Atlas Copco AB

STO:ATCO A

Earnings Call Transcript 2022-Q3

[Operator]

Good day and welcome to the Atlas Copco Third Quarter 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I'd now like to turn the conference over to Peter Kinnart, CFO. Please go ahead.

[Peter Kinnart, executive]

Thank you, operator. Good morning, good afternoon, good evening, everybody, and a very warm welcome to the earnings call, to the third quarter results for the Atlas Copco Group 2022.

My name is Peter Kinnart and together with me, is Mats Rahmström, to comment on the different elements of the result. [Operator Instructions]

Thank you. So then Mats, over to you.

[Mats Rahmström, executive]

Thank you, Peter. I will start with the picture actually on the introduction. The -- this is one of our recent acquisition, it's the Lewa pumps. And I thought I would put this in the right environment, so everyone understands what it is, because we do get a lot of questions. So the 3 pieces in the middle, these are the pumps that we sell. And you can see Sweden industrial pumps environment. And this, in this case, have reducing capabilities. And just like -- we like in Atlas Copco, it's an important part of this process, which I think everyone understands and it's still a smaller part of CapEx.

And it gives us also greater opportunity with an interesting service business. So I think the Lewa acquisition fits very well with what we like in Atlas Copco and what we are good at.

With that introduction, I will go to Slide #2. So it was on orders received. We were up 6% organically and very strong performance from 3 of our business areas. Compressor Technique, up 21%, Industrial Technique up 21% and Power Technique, up 16%.

And also in Vacuum Technique, which was minus 23%. The Industrial and Scientific continued to do really well and the minus is mainly related to the semiconductor industry. And all in all, that was close to SEK 40 billion, which is another very strong quarter for us.

We continue to have strong growth in service, which is good for our resilience and also the orders received came from all regions around the world. And as I said, sequentially down 8%. So in line with how we guided last time.

We had record revenues and up 18% and also sequentially had positive down [ 8% ]. Although we are still challenged by supply chain issues, we could still push out a little bit more products. And we could see strong performance in all business areas.

Compressor Technique, up 13%; Vacuum 27%, really remarkable; and Industrial Technique 14%; and Power Technique 20% up.

We had a number of acquisitions in the quarter, 11 of them, and for the year, we are at 21. We can go to Slide #3 to look at the profit. And the first 2, just -- it's the orders received and the revenues and the third point is down. The operating profit, which increased with 40% versus the quarter last year and with a 22% margin then, we had a record operating profit at almost SEK 8.4 billion, extremely pleased with that development.

We, of course, have support from currency to get to this level. At the same time, we have the dilution from the supply chain issues that we continue to have. And return on capital employed, 29%.

We can look at the quarters. It's a completely new level right now. We have up 4 very strong quarters on orders received. And also sequentially, we can see that we managed at least to step-by-step improve our performance as well.

We can go to Slide #4, which gives a little bit of geographical and let's start in Asia, it might look in the light blue there, plus 4% up. And this is the part of the world that we have most of our sales to SMEs, so Vacuum Technique was negative. But all the other businesses was actually double-digit growth in Asia.

So very strong performance there. If you go to Europe, also fairly strong performance from all the business areas. But maybe this is the area where we see that the business is -- could be at least a little bit softer. South America, strong performance on record levels of our business areas. And North America is very similar to the Asian story where we have double-digit growth for all business areas with the exception of Vacuum Technology.

So pleased to see that our offer is appreciated in all regions and that we have a product truly that fits the application in all these areas. We go to Slide #5 and that's more a confirmation that we now have 8 quarters with growth and the last quarters as well, that's 6[indiscernible]

Slide #6. And here, you have the bridge. First, on orders received. And you can see the help we had from currency there, 13% and organic 6%. And our revenue now 15% on currency and 18% organic.

Go to Slide #7. And here, you should see a pie chart with the business areas. Although the fantastic performance from Compressor Technique, 21% growth or share has declined somewhat in the group. Rest of it, even though with some of the Compressor Technique, we can see very strong development around LNG application, battery application and even carbon capture application. So many of the businesses that we believe will be more resilient over time.

Power Technique benefits, of course, from the recent acquisitions HHV Pumps, Vagner and Lewa, but also a very strong business for many of the product lines. And I think specialty rental also had a very good performance in the quarter. Industrial Technique, they benefit from the CapEx spend on the EV transformation in the auto industry.

It's final assembly, it's flexible automation, but also battery manufacturing there as well. And in Vacuum Technique although minus 23%, we should remember how much growth we have had in semi over the last 2 years, and Industrial and Scientific are doing really well as well.

