Atlas Copco AB

STO:ATCO A

Earnings Call Analysis

Atlas Copco Reports Robust Q3 Results

Atlas Copco Q3 showcased a formidable earnings narrative with orders exceeding expectations at SEK 42.6 billion, marking a 5% growth. This surge was fueled primarily by acquisitions contributing 4% and currency effects adding another 2%, somewhat offset by a slight organic decline of 1%. Resourceful areas like Asia and Europe shone brightly with 3% and 5% growth respectively, while Americas remained stable. The quarter was also celebrated for a record-breaking operating profit of SEK 10.1 billion at a robust margin of 22.7%. Revenue accrued reached a noteworthy SEK 44.5 billion, propelled by significant contributions from three out of four business areas experiencing double-digit growth. The persistent expansion in services across all sectors further solidified the company's resilience amidst economic uncertainties.

Atlas Copco Weathers the Storm with Strong Margins and Record Profits Despite Organic Sales Dip

Atlas Copco, the Swedish industrial company, has unveiled its financial performance for Q3 2023, presenting a mixed but resilient picture characterized by stable margins and profits in a challenging market. CFO Peter Kinnart led the discourse, shedding light on the company's robust growth in operational profits and a milestone achievement of exceeding SEK 10 billion for the first time. Despite a slight organic growth contraction of 1%, Atlas Copco demonstrated agility by achieving 5% order growth bolstered by strategic acquisitions and favorable currency effects.

Diverse Geographic Performance with Steady Growth in Key Regions

The company's global footprint revealed uneven but positive developments. Asia, accounting for 38% of the business, reported a 3% growth, Europe delivered a 5% increase despite cautionary expectations, and the Americas continued to excel with remarkable performance, signaling robust demand across key markets.

Segment-Wise Synopsis: Compressor Technique and Industrial Technique Lead the Way

Compressor Technique stood out with a commendable 24.9% operating margin, as large compressor deals and service growth propelled revenues to record highs, outshining a somewhat stagnant small industrial segment. Industrial Technique also registered strong organic growth spearheaded by general industries, notably in aerospace and off-highway segments, marking impressive revenue growth and profit margin appreciations up to 22.5%. Power Technique celebrated a 20% operating margin, illustrating the success of its diversified portfolio and strategic acquisitions, despite undergoing internal debates on seasonality impacts in the rental business.

Vacuum Technique Stumbles Amid Lower Demand

The Vacuum Technique segment faced headwinds with declining growth, attributable to subdued demand in the semiconductor sector, impacting manufacturing efficiency and resulting in lower margin leverage compared to other business areas.

Financial Health and Prospects: Solid Profits and Prudent Asset Management

Atlas Copco's financial health remained sound with an after-tax profit increase of 19% to SEK 7.8 billion and strong returns on capital and equity, reflective of a disciplined approach towards cost and asset management. The balance sheet expansion from SEK 170 billion to SEK 194 billion indicated strategic investments in acquisitions and rental equipment, aligning with the company's long-term growth objectives. Despite a slight negative currency impact, the profit bridge analysis depicted satisfactory margin improvements, and future currency outlooks are expected to remain stable, with potential slight negatives.

Guidance and Investor Insights

Looking forward, Atlas Copco provides a cautious yet optimistic guidance, signifying an operating margin of 22.7%. The company anticipates a return to normalized effective tax rates in the vicinity of 23% to 23.5%, in alignment with previous forecasts. Nonetheless, the leadership exudes confidence in the company's strategic direction and resilience in face of market uncertainties.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Atlas Copco Q3 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CFO, Peter Kinnart. Please go ahead.

[Peter Kinnart, executive]

Thank you, operator. Good morning and good afternoon, all of you on the line. Ladies and gentlemen, it's my pleasure to welcome you to this third quarter conference call on the results of the Atlas Copco Group. Together with me is Mats Rahmström, and we will guide you together through the material and of course, answer your questions. .

But before I hand over to Matt, I would like already now to ask you that when the Q&A session starts that you would all please ask 1 question at a time in order to make sure that all participants that have questions are able to bring it to the surface and we can try to answer it to the best of our ability. Thank you very much. And with that, I hand over to Mats to start the Presentation.

