profit margin for Power Technique. And the margin was negatively affected by the lower revenue volumes, also investments that we have done in our fleet that we will turn in revenue in the coming quarters as well and negatively affected by the acquisitions.

Return on capital employed at 18%. And we have released a new range of surface dewatering pump, now with connectivity includes and those are the high head -- what we call high head [ brands ] for high pressure and high flow to perform in very tough environments.

So if we go to the next slide, we can see that then we had -- you have seen already our orders received and revenues. And if I can comment then, if we exclude the amortization of intangibles related to acquisitions, our margins were at 23%. So -- and of course, including it was -- onetime items it was 21.7%. So we have some items affecting comparability perhaps this -- now that you take over Peter to further explain our profitability.

[Peter Kinnart, executive]

Yes. Thank you, Vagner. If we look at the net financial items, overall, not a [indiscernible] as you can see compared to last year. The biggest impact is, of course, the interest that we get from our cash position that is affecting the net financial items positively. The profit before tax then ends at SEK 9.2 billion, 21.3%, and we had an income tax expense of SEK 2 billion, exactly almost, which is 21.9% effective tax rate, which is low, as you can see. And that has partly to do with the fact that we have the impact of some provisions with regard to taxes that we have been releasing.

As we also mentioned last quarter, last quarter, the impact was even bigger, but then there was a big onetime effect. Now this is a gradual effect that will continue in the coming quarters at a similar rate. If we think about Q4, what would the effective tax rate look like? Well, most likely somewhere in the mid-22% to 23%, so I'd say, 22.5% roughly probably is where we believe we will end up.

The profit for the period after the taxes is SEK 7.2 billion, and then basic earnings per share SEK 1.47 per share. Return on capital employed 28% and return on capital equity 29%.

With that, I will move to Slide #13, and I can elaborate a little bit more on the profit bridge because what does this current margin mean compared to last year? Well, we start off with a margin last year of 22.7% and the share-based LTI programs didn't have any impact this quarter, as you can see. But we did take, as already mentioned, items affecting comparability, restructuring costs in Vacuum Technique and Industrial Technique, SEK 83 million for Vacuum Technique, EUR 40 million for Industrial Technique.

Acquisitions were dilutive by a certain -- diluted the margin somewhat. And then we have a negative currency impact, which is quite important and further diluted the margin. And if you then take all of these different components into consideration, it turns out that the organic development of the margin is basically flat, which, considering the circumstances, the volume drop that we experienced, as you can see, by SEK 500 million that we basically remain on the same margin, you could say, if we didn't have the other impacts on the bottom line.

With that, I would like to move to the next page, Slide #14, to go a bit into detail on the different business areas because there is a picture of the total group. But if you look into the different business areas, then the picture becomes a little bit more mixed. First of all, if you look at Compressor Technique, even if -- maybe I shouldn't be the one saying that, but I do believe that it's a fantastic performance that we see in Compressor Technique, moving the margin from 24.9% to 26.1%, with quite a strong drop-through from the additional revenues that we generated. A slight positive currency impact as well and then a slight dilutive effect from the acquisitions.

In Vacuum Technique, we moved from 22.8% to 19.3%, which is quite a big deviation you could say, from what we had last year. But in fact, besides the restructuring of SEK 83 million, and also a dilutive effect of the acquisitions, the biggest impact to that margin is, in fact, the currency effect. And that is driven mostly by operating exchange differences in the business area, in fact, giving quite a big impact on the margin. And if we take that away, then in fact, the drop in volumes is actually counted, you could say, by not decreasing profitability, but actually even a slight increase in profitability. So as a result, we actually have an improvement of the margin from an organic perspective within vacuum Technique.

In Industrial Technique, we moved from 22.5% to 20%. Also here, we have the restructuring costs, as already mentioned, which have an impact of 0.6% on the margin. Acquisitions are not really so material, but also here a negative impact from the currency, mostly linked to the development of the Swedish krona versus the other currencies, and therefore, we see a dilutive effect as well.