Go to Slide #8, which is Compressor Technique. I'm quite amazed with the continued strong order growth, up 21%. And you can see that we separate a little bit that the larger compressors that we see in gas and process. I mean all 3 are doing better than the smaller ranges of products. So it's more projects type of business. And here, we can also see then that we have a number of applications, which I mentioned before and maybe on top of that, we also see more and more project builds for hydrogen, which has some interest to us as well.

And they had solid growth in all regions around the world and a flattish development in Europe. Service is good for us and they continue to grow replacement products, which is very, very good.

Revenues on record levels, up 13% and operating margin at 24.2%. And here, of course, supported by the growth of the currency, but held back somewhat on the supply chain constraints and a very good return on capital employed at 83%.

We continued our journey on acquisitions with Oxymat which was acquired in Denmark, on-site air, we are strengthening our position there, very interesting. And then they continue with the rollouts on distribution to get access to both product but also distribution, sorry, service.

And one that stands out a little bit is the one in Germany, where we have bought a digital channel to reach our customers as well. And of course, if you look at the graph, it looks quite impressive both on orders received development and revenues, even if you take away costs.

Moving to Slide #9, which is Vacuum Technologies. And there we can see then the decline, which I referred to as this in semi equipment and you could see that trend already in the previous quarter that memory is not performing as well as logic.

On the other side from our perspective, it could be equally vacuum intensive dependent more on the process around those products.

Service continued to grow as well and we expect that to continue considering the amount of products we put in the market. For semi, I mean, there might be a softening of the market from a very, very high level for few quarters. On the other side, if you look at the CapEx cycle in the coming years and the change in society, how we live and operate and run industries, we don't have a concern long term for this. They pushed out record revenues, an increase of 27% and an operating margin at 23%, [indiscernible] by supply chain, but as we discussed before as well, price increases are more difficult when you have long-term contracts and long lead times.

Moving on, the next one, which is Slide #10. It's Industrial Technique. Very strong order intake, again, 21%. We believe automotive can be divided in 2 pockets of business. One is the traditional combustion engine business, very few products available in this market. It's more an OpEx spend, replacing tools, maybe do upgrades. The lion's share of the business is coming from the new EV market and the battery manufacturing as well. And I think we have been asked many times about the potential in an electric vehicle versus a traditional combustion engine retail and that has confirmed that we see equally or higher potential per vehicle when we go to EV or hybrids.

Also Service continues to develop well. Record revenues, still very challenged on the electronics, but we are scrambling there and the spot market buys to satisfy lead times to our customers and operating margin at 21.4% and the return on capital at 18%.

Move to Power Technique. There we have now continued growth on at 16%. The portable compressors are doing really well and generators as well, but even better the specialty rental and service continued to grow as well. And we have had a very good start with the 2 pump acquisitions as well.

And revenues, 20% organically, strong for us and a very strong margin for this end market at 18.9%, driven mainly by the organic revenues, of course, and diluted from the same challenges as everyone else has with the supply chain. And as which I mentioned already, the acquisition of Lewa and Geveke was completed in the quarter.

Then on Slide #12, you have the profit and loss and they give you 2 indications. There you have the -- for reference, you have the EBITA as well, which is at 23.2% and then what we report on operating profit at 22%.

And by that, I think I hand over to you, Peter.

[Peter Kinnart, executive]

Thank you, Mats. I will continue on the income statement on the same page. Net financial items minus elements in the income statement, but the change compared to last year is due to positive financial exchange in currencies basically. On the -- then we have, of course, profit before tax of SEK 8.5 billion and then an income tax expense of 22.6% of that. So that is roughly our tax ratio for the moment.

And we also expect that, that will be more or less what we will see in the last quarter of the year when it comes to the income tax rate. Then the profit for the period is up to SEK 6.5 billion compared to SEK 4.6 billion year ago, which is 43% up and resulting in basic earnings per share for the quarter of SEK 1.34 compared to for the share split adjusted, of course, SEK 0.94 last year.

And the return on capital employed reached 29%, 28.7%, I think you saw in one of the earlier slides versus 27% last year. And that, I would have to add here as well, is mainly driven by the currency basically. And return on equity of 32% versus 30% last year.

Then I move on to Slide #13, where we give a little bit more color on the profit bridge. And what we see here basically is a strong support from currency. As you can see, a slightly negative impact from the acquisitions, which is not uncommon for the first year, given the high integration costs that we typically have to bear.

And then we see a drop-through of 13% on the revenues, which is slightly negative on the margin. And when we do the analysis, then basically, what we see is that cost increases, whether it's material, labor or energy costs during -- before the third quarter are compensated by all the efforts that our divisions and business areas are spending on trying to increase the price levels to the market.