[Mats Rahmström, executive]

Okay. Thank you so much, Peter. On the front page, I thought it would be interesting to see. We have talked about this bubble curtain application for specialty rental, specialty rental did really, really well. So maybe to honor them then they used this front cover. So then this picture down the show when they're building a wind turbine. And if you look closely, you can see that there is a curtain around the building platform then to protect the sea species there. And if you look really, really close on the boat on the bottom part, there is actually 21 oil-free compressors there from the specialty rental team. So this is what makes us excited when we look at our day and maybe Page #2 also makes us quite excited.

So orders received, I must say came in above our expectation at SEK 42.6 billion, so 5% growth, 4% comes from acquisitions, 2% also from currency. And then that, of course, leaves us with 1% -- minus 1% organic growth for the quarter. And if I look at the business areas, I can see that 3 out of 4 then still has organic growth, which I think is outstanding. So Compressor Technique, up 4%. Industrial Technique, up 3%, and Power Technique, up 4%. And considering the uncertainties in the business environment, I think we quartered solid, but I think it's quite a strong performance by all the teams around the world.

And as you can see on the tax [indiscernible] towards large and industrial compressors continue. So it's the strategic long-term business. We still get a lot of orders there, and strong position for us with , if we call them sustainable segment, it could be battery, it could be EV transformation. The large compressors from CT could be [indiscernible], it can be different gas system but it is still doing very well. And if you go down a little bit as growth for Power and flow equipment. These new acquisitions, [indiscernible] and [indiscernible] doing really, really well for us, both in terms of sales and margins. So they delivered better than expected, so that's very positive as well.

And then you can see that from an operational point of view that most of our customers are running a lot of manufacturing. So Service is continuing to grow in all our business areas. And that, of course, gives us the resilience well when things are a little bit slower. Sequentially, we were down 3%, and we recorded a record revenues for the quarter with SEK 44.5 billion and the same thing there that we could see a strong growth on revenues, 3 out of 4; CT, up 14%; IT, up 19%; and Power Technique, up 18%, so double-digit growth for 3 out of the 4. And if you look at their level on the graph, you can see that, of course, in invoicing then, revenues is on record levels, but also orders received is quite a good level. So we can see some quarters earlier, but the past years, we have never been on this level before. So still quite strong orders received.

You go to Page #3. And then we then have a record operating profit. It's the first time and a milestone for us to be at SEK 10.1 billion. So first time about SEK 10 billion. At a very strong margin at 22.7%, and that gives us a 21% growth for operating profit. And just another milestone is that all our business areas then coming at the operating margin above 20%. So Compressor Technique at 24.9%, and vacuum at 22.8%, and Industrial Technique at 22.5%, and Power Technique then they are really, really happy about this that they're 20.0%. So we think that was quite a fantastic achievement as well and maintained a high return on capital employed at 30%.

Then we go to Slide #4. So this is the geographical, the light blue box gives the last quarter. So if you start in Asia, you can see it's 38% of our business and 3% growth. Compressor Technique continue to do really, really well in Asia, Vacuum, there's a little bit of a split there. China in semi was strong, and outside China was weaker down. Power Technique did fantastically well with more than double-digit growth. And Industrial Technique felt somewhat of a softer demand from the auto sector.

If we go to Europe, you can see it's 26% of our business and 5% growth. And maybe you flagged earlier that Europe would be weaker. What we have seen in this quarter is that Compressor Technique has been really strong, done really well in service, continue to do well in gas and process, but also low pressure. And also Industrial Technique and there we can see that a lot of automakers are catching up on the EV transformation and also the general industry did quite okay as well. And also Power Technique was [indiscernible].

In Americas done 27% of business, and you can see it's the flat development, and that's mainly due to the development in Vacuum in semi. Compressor Technique was really strong. We can see a lot of product business, carbon capture application, hydrogen, EV transformation, EV development and that EV also links into industrial technique that was also strong in the auto sector. If you go to Africa, Middle East, believe that there are some under investments in oil and gas, and we can see strong development for Compressor Technique in the region, and it's 5% of our business. And then in South America, CT did really well and also Power Technique did really well and [indiscernible] in that region.

If you go to Slide #5, that you can see then the organic growth development per quarter, and slightly, slightly down then for this quarter with minus 1%.