Then we also see, let's say, a negative drop-through in Industrial Technique. There is a volume decrease. Revenue volumes are down. And that is not, let's say, answered by a similar reduction in the cost immediately, and therefore, we see this negative impact, diluting the margin to now 20%. And of course, that is one of the reasons why we have chosen to take measures within the business area to make some restructurings. And we will, of course, evaluate like we do in Vacuum Technique as well how we -- how they develop and how the savings are materialized in the coming quarters. And if we need to make further adjustments, the business develops in the coming quarters.

Then moving on to Power Technique, we go from 20% to 18%, as Vagner already mentioned. We are, of course, comparing to an almost stellar quarter last year in the sense that we had an absolute record profitability in Q3 last year. We would love to repeat that, of course, but this quarter, that was not feasible. We also see the continued impact of acquisitions during the first year being dilutive like in the other business areas.

Currency effect is basically quite mild, only slightly negative, but not really material. And then we see the impact again from the lower revenue volumes that are not immediately followed by an adjustment in the costs. But on the other hand, also the fact that we -- you remember that in the last quarters, we've also indicated from the cash flow perspective, mostly that the higher fleet has been increasing. We have been investing. But there are 2 reasons for that. On the one hand, we have, let's say, slowed down a bit the investment pace during the COVID years. So we have a bit of a catch-up to do.

But secondly, from the Capital Markets Day, you might remember that we're also trying to work on new, more adjacent areas. For example, it could be rental of industrial cooling temporarily or industrial gas generation on-site, for example. And in order to be able to answer the request from the customers, we, of course, need to build up some fleet initially that is not immediately corresponding to revenues at the same time. But of course, the intention is that, that will improve and that we will see a positive impact over time from these investments we have been making. But I think that basically gives a bit more color on the respective margin development of the different BAs.

I move to Slide #15 on the balance sheet. There -- I think there is not so much to comment about. We see an increase on the intangible assets compared to December, which is, of course, related to the acquisitions we've been doing. We've closed again 10 acquisitions in the quarter, as you saw. We also see the increase on the rental fleet, which I just commented to, and also the impact of the investments we have committed to with regard to property plant and equipment.

One particular project that stuck out this quarter is the continued investment in our new Wuxi plant, which will be inaugurated spring next year. And then the last point on the asset side would be the increase of the cash, which is, of course, related to the positive cash development from our good cash flow that we have seen. And on the liability side, I would say the equity, of course, is affected by the positive profitability that we have been generating over the years.

I move on to the cash flow. I think operating cash surplus is quite stable compared to the same period last year. We see a slight increase in the taxes paid this quarter. But I think the main point to highlight here is the change in working capital, which was last year, almost SEK 1 billion negative. And this year, we see a positive impact of plus SEK 1 billion, so of course, that has a positive impact comparing the 2 periods of SEK 2 billion, and that is also why we end up with a SEK 9.1 billion cash flow from operating activities, slightly offset by increased investments in rental fleet and as well the investments of property plant that I just referred to on the balance sheet as well. So that gives our -- puts our operating cash flow at a total of SEK 7.5 billion for the quarter, a 46% increase year-to-date from SEK 21 billion.

And then you can also see from the year-to-date numbers that we have basically spent SEK 5.2 billion on new acquisitions. I think that more or less sums up, I would say, the comments on the financials. Maybe one last point with regard to that is the outlook for the exchange differences in the results for the coming quarters. As you noticed, this quarter, they were relatively high, all things being equal. And of course, I can't really predict the exact development of the exchange rates in the coming 3 months. But all things being equal, we expect that the currency exchange impact will be significantly smaller, possibly around 1/3 of the current, even though it would still be slightly negative.

So with that, I have come to the end of adding some comments to the financials, and I would like to give the word back to Vagner to comment on the near-term outlook.