Then we also have supply chain inefficiencies and those are more temporary issues, I would say, inefficiencies in our factories or spot market buying in order to get electronic components, for example. And those we don't really manage to compensate even though there is a positive impact from volume as well as mix.

And then last but not least, we also continue, as we have already indicated at previous call as well, to spend increasing amount of money on product developments and that is, of course, the currency for the future.

And also in our activities when it comes to digitalization, improving presence in the market and so forth. So that all adds up to a slightly dilutive effect still of 1.1%, but mainly and predominantly very good continuous progress on the pricing.

Then if I move to the next slide, Slide 14, where we see the breakdown of the bridge by business area. Then basically, the conclusion is the same. What I would like to highlight here is the very strong performance of Power Technique with a very positive top 2 as well, all business area supported by currency, some to a higher extent than others, but overall, a very positive impact from currency across the board.

And then depending a bit on the different business areas that were able to cope with the different challenges, pricing or cost increases. And as we already said earlier, particularly in the semi industry, for example, or motor vehicle industry where we deal a lot with key account customers. It is a little bit harder to get the same type of price realization in the market now with the more broad-based industrial applications.

Moving on to Slide #15 then on the balance sheet. Well, maybe first of all, before talking about any specific category, I think it's worthwhile mentioning that when we compare the quarters that there is an enormous amount of currency impact in that balance sheet as well due to the valuations. And we could say that about SEK 19 billion year-on-year is the impact on our balance sheet from currency.

Then of course, there are still other increases out there on the intangible assets, there's, most notably, of course, the change in our intangible assets, thinking of the acquisitions of Vagner, Lewa, Geveke, Oxymat and many more. The other probably remarkable item here is the other property, plant and equipment with an increase of 3.5 compared to December.

And there -- sorry, compared to September last year. And that is, of course, due to the investments that we have approved for capacity expansions, mostly in building of Compressor Technique basically.

And then I think the 2 items that really stand out here as well are inventories and receivables, net working capital or working capital components that have gone up by about the same amount. And we see basically all the business areas increasing there.

For inventories, the ratio is slightly up. For receivables, however, it's fairly flat and we also see no increased risk on receivables, right? So it is all related -- largely related to the volume increase that we have seen, aside from the currency impact.

Then the cash and the cash equivalents. As you can see, that has gone down a bit by -- compared to September last year. And of course, they have the reasons, are the redemption, the first payout of the dividend. And then, of course, the numerous acquisitions that have been done in the course of the year.

And then going to the equity and liability side. On the interest-bearing liabilities, we have increased our short-term funding a bit by having a few bilateral loans, which is due to the fact that our working capital has gone up, and of course, also due to the high amount of acquisitions that we have done.

And then we also need to think about the dividend that will be payable in the course of October. On the 26th of October, we will pay out the second part of our dividend, SEK 0.95 at that point.

And then last, but not least, here, the noninterest-bearing liabilities, they have also increased. It's quite a mix of many different things, but the most predominant part are, of course, the tax payable that are linked to the purchasing of all the inventories. Secondly, quite large as well, the advanced payments linked to the project business that is going quite well during the quarter.

And then other types of accruals such as income tax liabilities or other accruals that we did. Before I continue to the next slide, I still would like to mention 1 thing with regard to the bridge and that is the outlook for the currency development.

And here, we actually think that it is most likely to be similar, positive, compared to the third quarter. However, most likely, slightly lower than what we have seen until now.

Then I will really move to the next slide and that is Slide #16, talking briefly about the cash flow. I think the image is very similar to what we have commented over the last number of quarters. We see a very solid operating cash surplus, I would dare to say. At the top line there, almost SEK 10 billion.

Then the taxes paid are a bit higher, but that is purely linked to the volume, the increase of the business and the profitability that has gone up. And then the change in working capital, which is still negative, but significantly less negative than it has been over the last 2 quarters, as you also can speculate from the year-to-date numbers here.

And it's, of course, across all the different categories that we see increases, including the payables, although not at the same extent as the inventories. And then we see the investments linked to the capacity expansion that we are realizing across the globe, can be South Korea, can be in China or in U.S. as well as -- and Belgium are the 4 dominant locations where we are doing quite large investments.

That is, of course, increasing the cash outflow, as you can see. And that gives us, overall, after all of these different items, an operating cash flow of SEK 5.7 billion compared to SEK 4.7 billion a year ago, same quarter. But then, of course, the big difference at the very end of the slide is then the amount of acquisitions, the money that has been spent over the quarters.