On Slide 6, you can see the bridge, the sales bridge, and the structure changes is, of course, the acquisitions that we had done in the last 12 months. You can see both on orders and revenue, it's 4%. And I think still we have quite a strong pipeline for acquisitions. Currency still support us, and you can see then the organic, which confirms minus 1 and plus 10.

Move to Slide #7 gives the pie chart of the group. And you can see in the boxes the development. So Compressor Technique with 46% and 4% growth. And then you can see Power Technique with the same 4% and 16% of the business. And if you are interested to learn more about Compressor Technique and Power Technique then you should note down that on May 16, 2024, we will have a Capital Markets Day in Antwerp then to focus on these 2 areas. And you can also see that we have 16% of Power technique, and we have 17% of Industrial Techniques. I think Industrial Technique feels that they are coming uncomfortably close to Power technique.

We go to Slide #8 that focuses on Compressor Technique. 20 billion orders received, really, really strong, continue to see strategic business, large-sized compressors, good execution into sustainable segments as well and things like these investments continue. And smaller industrial, that we flagged for what a little bit, but flat this month. So I think quite a strong performance there, and then continued strong growth for service. And I can see that we are getting quite good at predicting and prescriptive the legal connectivity with our products that is gaining market shares as well. Record revenues here as well, 14%, SEK 19.5 billion. So that's promising and record profit then. And I think 24.9% is quite a remarkable margin considering also that they have negative effects from currency, sales mix and acquisitions.

And if you look at the innovation box down there, last month -- last quarter, I think I introduced some new products for the hydrogen market, and this is continued expansion then, and this is expanded for the hydrogen liquefaction process. And you will learn more, of course, if you come to see the Capital Markets Day. And you can look at the level as well being very, very strong for us.

And then go to Slide #9, it's under the Vacuum Technique. We have seen continued decline then in -- it's clearly down, but we also saw softer demand in the quarter for Industrial and Scientific, but continued growth for service. And I think you could look at the graph here that even if we say that we are down significantly or markedly, you can still see that compared to earlier years, this is quite a good level, but there is, of course, is quite a big gap now between revenues and orders received that we are ready to adjust if needed so.

Still strong orders on hand in Vacuum and all other business areas as well. And revenue then, SEK 10.8 million, you can see pushouts from customers that we have the equipment ready, but they asked us to wait a little bit with delivery, either they are waiting for something else or they have delayed their projects.

Operating profit, 22.8%. We're happy with that. And the strategy for us in Vacuum has not changed at all. We continue to focus on innovation. We continue to focus on the digital journey in service and also the operational platform for us. And we can see, although some of them delayed that a number of constructions in semi, for example, then has never been higher than it is today. So we expect this business to be back later.

Industrial Technique continued strong organic growth. This time, it was GI that did really, really well. And that surprised me a little bit. And I dig a little bit deeper on GI. And we can see that smaller orders, smaller businesses, that is slower but also GI is getting more of the project business and project business for us could be that we sell a complete workstation. It could be software involved, it could be sockets, could be screw feeding and more automation. So if that trend continues over a couple of quarters, then we have really succeeded with that strategic move to get more of the scope in the assembly stations.

And we also see more and more electric tools in GI as well. And 2 segments that stand out was aerospace and off-highway that did really, really well. Revenues, up 19%, at SEK 7.3 million and record operating profit and margin at 22.5%. And that little tool that is very difficult for you to see is actually on our sustainability journey. This hydraulic tool is used in the wind turbine when you'd actually assemble the towers.

Power Technique, those are the team that's so happy about the 20% margin, but also done strong order growth at 4%, [ SEK 6.3 billion ]. And one of the things that we are debating a little bit internally, then we always have been seasonality in this business. It's still seasonality in the business due to the rental company. But over time, we will see less and less of that because we are building on our service offer. We're building on a specialty rental offer, but also the pump business will make a huge difference as well with less seasonality in the years to come.

Equipment was quite okay, specialty rental did extremely well and service did well and that ended up in the 4% growth. Record revenues for them as well, 8% organic increase and then the record operating profit at 20% margin. It's a little bit fun, then you can say that the lowest operating margin in the group is 20%. So I think that's a strong signal.

Summarizing Power Technique, strong orders, record revenues, record operating margin, 20% margin and the acquisitions are doing real way. So you understand that they are happy.