[Vagner Rego, executive]

Thanks, Peter. Regarding to the near-term outlook, I think from Q2 to Q3 -- during Q3, I think it has not become easier to predict or to give you guidance because if we look to the world, there are quite a lot of things ongoing in the macro economy, the global economy, some conflicts ongoing in the world that has become -- has brought more uncertainty. And then when we look to our business, we saw a little bit more hesitation from our customers to place orders.

So then if we look to our industrial compressors, together, general industry in Industrial Technique and general vacuum, some parts are flat and some are negative, and that is a big part of our business. And then together with the automotive that has a negative, let's say, a little bit softer market and also construction a little bit softer end markets, so those are a little bit flat, still negative. And then we still have a positive outlook for semi still growing. We had positive development in orders received and a possibility to continue to have a positive development.

So if we combine all that, I think we have the picture that we have now. Of course, this is not a straight projection of our orders received. What we are trying to guide here is in our customer activity level. And we also need to consider that between Q3 and Q4, we do have some seasonality. We don't have a specific number around that, but there is some seasonality. And then if we exclude seasonality, currency and large orders, so then the underlying customer activity we believe that will weaken somewhat. And that's how we have built up this near-term outlook.

So it's important to say we don't see a drop of the cliff scenario. That's what we are communicating. This is not what we are communicating here. I think [indiscernible] somewhat is important here.

[Peter Kinnart, executive]

Okay. Thank you, Vagner. And with that, we have come to the end of our presentation. So now it's time to open up for questions. Well, maybe just [indiscernible].

[Operator]

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

[Daniela Costa, analyst]

I hope you can hear me well. My 1 question, I want to focus on compressors and I just wanted to understand a little bit more on the sales. The 2% organic looks relatively low compared to where we were last quarter and where the comparables seem to have been getting easier. Can you disaggregate a bit more? I know you do on orders mentioned the Gas and Process part has been weaker. But is that also what has maybe slowed down on the revenues and you see that as temporary or maybe has sort of like more of a trend?

[Vagner Rego, executive]

Yes. Thank you, Daniela, for the question. Yes, indeed, we do have a good level of orders on hand and Gas and Process -- and not only Gas and Process but Gas and Process and oil-free compressors, they have quite long lead times. And we also got some orders that it's really for the marine business for LNG cargo, for instance, this is really long term. So when those orders will come in the future, those sales will come in the future. I think that is still there, is still valid and we don't see huge levels of cancellation. The revenue will come in the future.

[Daniela Costa, analyst]

So just temporarily depressed because of the lead times on the sales?

[Vagner Rego, executive]

You have that -- I'd say that is -- the biggest part of that lower revenues.

[Operator]

The next question comes from John Kim from Deutsche Bank.

[John-B Kim, analyst]

I'm wondering if we could talk a little bit about Vacuum Technique. Can you give us a bit of color on the order intake growth in the quarter? Do you see it -- I know Asia is over-indexed here. Do you see that more as a China nearshoring story, a natural recovery in demand? Or is it more of a push to memory build out?

[Vagner Rego, executive]

No, I think that the order growth was quite relevant in Asia, but not only coming from China. I think that comes from the countries where the semiconductor is active. I think mostly, I would say, in all of them, we had good positive order development. So -- and then followed by Europe that we had also some good orders for the semi market and while U.S. was a bit on the weaker side.

[John-B Kim, analyst]

Okay. Just a quick follow-up. Can you give us any color on the age of the VT backlog, if it's changing at all?

[Peter Kinnart, executive]

I'm sorry, could you repeat the question? We didn't fully understand it. The line is not so fantastic.

[John-B Kim, analyst]

Sure. Can you give us any color on how the age of the VT order backlog has changed? Is it fairly constant or has it changed year-on-year?

[Vagner Rego, executive]

I think the backlog has been going down. Let's say, we don't have orders in delay, I think that we don't have. We are back to normal levels when it comes to the order book.

[Operator]

The next question comes from Gustaf Schwerin from Handelsbanken.