You have the list in detail, but of course, the biggest contributors are Lewa, Geveke and Oxymat. And with that, I conclude on the cash flow, and I hand back to you, Mats, for the near-term outlook.

[Mats Rahmström, executive]

Thank you. I hereby trying to guide the customer activity level, as we call it, between the Q2, Q3 and Q4. There is no huge science in this. The -- new buying business area, you see what are the signals they get from their customers.

And this time, we said that we still believe that will weaken somewhat compared to the high level that we have seen in the third quarter. And of course, we have had 3 very strong quarters. And in some what you might want to read in that we haven't seen any signs of a recession type of scenario.

And we still think that in the growth number, growth we have for strategic programs, long-term strategy like in gas and oil free, it still looks fairly positive. We're also gaining market share in what we call resilient technologies linked to the sustainability should be this future proof our company.

Semi, we do see short term being a softer, which is already confirmed in the previous on this quarterly report. But long term, we don't see that as being an issue. The other way around actually that there's many investments in that sector.

On the negative side, we have seen the slowing down in general industry. That could be industrial tools, could be industrial vacuum, for example, industrial compressors that we see slower growth or no growth as we see.

And there's still some hesitation about the corona linked to mainly China, this announcement came today. And recently introduced was also this CHIPS Act that we are evaluating to see how that will impact the semiconductor business globally.

And of course, the Russia and Ukraine war makes it more challenging in Europe in many ways as we know and it's probably not so good for business. And that's why we have concluded a somewhat less activities perhaps that was talked about, from a very strong quarter, yes.

Then we have -- before we start the Q&A, we would like to remind everyone Capital Markets Day. So if you really like to know the inside of our group and learn more about the strategy and what we will do going forward. This is on November 17, here in Stockholm. And if you like to register for that, you need to do that before October 31. Should we then open up for questions?

[Peter Kinnart, executive]

Yes, Mats. Thank you very much for those comments. Operator, I would like to hand back to you. [Operator Instructions]

[Operator]

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

[Guillermo Lojo, analyst]

I wanted to ask about, obviously, Vacuum Technique. And I guess you commented on a number of factors impacting your orders and also the outlook I guess, into Q4. But I wanted to elaborate on one of the statements in your report when you talk about the ramp-ups from customers being slower. What do you see there? And in addition to that, on cancellations, do you see any risks on cancellations? And last but not least, on U.S.-China ban. Are you seeing anything there or any comment there will be helpful from our standpoint?

[Mats Rahmström, executive]

Thank you. On the ramp-up -- what we can see that, of course, there is long lead times from many of the suppliers. That could be a timing-wise as well that they don't get all the material they need to be able to ramp up production.

And I assume that it also could be where they have better capacity, but they are slower to ramp up some of the factories. And this is what we see. And I believe that the first one comment I made on this is probably the most relevant one. And of course, very difficult right now to start a new line with something and you need to coordinate all the efforts from all your suppliers.

The second one was, yes, it was cancellations. No, we haven't. In this quarter, we haven't seen any big shift in cancellation. It's quite on a normal level. And the follow-up question on that normally is, if we believe that we have like air or fake orders in our systems and I think I've been through this in Industrial Technique.

It's very linked to projects. We can see the product that is the same for vacuum technologies as well. And for SMEs and VT, it's the same thing, we know where the products are going. And the only way we can see that there could be a change, of course, would be products that goes to distribution, where they have stocked up. But we don't see anywhere where you can see that anyone face trouble in ordering or anything like that.

With that said, I'm not saying that we cannot see cancellation, but that's not been a major change in this quarter.

[Operator]

The next question comes from Lars Brorson from Barclays.

[Lars Brorson, analyst]

Maybe just on that, can you remind us, I think when Guillermo was asking to the kind of impact on what we see in the semiconductor industry right now. Can you remind us please how much is China of your VT business? What I did want to ask too was the organic drop-through margins in VT.

In the short term, Peter, it looks like you bottomed out, you had a couple of quarters of negative drop through in the first half. We are now turning positive. What's the cadence here on the margin improvement? Can we get back to incrementals to the 40s, 50s over the next sort of 3 to 4 quarters in VT?

And if I can, sorry, just over the medium term, I'm trying to get a better understanding of the organic drop through in semi VT. My assumption is that's probably in the 60s. Any reason to believe that will be materially different in a downturn that we may hit over the next year or 2? And what can you do effectively to lower that breakeven point -- lower those drop-through margins and de-risk the earnings profile as we get into perhaps 2024 on the other side of the backlog that you'll be invoicing this year?