Then we come to Slide #12, the profit and loss. And for guidance then, you can see that we indicated EBITA, which is the amortization of intangibles that we take away and then we would have been at 24% and the EBIT -- operating margin at 22.7%. Peter?

[Peter Kinnart, executive]

Thank you, Mats. Then when we go down further on the income statement, we come across the net financial items, which you can see are somewhat negative. And that, of course, has everything to do with the current cash position, net cash position we have as well as, of course, mainly the increased interest rates that we are all exposed to. Then we have a profit before tax of just a few millions south of SEK 10 billion and an income tax expense of [ SEK 2.1 billion ] that is an effective tax rate of 21.4%.

And that is actually a surprisingly low effective tax rate for -- even also for this quarter. And it had to do with the fact that we had compared to normal quarters, less or fewer negative one-offs related to tax audits that are going on across different entities, et cetera. And that gave a kind of onetime effect, you could say, on the tax cost for -- going forward, we would assume that the tax rise effective tax rate would actually go back to previous normalized levels, somewhere around 23% to 23.5%, somewhere in that range, we expect it to be.

That gives us an after-tax profit for the period of SEK 7.8 billion, a 19% increase compared to previous or same quarter previous year and gives us the basic earnings per share of SEK 1.60 per share, return on capital employed of 30% and return on equity of 32%.

Moving then to the profit bridge on Slide #13. What I would like to say here is that we are very happy with the way the profit has developed in the sense that there is a very strong drop-through. In the income statement, we have a slight positive impact from the share-based LTI programs. We have a little bit of dilution from acquisitions, but that is actually well in the ballpark as expected in that first year of the acquisitions.

And we also have a small negative currency impact to be digested. But nonetheless, thanks to increased organic revenues, we managed to increase the margin with a good percentage point. And then when it comes to the currency outlook or the -- we would assume that it would be rather similar to what we have seen now, maybe it would turn slightly negative, but at least hovering around 0 based on what we know today.

Then if we move on to the next slide, I can give a little bit more color to the bridge of the respective business areas. For Compressor Technique, the margin has gone up even further from the already high 24.2% to now even 24.9% in spite of both negative impact from acquisitions -- dilutive effects from acquisitions and from currency. And of course, the fact that we have had a lot of focus over the last few years on pricing, but also good volume, et cetera, have contributed to this positive development.

On Vacuum Technique, picture is slightly different. Even though one might say that underlying activities are very similar across the 4 business areas when we think about how we work with pricing and how we try to improve the margin to counter the cost impact that we have seen from the past. But of course, unfortunately, here, we see a bit of the drop in the growth pushing through into the income statement.

And so as a result of that, we are able to get more or less margin as we have otherwise, meaning that there is a relatively lower drop-through than we have seen in Compressor Technique, for example, or in the other business areas for that matter. And that is mostly driven by the fact that the positive effect that we see in the other business areas or in Vacuum technique, a bit compensated by lower efficiency, mostly in our manufacturing entities as well as in our service technology centers as, of course, the drop demand from the semiconductor industry reflects also in our utilization.

On Industrial Technique, strong revenue development pushes the margin up with a very good drop through there as well, going now from 21.4% to 22.5%, and with also there quite significant relative negative currency impact and a very minimal impact from acquisitions.

And in Power Technique, last but not least. A very strong drop-through there as well with a slight positive impact even from acquisitions, as Mats already said, with very good performance in the acquired entities. Also there is a negative impact from currency, but then a good boost of the underlying organic margin, you would say, so that we end up at 20% and all business areas have now reached the milestone of crossing the 20% operating profit margin.

Then I move to Slide #15 to the balance sheet. There, I compare year-on-year except last year in September this year. We see, well, mostly increases along many different lines from SEK 170 billion to SEK 194 billion. There is an increase on the intangible assets, which is purely related to our acquisitions and actually mostly linked to the goodwill.

We have also continued investments in the rental equipment given the very strong demand we have there. The other property, plant and equipment, I think also doesn't come as a surprise due to the fact that we have been talking quite a lot about investments in different sites across the globe in order to support our local-for-local strategy. And the right-of-use assets goes into the same bucket, you could say because this is, of course, linked to also buildings that we are leasing and using in the business.