[Gustaf Schwerin, analyst]

Can I ask on the vacuum margin and the drop-through now in Q3. If I go back to Q2, we were discussing the negative volume effect there, and it sounded like you had some under absorption when you are pleased with the backlog. I think leverage now looks much, much better. So what is the delta there quarter-on-quarter?

[Peter Kinnart, executive]

Yes. I think the drop-through is indeed quite a bit better now. Well, quite a bit. It's not exceptional either, of course, but we've seen an improvement. And like we already indicated we've already started to take measures to be more cautious on the cost sides without necessarily initially taking immediate restructuring actions. Then we have also started the restructuring process in -- at the end of Q2, as you know. And I think that is partly a reason why we see some positive improvements on the Vacuum Technique drop-through now. Of course, we continue with the restructuring activities mostly on the general vacuum side in order to make sure that we continue to rightsize the organization for the business level that we are able to do there. But I think that's the main reason for the improvement of the drop-through.

[Operator]

The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I just wanted to ask on the Gas and Process. I guess on the demand side and on the sort of the pipeline and the underlying activity thing, appreciating that the orders were down, I think, both year-on-year and sequentially. Is that just a function of timing? And is the pipeline sort of every bit as good as you would have said it was 6 months ago, 12 months ago, kind of sort of choose the timeline?

And then just to clarify on the answer to Daniela's question earlier, on the lower revenue in the Q3, which is a function of maybe the phasing of some of these orders, would you expect that to bounce back in the Q4 to kind of the level we see in the Q2? Or do we need to be thinking that a lot of these orders are actually a lot longer dated, and therefore, it's more support for kind of '25 and '26 numbers, not necessarily Q4? Hopefully, that was clear.

[Vagner Rego, executive]

Yes. If I can comment on the last part of the question first, I think those are long-term orders that we do have orders for '25 -- to be invoiced '25 and '26. I think that is an important point. Then when it comes to the demand -- for the customer demand, I think we do see the projects. I don't see projects being canceled. The pipeline is quite good. But I think the decision process is slower. There is an impact from the U.S. election. Depending on the direction we do have good activity levels around energy transition technologies or lower CO2 footprint. And some people are waiting to see some clarification, some companies, I mean, clarification on the scenario, but the portfolio remains solid. We have a solid project portfolio.

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So on the outlook, I want to zoom in a bit more here. In VT, Industrial and Scientific seems to be bottoming a bit when we look at the quarter-on-quarter commentary in the report. Semis orders are growing in equipment quarter-on-quarter, and that seems to continue as per your comment, Vagner, at the end. [ Peter ] orders and commentary also don't look too bad. In IT, automotive orders are, of course, down a lot year-over-year, but down somewhat quarter-on-quarter. So is it mainly industrial and IT and weaker demand in VT where you see incremental weakness ahead? And is it mainly Gas and Process rolling? Or do you also pursue more weakness on the industrial compressor side?

[Vagner Rego, executive]

Yes. I think that's quite a mixed picture. I confirm on the vacuum side, the industrial and scientific vacuum is indeed on the weak side. On the compressor side, I think we see -- on the industrial compressor side, we see a bit more hesitation coming from the market. And I think that is the best word for me to describe what we see now. Projects, we see good project, but much more hesitation, and we need to see what is going to happen in Q4. And that's why we had that outlook that is somewhat lower.

[Klas Bergelind, analyst]

Yes. Do you also think that, that impacted revenues? I heard what you said on LNG, Vagner, when it comes to longer lead times. But do you also think customers on the industrial compressor side, were pushing out the sort of delivery timing schedule? Or is that not happening on revenues?

[Vagner Rego, executive]

Yes. We see some projects being postponed. If the project is postponed, of course, sometimes we don't need to deliver the equipment. We don't need to delivered equipment. I think that has an influence, especially coming from China.

[Operator]

The next question comes from Sebastian Kuenne from RBC.