[Mats Rahmström, executive]

Maybe I can start on Vacuum Technique and semis. We have not disclosed exactly how we -- the sales is around the globe. But China, among with Americas and Korea are the top 3 countries. And so it's a significant part of that business.

And all in all, I think we have maybe 20 customers and it spreads among those 3 countries, so it's a significant part is, of course, China.

[Peter Kinnart, executive]

Okay. Thank you, Mats. And then I will move on to the other question on the drop through for Vacuum Technique, that's positive. So yes, I think, first of all, from our point of view, we are at least very, very pleased to see that we are able to make that turn and to get these positive numbers on the bottom line versus our revenues. Even though from a margin perspective, we're not quite there where we would like to be. So we're happy but not satisfied still. But then, of course, I think it's very much, thanks to the strongly increased efforts on the pricing side, to counter all these negative impacts while at the same time, of course, the inefficiency in the factories still are difficult to handle with supply chain issues, particularly on the chip side causing still similar problems as we have seen over the last few quarters and has not really been a firm improvement there.

Whether this drop-through will now go all of a sudden to sky high levels of 60%, I can't really say, but what we have generally said when we talked about drop-through is that over a longer period of time, we normally count with something around 30%, 35% across the business areas. And I would not see any reason why we should not continue to believe in that scenario rather than having this enormous drop-through.

I think we also want to make sure that we continue to invest in the future, that we do the right R&D initiatives and so forth, that we upgrade our systems so that we are able to cope with the future rather than trying to max out on the drop-through.

[Operator]

The next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I wanted to focus on your biggest business, Compressor Technique. It was down organically in 2020, I think, minus 3%. Obviously, everyone is wondering when there is a slowdown. I'm not -- don't want to ask you when you think that is. But when we have the next slowdown in macro-wise and in general, industrial, do you think any -- can we look at 2020 has sort of perhaps the bottom of what your orders could do?

Or do you think there's specific things that were unique to 2020 where that drop was maybe much lower than, for example, if we look back at history, at 2018 or even 2015 -- sorry, 2008 or even 2015, just for us to think about how do we contextualize a potential future downturn versus the example of 2020?

[Mats Rahmström, executive]

Thank you for the question. That 2020, I think on the negative part 2020 that we might not see in the next slowdown would be the access to accounts. COVID limited us to have service on site that limited that possibility for us.

On the other side, if I recall it correctly, we had a lot of government supporting programs that made us be able to keep a lot of the employees, employees we could have a quick ramp-up or ramp-down of this business again. A couple of other things that I think might be positive for us is, of course, then that we continue to develop the service business and as long as the operations are running even if CapEx is still there. OpEx continues and then that will support the service business.

And myself even if I don't have the evidence that this, I believe that sustainable applications like wind, power, battery, hydrogen many of these investments, I think many of our companies will -- customers will continue to invest in that and I think that will speak positively about that as well.

So there are some changes, but I don't see that we would be significantly worse. I think that could depending a little bit on how we get support as well, of course. But there is no structural things except for those things that I said and those are actually positive.

[Peter Kinnart, executive]

I might also add, for example, that the strategy of climbing the service level in the service organization has been quite successful. And of course, that means we also have a higher relative proportion of service plans into the portfolio, which is typically one of the elements that, of course, make the business more resilient.

[Operator]

The next question comes from Mattias Holmberg from DNB.

[Mattias Holmberg, analyst]

I'm a bit curious on the strength you see in Compressor Technique. If you could elaborate a bit on how much of that in sort of the current environment you believe comes from higher energy prices? I don't want to put the words in your mouth, but I have sort of a sense that you're downplaying a bit the urgency from customers to make these investments right here and now. So I'm curious to get some thoughts on that.

[Mats Rahmström, executive]

Yes. So I understand the question. And the link from the Russian-Ukraine conflict into a higher energy prices and then how that impacts the business, then, I guess?

[Mattias Holmberg, analyst]

Yes. I think essentially, if you're seeing much of the demand growth in Compressor Technique as a direct result of the high energy prices.

[Mats Rahmström, executive]

I think that's a little bit too early to say that the customers are taking decisions based on that. On the other side then, energy prices are a big factor for selecting your compressor or any other of our equipment and it's normally 75% of the costs. So every increase pushes customers to the premium around with energy efficiency, and also the sustainability designs-based targets and more and more of our customers sign up for that.

And I think there is a willingness in many regions around the world today to talk about those efficiency of the product itself. And also the CO2 platform and that is, of course, also linked to the financials in terms of energy costs.

So I think, it actually speaks in our favor to distance ourselves from the copycats out there, but also help our customers down their CO2 that they have in Scope 3 and probably Scope 4.