The next important point to mention is, of course, the inventories that have gone up year-on-year by about SEK 5 billion. If you compare to the previous quarter, we are actually quite flat, even slightly down. And that I think shows in a modest way, I have to admit. But it does show, of course, the efforts that the business areas are putting into recalibrating their stock levels in order to have a lower ratio of inventories going forward. So I think even though here, we still see quite a significant increase. I think we are gradually getting to the point where we are able to bend that trend and get back to more normalized inventory levels.

On the receivables, also an increase of SEK 5 billion, purely linked to the growth of the business, the revenue increase we have seen. There's no alarm in our receivables as we see it, the ratios are quite stable and I think that this is a healthy receivables portfolio. And then, of course, the cash and cash equivalents, they go up by about SEK 2.3 billion, which actually today has dropped significantly due to the payout of the second part of the dividend.

Moving to the equity. The increase by SEK 15 billion is purely related to the earnings from the income statement. The interest-bearing liabilities have gone up slightly but nothing major to comment on.

And also noninterest-bearing liabilities have gone up by about SEK 5 billion, which is a different, let's say, a cumulative effect of different things. increased advanced payments, which has been a big focus in order to kind of count a little bit the increase of the inventories. The payables that have gone up year-on-year by about SEK 0.5 billion and then other liabilities and accrued expenses that also have gone up in line with the growth of the business, I would say. So nothing alarming here either to mention.

If I then move to the cash flow on Page 16. Then the first thing that catches my eye at least, is the very strong operating cash surplus of SEK 12 billion. For the year, we are now at SEK 33.7 billion. The financial items are also here, of course, giving a bit the same picture as we see on the income statement due to the exact same reasons. The taxes paid are up, and this is due to 2 main reasons similar to the previous quarters. On the one hand, of course, the increased profitability also means that we will pay more taxes in absolute terms. Secondly, we also see that we are growing faster in countries where the corporate income tax rate is nominally higher, so we have actually a higher tax rate for the group as a result of that.

Then we see the change in working capital of about SEK 1 billion, and that's in a very shortened version, I would say is purely due to the fact that the payables have been going down, and this is also very much linked to the interest rate development. As you might remember, we are making quite a lot of use of supply chain finance systems, and that has been a fantastic tool to manage our working capital over the last decade, I would say, at least.

But now that the interest rates are going up, those companies that are actually cash rich and are participating in the program or gradually stepping out now because they do not want to pay the high interest rates in order to get the money faster and considering that they do have the cash and that they can actually don't pay that kind of interest rates for themselves because they have probably a similar or maybe even slightly better credit rating than the Atlas Copco Group.

Then moving on to -- that gives us cash flow from operating activities after also a bit more investment in rental equipment of SEK 7.9 billion, almost SEK 8 billion. And then the investments in property implant and other investments are very similar to the same quarter last year.

So ultimately, the operating cash flow ends up at SEK 6.6 billion compared to SEK 5.7 billion a year ago. and now we are reaching SEK 14.4 billion for the full year. The acquisitions were SEK 315 million, where last year, of course, the number was much, much higher, which had to do with a number of different acquisitions, but then I think the largest acquisition in that bracket was LEWA and a few other companies across the different business areas. So with that, the financial statements. And I would like to hand over back to Mats to comment a little bit around the near-term outlook.

[Mats Rahmström, executive]

Okay. So we are trying then to estimate and see what we have learned in Q3 with the customer activity. So it's sequentially between Q3 and Q4. And we said that the customer activity level will weaken compared to the third quarter. Probably that doesn't come as a surprise to anyone. I must say though that it's been -- it's always difficult. This time, I think it's a little bit more difficult to predict the future a little bit what will happen.

But we see some negative signs then. Of course, we continue to see that the smaller day-to-day business is slower and softer for us. And there is a hesitation on some of the products and programs. It takes more time to get the decision. We saw somewhat of a slowdown on EVs in China. On the other side, we saw strong EV development vector in Europe and North America. The increased protection is in semi, makes it difficult to predict and the geopolitical situation, of course. And probably the interest rates that put a lot of pressure on consumers with come to us as well.

On the other side, I think I repeated myself more or less from the last quarter. Orders received was only down 1% organically. You can see that the resilient service business that we have growth in all 4 business areas. The strategic business is continuing bigger deals, even if it takes a slightly longer then. Position in what we call maybe sustainable segments, modularized segments like automation, EV battery, solar, wind is developing really well for us, and we don't see that people are backing off from that. It might take a little bit more time, but I still think that's strong. But all in all then, we said that it will be a weaker customer activity in Q4 compared to Q3.