[Sebastian Kuenne, analyst]

The question relates to IT. Here, you have, in my opinion, a relatively small restructuring charge given what we hear on the battery side in China and automotive CapEx side in China. Could you maybe tell us why you took a relatively small adjustment here, and whether you see other areas to offset that softer auto CapEx side of your business?

[Peter Kinnart, executive]

Yes. Well, I mean, first of all, of course, we have tried to make a thorough analysis of the business areas performance and the individual divisions have done that for themselves. We also need to consider that we work with highly talented, highly skilled people that take years to develop the competence and the understanding of the applications in the market. And so when we need to take restructuring measures, we don't take the decision very lightly, and we were very cautious about especially reducing the number of people in order to make sure that we don't lose some of these competencies and skills that we have built up for many years, and of course, we'll take again many years to build up if we need to recruit them back. So this is a bit maybe kind of surgical approach that we apply in order to avoid harm to the long term.

What I need to add, of course, is that this is a step that we have taken now in this quarter. We evaluate continuously how we feel about the performance of the respective divisions within the business area. And then again, on a kind of piecemeal approach, we will decide in the coming quarters if we need to do more or if -- what we have done has been sufficient. But we prefer this more surgical approach. So I don't think the results overall are dramatic and have fallen off a cliff yet. And so we try to be proactive, but at the same time, we try to make sure that we protect the competence and the skills of our workforce, which is basically our biggest intangible asset we have actually.

[Operator]

The next question comes from Andreas Koski from BNP Paribas.

[Andreas Koski, analyst]

I have a question on Vacuum Technique. This was, again, another quarter with a book-to-bill well below 1, and you were again taking restructuring cost. We saw restructuring costs also in the second quarter. And you are now talking about the normalized backlog. So I just want to understand if you are with these restructuring costs, adapting the business to a revenue level in line with the order levels that we have seen in recent quarters. So how to think about the revenue development going forward?

[Peter Kinnart, executive]

Yes. I think the restructuring costs, of course, are still both -- in both quarters, actually, mostly focused on the industrial and scientific vacuum area. I think that's very important to underline. On the semi side, I think the order development is quite positive. And as Vagner has already indicated, the backlog has been reduced quite significantly compared to, of course, the enormous backlog that had been built up during this enormous demand spike that we have seen during and after COVID, given all the supply chain issues we faced at the time. So from a delivery point of view and a revenue point of view, we are able to deliver quite correctly, let's say, what the customers expect from us when they place certain orders.

In the semi side, we have seen good growth over the quarter, with, of course, some differences across different geographies, but still overall, very solid. And the measure that we are taking are mostly, if not purely, directed towards the industrial and scientific related vacuum activities. And there, after the first quarter initiatives we had taken, we felt that looking at how the result was developing, we needed to do another step, and that's exactly what we have done in this quarter with SEK 83 million. Maybe one could argue that this is also here, maybe not an exorbitant amount, but again, also here, competence and skills in our workforce is extremely important. And we just need to make sure that we don't take a step too far because that will cost us much more than the restructuring cost that we take.

[Andreas Koski, analyst]

Okay. So you're not doing this in preparation of a lower revenue level for Vacuum Technique overall?

[Peter Kinnart, executive]

No, I would say that is not the rationale behind the restructuring costs. We are -- especially, again, in general, if I cluster it a little bit under the term general vacuum, there, I think we have seen quite a significant drop over the last quarters in the order intake. And that, of course, will result ultimately in a lower revenue level as well. And then, of course, we are doing what we need to do in order to protect the profitability of that part of the business, and that's what we have been doing.

On the semi side, we are fine from an order perspective, we believe, with the growth we have seen, and that will also materialize in the necessary revenues to support the margin in the future.

[Operator]

The next question comes from James Moore from Redburn Atlantic.