[Operator]

The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I actually wanted to ask on Industrial Technique. It just seems over the last couple of quarters, we've moved to quite a different place to where we've been historically in terms of the run rates on orders and clearly, there's a good tailwind in terms of EV, and I assume that the recent acquisitions or recent-ish acquisitions are making a difference as well.

But is there anything to point out in terms of kind of one-off nature or do you think this is the kind of sustainable level we should expect going forward given obviously the commitment from a lot of the OEMs on the auto side? I'm just sort of trying to understand if this is just a run rate that we can kind of assume going forward or whether -- is there anything we need to be a bit more cautious on?

[Mats Rahmström, executive]

I don't think there is any onetime effect at all. It's the transformation then. I think Tesla showed a way into electrified car market, and they also now show the profitability from those investments. And everyone has is playing catch up.

So we see very little fossil fuel type of projects. I mean it's mainly in the EV. So you can see the number of cars manufactured has not catched up with the record levels that we've seen in the past. But as we can see now that China versus Europe and America is almost doubling.

It's bigger in size, so we need to have a very strong presence. We have a very strong presence in China and in the neighboring countries as well. And so that transformation is what builds our business right now. And we gain market shares because we have these different technologies to build lighter vehicles and also help them with the battery assembly, which is engaged in 3 of our business areas.

And then you're absolutely right with the recent acquisitions that we have now, we take a bigger part of the Scope and with the investments today, if it was the tooling before we do more on the flexible automation today as well. But we just point out we are not a machine line builder at all, but we do flexible automation per station. So little bit bigger group, well positioned for the transformation is what you see in Industrial Technique industrial sector and also a boom in battery manufacturing around the world from both the OEMs but also Tier 1s.

[Operator]

The next question comes from Klas Bergelind from Citigroup.

[Klas Bergelind, analyst]

Klas at Citi. So I just want to come back to the outlook to confirm that the group outlook of somewhat lower demand into the fourth quarter is a reflection of service semi equipment weakness and relatively stable industrial demand quarter-on-quarter. Your China exposure is pretty big in VT. And I'm wondering if you've seen any weakness linked to the new export rules or if that is yet to come?

And then quickly a follow-up on the backlog in CT, book-to-bill now 1.15 getting stronger still, the backlog in VT, however, is shorter, 0.9 book-to-bill. I just want to ask on CT whether there is any preordering there at all or if this seems very secure to deliver solid sales growth into next year. Sorry, that was a lot of questions in one, sorry.

[Mats Rahmström, executive]

We'll try to take them one by one. In the outlook, yes, you're absolutely right. We see the trend in semis, so it's linked to that as well. And then I also mentioned general industry, could be a manufacturer of white goods or anything like that. And you can see the consumer brands struggling at this point.

So we can see a softer market there. So those are on the negative. But at the same time, I said that we see still a lot of applications for bigger machines, bigger projects, more strategic projects. And then we will see how that plays out with solar after that.

On the CHIPS Act, there's a limitation down to which accounts you can sell to. And on the technology level, if you can have American workers in your organization and the content of -- American content into your product.

And initially, when we do the -- if you I ask me, we don't have any Americans working for us, that is not a problem. We foresee then the cryogenic is the only product range that we actually manufacture in the U.S. and maybe some other small products limiting factor to us.

So the direct impact of whether this have the dry pump would be fairly limited. On the other side then, if the toolmakers in the U.S., don't have licenses to sell to these companies, of course, we cannot sell to these toolmakers that the product will end up in China anyway.

And this, I think we will see in the coming couple of months who gets licensing, who doesn't get licenses to sell in our markets. But the direct impact is fairly limited, that could be significant if we can see our customers in other parts of the world cannot import or sell to Chinese customers. I think that's the best I can do on that right now before any. And I think, Peter?

[Peter Kinnart, executive]

Yes. I think you had a question about the backlog around CT and if there's any preordering in that, and I think -- but we have discussed about preordering in Vacuum Technique and that has been the case for a while without any dual -- or double ordering.

But for CT, this is not really an issue, maybe a bit on the distributor side potentially to, let's say, stay ahead of maybe price increases. But I would say that is not minor compared to the bulk of the business that we are running in Compressor Technique.

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

I just wanted to ask a question around the compressor growth and the gas and process compressors, particularly. I think you mentioned a couple of kind of new areas of technologies for carbon capture, hydrogen. And obviously, you talked about sort of significant increases here. So I'd like to understand really kind of what is driving the significant increase. Is this really kind of the poor gas and process business into, say, industries like oil and gas and LNG? Or would you say kind of any of these newer technologies that you referenced are actually having -- are big enough already today to have a meaningful impact on growth rates?