[Peter Kinnart, executive]

Thank you, Mats. With that, we have gone through the full presentation. And we would now like to hand over back to the operator in order to start the Q&A session.

[Operator]

[Operator Instructions] The next question comes from Andrew Wilson from JPMorgan.

[Andrew Wilson, analyst]

I wanted to ask around the compressor business. And I guess thinking about the sustainability of what feels like it's been a very good group, I guess what we describe as sort of the newer areas and newer applications. I guess just thinking about from a kind of macro perspective, I know you've sort of alluded to maybe decision-making taking longer.

If we think about the macro impact on that -- on those segments and appreciating that it's a number of different product lines and applications. Is this just a business which is going to continue to grow as you see it? Because you're coming from a relatively low base in markets which are just somewhat detached from sort of GDP and IP expectations? Or do we have to be mindful of the market within that? I'm just trying to sort of separate the dynamics there than maybe other parts of the compressor portfolio that we've kind of, I guess, core compressor we've talked about over the years. Hopefully, you can just help us with a bit of color on that.

[Mats Rahmström, executive]

Yes. If I start, I mean, we see right now and going in the coming years that the sustainability segments if you define them as that is probably our biggest opportunity. And of course, they are in different stages. Linked to the CT, if you say, battery manufacturing, I mean, it's up and running. That type of transformation is really happening here now, so that we can really, really confirm. Then you see that there is a lot of project business around hydrogen.

Commercially, we don't think it's there just yet, but we are building the portfolio. We think we will be there if it's for transport or driving engines or whatever it might be. But for us, it's something that we think will happen, but it's not so much now. It's more with project business. We also get more and more carbon capture business, which is also then you compress some sort of gas. And in general, if it liquid natural gas or any other gas that needs to be compressed, transported somewhere, it is really, really good for Compressor Technique and XPANDER.

So for us, we believe that this is a segment that is really interesting and we haven't measured this quarter, but in the previous quarter, we said that around 10% of the group's business has been in this new identified segments. We don't have a true measurement, but we are trying to estimate it a little bit. So yes, it's a significant part, and it continues to grow. And I think it's more sustainable throughout the slower period than anything else.

[Andrew Wilson, analyst]

Sorry, Mats, can I just clarify the 10%? Is it 10% of the group's revenues or business or CT's business?

[Mats Rahmström, executive]

It's actually for the group.

[Operator]

The next question comes from Sebastian Kuenne from RBC.

[Sebastian Kuenne, analyst]

My question relates to VT. I would like to know what the development of the capacity utilization is over the last couple of weeks and what portion of business goes into China, either directly or indirectly through the [indiscernible] clients.

I'm sorry, through the clients that makes semiconductor equipment -- Fabrication equipment like Applied Materials, Tokyo Electron and so on.

[Mats Rahmström, executive]

I don't know if I have the -- I tried to just elaborate a little bit of color on the VT business then. Of course, it dropped down the semi orders, but it seems to stabilizing on a lower level at this point. We can also see that the number of cancellations have decreased quite significantly from what we saw in Q1, right? Was it Q4? So that we see. We see the utilization of our customers is at a lower level right now by a bit between 7% to 8%.

And it probably needs to come up around 90% before you see big CapEx investments again. And as you say, that I think inventory needs to come down, price needs to come up a little bit. And then utilization is, of course, and then we will see the CapEx and the first mover are most likely the ones that you mentioned, the Applied Materials, Tokyo Electronics, that are the 2 makers.

But at the same time, the society is really changing in this direction. We have just the start of AI, et cetera, et cetera. So the number of projects in semi, it's more than we had seen before. But there are pushouts right now that we are adjusting to. But over time, we are very, very positive to this market.

[Sebastian Kuenne, analyst]

What does it mean for Edwards in the U.K. in terms of utilization then?

[Mats Rahmström, executive]

We don't share our utilization externally.

[Sebastian Kuenne, analyst]

Okay. And China exposure was the other part.

[Mats Rahmström, executive]

Sorry, what was that?