[James Moore, analyst]

Maybe a question for Peter. I'm just looking at the currency impact of Vacuum Technique, and it's quite a big number, but the EBIT impact is bigger than the revenue impact. There's obviously quite a bit of transaction in there. I've got some details from a decade ago on Edwards. But I guess, the composition of cost and revenue by country has changed. Is it possible to give us a flavor for the transactional flows. I'm just trying to think what percentage of sales is long dollars these days? And is it about import export? Or is it more because the vacuum industry sells a lot even in Europe in U.S. dollars? And is it that? Or is it more the import export side driving it?

[Peter Kinnart, executive]

Yes. Thanks, James, for that question. I think it's, of course, an obvious point to raise considering the big impact it had on the drop-through in or on the margin development for Vacuum Technique. I mean in -- to simplify maybe a little bit too much, but still, I think fundamentally, that is the reason behind it. We do business in -- I mean, the business concentrated in a number of markets. As you know, we have a couple of countries in Asia, the United States, also in Europe, we have some, let's say, key market that really -- where all the business more or less concentrated. The rest of the other countries is much more limited for Vacuum Technique.

And as you correctly indicate, the invoicing across all of these -- especially the big countries in the mix, the invoicing is done almost exclusively in U.S. dollars. And that means that, today, just like in the past, in fact, the Vacuum Technique is a little bit more exposed to this kind of currency fluctuations and the transaction effect, as you referred to than the other business areas who are much more spread out, and we have a much more, let's say, diversified basket of currencies in their transaction effect.

[James Moore, analyst]

Has that changed over time, Peter, -- has it always been -- are we talking 80%, 90%, 100% dollars?

[Peter Kinnart, executive]

Well, the exact percentage, I wouldn't be able to give you, but I think that has been the case over time, basically. And we -- you might remember that a number of years ago, long before I took the role here, we've had very high operating margins, in Vacuum Technique. You might remember that from time to time, we remind, let's say, the market about the fact that when the margin was up to 25%, 26%, it was mostly driven by exceptional high positive currency effects. And you could say that, unfortunately, at this point in time, we see a little bit the opposite.

[Operator]

The next question comes from [ Torsang Mann ] from Bank of America.

[Benjamin Heelan, analyst]

It's actually Ben from Bank of America. I wanted to ask a little bit more on the automotive outlook in Industrial Technique. Could you give us a little bit of color. Obviously, it slowed in Q2. That's continued in Q3. Is this a new level going forward? And what are the conversations that you're having with customers like? And any color that we can think in -- into Q4 and into 2025 around the demand levels for the automotive exposure?

[Vagner Rego, executive]

Yes, I think it remain a negative outlook from what we can see. From the project side, there are projects, but there are less decisions being taken. I think the EV adoption is a part of that. If we don't see that going up, and I think clarifications in Europe are necessary for that. And also, you have the consumer confidence playing a role on that. But that said, I think, in long term, we are quite confident about the markets because I think we have been well positioned. There are new technologies coming into the market, the on-box concept. So -- and we are preparing, we are deploying R&D as well to be ready for those changes, more flexibility in the production lines in the high end. We are also getting ready for that. I think for long term, we are well positioned in that market, but it's very difficult to predict now the short term.

[Operator]

The next question comes from Rizk Maidi from Jefferies.

[Rizk Maidi, analyst]

My question is on Compressor Technique's margin. I think this is one of the highest, if not the highest quarterly margin ever achieved by this division. I'm just wondering whether you could tell us a little bit what's driving that exceptionally high organic drop-through. And more importantly, just understanding the price and mix contribution there?

[Peter Kinnart, executive]

Well, I think, first of all, of course, we continue to have a positive revenue volume effect that I think is undisputable. Talking about price without going into too much detail because, of course, it's always a like-for-like calculation we make. And in the end, there's much more to it than just the like-for-like. But in Compressor Technique, I would say that we continue to benefit from a positive price effect overall. Of course, the current price effect in the business area is not the same as it was about a year ago, 1.5 year ago when inflation was really hitting all-time highs in the last 20, 25 years, but still possibility to continue to increase prices.