[Mats Rahmström, executive]

I think those -- you picked up it absolutely correctly. And the segments you mentioned represent more than 50% of sales in gas and process for the quarter. It is there is a big shift from what it has been in the past that we have been working on strategically for quite a number of years to make that happen There is still business from refineries and from oil and gas in there, but it's not the lion's share anymore.

[Max Yates, analyst]

Okay. But I mean, on something like carbon capture, is that sort of a meaningful part of growth, would you say? Or is it really or not so much?

[Mats Rahmström, executive]

Carbon capture for most companies is still a project business and I say that at the smaller part. But if you then rank natural gas as one of the resources that is something in the part of the transformation that's significant for us.

And the hydrogen is also more on project business, but there is a number of project businesses out there right now. And it's important for us to be early into these applications to be selected as a supplier when it's commercially available in another way. And it's everything from transport to playing on, I think those experimenting in the products in many different segments.

[Operator]

The next question comes from James Moore from Redburn.

[James Moore, analyst]

Can I clarify an earlier answer and then ask one? Just on the earlier, we were talking about cancellations and I'd also like to ask on deferral policies. If a major semiconductor OE customer says, "Can we cancel," do they have to pay a fee? But alternatively, can they defer an order up to 6 months, 12 months? And is there a contractual limit to the time frame on deferrals?

And my question is, hypothetically, if the global semi CapEx was to fall 20% next year, say, would you expect to see a similar magnitude in the organic sales of the semi OE division of VT? Or would you expect to see a better outcome because of backlog protection?

[Mats Rahmström, executive]

The contract with the different OEMs could look quite differently. So that might be not one answer. But I would assume as a group would be more of the forgiving part to maintain a long-term relationship with customers and maybe we rearrange it a little bit to help them with something else or if they need to push it, we try to support that as well.

It is only a handful of customers that makes a difference in this segment and I think you need to keep a good relationship. And that said, there still might be penalties in the per contract and I don't have details on that presently. And then there was another question, what was the second question?

[James Moore, analyst]

Just really if global semiconductor CapEx all in was to drop 20% next year, say. I'm just trying to understand because traditionally, you have seen a much more direct one-for-one relationship between the organic sales, not the orders, the sales of the semi OE division to that number. If we were to see that again, would you expect that same one-for-one relationship?

And I'm conscious of your backlog or do you think because of the specific U.S. Arizona style projects to get sovereignty nationally in the U.S., Europe, China, that we might see something that's different, if you get the question?

[Mats Rahmström, executive]

Yes. But of course, if there is a huge drop for many of our customers that will, of course, impact us. But I'm not sure we see slow down, as we said, in 2023. And we don't know so much more than you can read yourself in terms of CapEx outlook for the industry.

And what we have learned over the years is that they are normally wrong. And we try to stay close to the customer and catch them. I mean our presence with these key accounts are so -- and the relationships are so close. So we -- if they continue to develop the business, we will for sure have our share of that. If there will be a sharp decline and that will impact us equally much as well.

I'm not sure if I helped you James, but that's how we see.

[Operator]

The next question comes from Rizk Maidi from Jefferies.

[Rizk Maidi, analyst]

I just wanted to ask about the items that you were not able to compensate for and that was sort of spot market buying, airfreight and factory inefficiencies. Whether you've seen any changes or any easing there? And any easing on the supply chain constraints, please, I'll stop there.

[Peter Kinnart, executive]

Yes. Maybe it's not so much that we -- we can't compensate for it because, of course, you could continue to push prices up to the limit that you would actually be able to compensate, so it is more that -- it's almost intentional. I would say that we don't really want to compensate for our own inefficiencies in our factories that are resulting from the supply chain issues because those will be only temporary. And at some point, as demand might -- general demand from customers, global demand might go down a bit, maybe there will be some easing in the supply chain.

And that would then, of course, result in the fact that the items are flooding into our factories. We were able to produce and we get back to the normal utilization that we would like to see and we would be able to get rid of those inefficiencies. The same is right for the spot market buying. If the market for the chips eases up a little bit and they become more easily available again then, of course, those unusual spot market buys will actually complete disappear and we would normally use our regular channels to buy these items.

So we would rather absorb that for the time being, than to try to even put that burden on the customers. Again, from a long-term perspective, how we want to deal with the customer and how we want to secure the long-term business with those customers.

[Rizk Maidi, analyst]

Interesting. And just very quickly, if you could just on CT, if you could just give us a sense for how big is the large industrial compressors and gas and process compressors as a percentage also of overall CT?

[Mats Rahmström, executive]

If you refer to the gas and process business, it's approximately 10% of the CT.