[Sebastian Kuenne, analyst]

The China exposure of VT directly that goes to China?

[Mats Rahmström, executive]

That we don't share either. What I did share was that we can see that there is quite a strong business in China to deliver equipment there, and we see less than in other part of Asia and America. So I think for this quarter, I think China has been the most positive on the semi side. .

[Operator]

The next question comes from Klas Bergelind from Citi.

[Klas Bergelind, analyst]

So Mats, you sort of answered my first question a bit in the outlook comment. It seems like you are factoring in some quarter rather than having seen any major change from our customers. But it's just that you have changed the wording to weaken from weaken somewhat, when you reported last time? I'm just trying to understand the magnitude between the last message and now. To me, it feels more like end markets from a high level going down such as battery led demand in Asia rather than anything materially changing on the general industrial side. But yes, if you could sort of talk through a little bit the change in message?

[Mats Rahmström, executive]

I think that we said somewhat at the time, and of course, it should not be linked directly to our orders received. It's more to the customer activity. And we saw the same thing. But the quarter came out better than expected at only minus 1%. But then we have seen some of these trends that we talked about earlier, the hesitation, a little bit less quotes in some areas so that we can see that there is a weakening. How much that is -- and that's why you don't have the somewhat there. It's just [indiscernible], it's a little bit and maybe show that there is more uncertainty this quarter in the statement than we had before.

[Klas Bergelind, analyst]

Okay. Very clear. Just a quick follow-up on the distribution part in CT. Here, you sell more through distributors sell mainly direct across the total CT. But if you just look at small and medium-sized compressors, if you can talk about channel inventories, what did you see through the quarter and perhaps a bit into October across geographies that would be very helpful.

[Mats Rahmström, executive]

I mean I don't even have those numbers. But what we have seen, of course, is that during the COVID situation that the batches to distribution was significantly higher. And now we have delivered on many of those industrial smaller compressors. So I would assume that part of the decline is, of course, that they have stocked up. I don't have a view on and we don't know the inventory level at our distributors, that probably they knew in the customer center, but we don't consolidate that. But I'm sure that's part of the weakening that they are waiting to sell a little bit of the stock that they have.

[Klas Bergelind, analyst]

Yes. No, I thought it was interesting to give you that small and medium size was flat year-over-year, which I think was better than.

[Mats Rahmström, executive]

That was unexpected.

[Operator]

The next question comes from Ben Heelan from Bank of America.

[Benjamin Heelan, analyst]

I wanted to ask on pricing, particularly in compressor and power and how you've seen pricing evolve in the third quarter versus how it was performing in the second quarter.

[Mats Rahmström, executive]

We don't really divide the pricing. But over a period of time then, we could see that when the inflation increased prices hit us during the COVID years that we dropped slightly down on gross margin. But if you calculate this quarter, you will see that we are back on levels that are slightly better than 2019. And so we are extremely happy with the work done and that the customer accepts the value proposals that we have, and that's really the main thing for us that we continue to increase the value for customers and that we do by all these new products that we introduced every quarter.

So it's a mix then. If you look at a same basket as last year will be the same product, then of course, it's positive. But if you add on the new products as well, then we don't introduce products with low gross margin. So we always challenge ourselves. So every new product, increased value for customer increased value for us. .

[Operator]

The next question comes from John Kim from Deutsche Bank. Please go ahead.

[John-B Kim, analyst]

I want to speak a little bit about Vacuum Technique. Can you comment on possibly the different headwinds or tailwinds that you may face next 2 to 3 years? I understand you may have opportunities with near shoring and more localized production. But we are hearing things about order push-outs And I'm trying to think about the overlay of the 2. I know you haven't seen cancellations, but are you experiencing more delays in invoicing and delivery within VT? And is it specific to any of the end markets, i.e., memory.

[Mats Rahmström, executive]

Yes. But we do see push outs in the deliveries. I mean we are talking 5 to 6 customers that make this market and as we said before then, we've seen an acceleration in China in this quarter, and we've seen pushouts in Americas and other parts of Asia. When we internally then looked at the CapEx going forward, and we set the stake at 2030, I think, I'm looking at Peter, but we try to really understand is how big is the U.S. and how big is Europe?