Secondly, of course, there is the impact of the new product lines that we introduced and the R&D impact, you could say, where we provide more value to the customer and especially provide a lot of energy savings, not only with the compressors but also with the service activities. So as a result of that, we are able to monetize on that concept. So I think that is the reason for that. And of course, with the additional volume and also a kind of stable cost structure and a solid gross margin to begin with, we are able to get quite a lot of leverage out of that. So I think that is basically the reason.

Of course, like we have said many, many quarters about drop-throughs, sometimes they are a bit lower, sometimes they might be even slightly negative. When we talk about long-term drop-throughs, then I think 30%, 35% is what we generally think about. And okay, what happened this quarter is rather exceptional, and that happens also from time to time, but it's not something that we -- that one should model into the calculations. That is rather unusual, I would say.

[Rizk Maidi, analyst]

Okay. So just to understand, it's a volume and a price effect more than a mix effect, right?

[Peter Kinnart, executive]

Yes, I would say so.

[Operator]

The next question comes from Sebastian Kuenne from RBC.

[Sebastian Kuenne, analyst]

It's a brief one. I have some incoming questions from investors who did not quite hear your comment on the outlook. So I wrote down, if we exclude seasonality, FX and large orders, then customer activity is expected to do what exactly? Can you repeat that, please? That's all I would like to know.

[Vagner Rego, executive]

Yes, the customer activity level will weaken somewhat.

[Sebastian Kuenne, analyst]

Weakened somewhat, yes. That's excluding seasonality, FX, large orders?

[Peter Kinnart, executive]

Yes. As always, I mean, this is, of course, the way it is placed always every quarter. And it's...

[Sebastian Kuenne, analyst]

Misunderstanding in the call earlier, that's why I just want to clarify that. Perfect.

[Peter Kinnart, executive]

I just wanted to repeat that this is not different to any other quarter in the way we have communicated.

[Operator]

The next question comes from Jonathan Day from HSBC.

[Jonathan Day, analyst]

It's again coming back to Vacuum Technique. And I was just wondering if you could perhaps comment on capacity utilization. I think, in Q2, you said that you've seen a slight increase in utilization rates, but still far from the higher levels that you've experienced historically. And I was just wondering if that trend has continued in Q3 or whether there was a change in trend?

[Peter Kinnart, executive]

Well, I can take that if you want, Jonathan. So I think we have seen a gradual improvement in the utilizations. And I think that is also reflected in the development of our service business because, of course, the service business benefits from better utilization in the fabs. But it doesn't seem to be of such a nature that it immediately also triggers initiatives from the larger OEMs to make big investments, rather the opposite, I would say. We have seen in some of the research material that many of these larger players in the semiconductor space have decided to postpone the start or postpone the build-out of their new fabs, and that might imply that utilization is maybe not yet at the level that they would like it to be. But we have seen a positive impact from better utilization in the fabs, that is true.

[Operator]

The next question comes from Magnus Kruber from Nordea.

[Magnus Kruber, analyst]

Magnus Kruber here from Nordea. A couple of questions from me as well. On the same line, there were semiconductors, you obviously saw a good sequential acceleration in the orders driven by semi. Is there any reason to believe that this should ease going into the fourth quarter, considering what you see in your own pipeline?

[Vagner Rego, executive]

Yes, I think it's difficult to comment on that. But I think it's also fair to say that we had a low comparison base in Q3 last year. I think we can start with that. And I think there is, let's say, the environment. When we said in Q2 that we will not see a dramatic uptick, it's going to be a slow improvement in the market. And I think that we haven't changed our vision. If there is an improvement, it's going to be a slow improvement.

[Peter Kinnart, executive]

Thank you, Magnus. And with that, I believe we have come to the end of this third quarter earnings call for 2024. I would like to thank all of the participants for raising very interesting questions and also for being very disciplined in asking one question at a time. We look forward to hearing of you, of course, in the coming weeks and months again. And thank you again for participating in the conference call. Thank you. Goodbye.