[Rizk Maidi, analyst]

And the large industrial compressors as well, Mats, within the industrial application?

[Mats Rahmström, executive]

We haven't made that reference externally, so.

[Operator]

The next question comes from Andreas Koski from BNP Paribas Exane.

[Andreas Koski, analyst]

I would like to ask on higher selling prices. Could you please give an indication of how much of your organic order growth?

[Mats Rahmström, executive]

Andreas, it's very difficult to hear you. It sounds like you're in a box.

[Andreas Koski, analyst]

Okay. Give me 1 second. You hear me better now?

[Mats Rahmström, executive]

Yes. Yes.

[Andreas Koski, analyst]

Sorry about that. So on your selling prices, could you please give an indication of how much of your organic order growth that is related to higher selling prices and if there are any major differences between your business area?

[Peter Kinnart, executive]

Well, on the actual numbers on the pricing, we don't disclose that information. But as I already indicated, there are differences between the business areas. Those business areas or even divisions within the business areas are more exposed to a very broad-based customer base, are more likely to be able to transfer prices into the markets. Where if we talk about divisions or business areas are more exposed to key account type of channels there, it is much more difficult given the type of long-term contracts that are in existence and that are very hard to kind of deviate from.

So then when I talk about those key account type of markets or channels, then of course, we talk mainly about semi. First of all, as Mats mentioned, it's always a handful of customers that we are dealing with.

And then the second one, which probably stands out mostly than motor vehicle industry with a number of very large players as well and they're rarely being used.

But you are talking about general vacuum, for example, broad-based small industrial compressors, then we would typically, of course, have a very broad-based customer base and that gives us a little bit more room to be able to transfer those price increases to the market.

[Andreas Koski, analyst]

Yes, I understand that. I just wanted to understand the magnitude of your higher selling prices. But okay, if you don't want to disclose that, I understand. Can I follow up on James' question? You have accumulated orders on hand of around SEK 15 billion since Q1 2021 for Vacuum Technique. And I guess most of that is related to semi equipment. So how much of that backlog do you expect to deliver in Q4 and during 2023?

[Mats Rahmström, executive]

I don't -- I'm looking at Peter here. I don't have a number on that. I mean, every of our factory is running at full capacity right now, and it's really down to our sub-suppliers as well. If they can commit to give us products on time. And it's a little bit wait and see and that is also struggled through commit to customers, of course, and to make sure we get that. So we don't have a firm number that we would like to commit to that at this point.

[Andreas Koski, analyst]

Okay. And lastly, do I understand it correctly that preordering stopped in this quarter...

[Peter Kinnart, executive]

Can I just interrupt , sorry, can I please interrupt to give the opportunity to 1 or more of your colleagues to ask because still as we have only very few minutes left, questions to consider. Thank you, Andreas.

[Operator]

The next question comes from Gustaf Schwerin from Handelsbanken.

[Gustaf Schwerin, analyst]

Just a follow-up on the U.S.-bound equipment. On the Chinese exposure that you have in Vacuum, do you have a rough split or how it looks between domestic and foreign players as there seems to be some exemptions like we're already seeing that from TSMC, Samsung already?

[Mats Rahmström, executive]

We are looking at each other. What is that you like us -- we didn't fully understand what you're looking for.

[Gustaf Schwerin, analyst]

It looks like in the bands, there are some exemptions for foreign players in China. We've seen announcements from like TSMC and Samsung already that they've gotten, I think, it's a 1-year exemption from this band. So I'm interested to hear of the China exposure you have, do you know roughly how much is actually domestic players and how much is foreigners?

[Mats Rahmström, executive]

In our case, it's from the new CHIPS Act. It is very limited impact on us. It is the product that we get from the U.S., which is cryogenic, which goes on the pumps, which is very, very small part of our total business. So if our customers that supply into the U.S. crude supply, then would have limited impact on us. But if they don't get licenses, I don't know who will get licenses at this point. And of course, it could be a larger big impact on us. But the direct impact for us as being a Swedish, English, Belgian type of company, it's not the big impact that is caused.

That concludes the question.

[Peter Kinnart, executive]

There we are out of time now. So sorry, Andreas, for interrupting you. I just wanted to give 1 other participant the chance to raise 1 more question. And I see that there are a few more people in the line -- on the line that still have a question and have not been able to ask.

But of course, our Investor Relations team is at your disposal to answer those questions that you might have. You know how to contact them. So please reach out to them, and they'll be happy to help you with these questions. That's it from our side. So thank you very much for attending the call and for your very interesting questions. I would like to hand over now back to the operator. Thank you very much.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.