And if you look at some of the products that have been announced and some of the things that we are aware of, it's still such an unbalanced view on this that 70% of the investment still happen in Asia. We believe that around 10% will be in Europe and maybe 20% will be in Americas. So still, we need to be the best in Asia, and then we need to take the new opportunities in Americas and Europe, but most part of the business is in Asia still.

And I think in the beginning of the year, we were hoping and believing that we could see maybe a pickup of the semi business at the end of this year. That seems unrealistic now and we look at the quotations that we have and the speed of some of these projects. And of course, we follow every project around the world about the detail, and we know that many of these projects are delayed. At the same time, we see that there are more products than ever before.

So when the business is back, it might be back with quite significant investment and we don't think it's Q1. Is it probably Q3, Q4 right now that we believe, but we don't have any magic. We don't know. And I think probably the best trend is to look at the toolmakers, They'll be probably ahead of us and if they are ahead of us, we will start selling the turbo pumps first, which is part of the tool makers offered to end customers.

[Operator]

The next question comes from James Winchester from Barclays.

[James Winchester, analyst]

I was wondering if you could provide a bit more detail on the moving parts within gas and process. For example, was it kind of back to north of 15% of orders this quarter? And of course, it's been a super strong year for gas and process. But kind of looking forward, how are you viewing kind of more normalized run rate? .

[Mats Rahmström, executive]

The gas and process part of CT Europe?

[James Winchester, analyst]

Yes, of CT.

[Mats Rahmström, executive]

Yes. I mean it's been around 10% before, and I think now it's between 10% to 20%, so maybe around 15% of the CT business and of course, we are growing out of capacity there more than anything else. The lead times are becoming really low. But the demand is for certainly there, and there's more to come and we are building on our capacity in Asia. We're building on our capacity in the U.S. and in Germany then to match up with these new demands.

And it is quite a significant change from what we've seen in the past. It's our separation, but it's also carbon capture, it's liquid natural gas and other applications. So we are trying to make that this is more sustainable, more modularized over time to make it more profitable. instead of just having product business there. So we are very, very happy with the top line development, but also very happy with the margin development in that division. .

[Operator]

The next question comes from Max Yates from Morgan Stanley.

[Max Yates, analyst]

Could you just talk a little bit more around what you've seen in China during the quarter? And I mean, I appreciate you mentioned kind of some slowdown in EV investments. But if you talk about kind of small and medium-sized compressors, perhaps some of the sort of shorter cycle business. How did you see those evolve in China? And are you seeing any kind of improvements or stabilization in China through the quarter or in Q3 as a whole?

[Mats Rahmström, executive]

For Industrial Compressors, then we experienced a softer market overall where customers are a little bit more hesitant to order compared to what we saw in the first half of the year. In Vacuum, which is somewhat of a softer market for Industrial, Vacuum compared to previous quarters as well. And for Industrial Technique then still see the larger projects, but somewhat slow, as mentioned earlier on the call. And Power Technique also somewhat a slowdown on the construction market and maybe sequentially affected by several large proper developer having some difficulties as we see them.

And the positive side, of course, that they speed up a little bit the development on their semi industry. In general, I think we can say that the different regulations, the geopolitical situation makes -- it's not the best environment for fast and quick decisions when it comes to projects. So there is an uncertainty in the market. And as you can see, when I listed a little bit all the business study. That is a little bit softer demand in this quarter. Then we normally know that -- there's no reason to it. But if you look 3, 4 years back, Q4 has always been a little bit softer in China and Q1 was a little bit stronger. So there's no reason for the seasonality, but the reality, we have seen seasonality in the China business.

[Operator]

The next question comes from Jonathan Day from HSBC.

[Jonathan Day, analyst]

I was wondering if you could talk a little bit more about the general industry trends that you're seeing in Industrial Technique and as you said you were sort of quite surprised. I think they may be sort of contrast a bit with what we're hearing from other companies in the sector. So I was just wondering if you could talk a little bit to those and give us some color as to how they're perhaps are progressing again in the few weeks of Q4.

[Mats Rahmström, executive]

Yes. We don't comment on Q4, but I can give some color. I mean, when we were running this general industry business, a significant part of that business goes through distribution. That is changing over time when we have more projects. And it used to be a business of [ air ] tools and normally station assembly, but with the widening of our product portfolio with the intention to get more of the scope and also the transformation to electric tools.

So the lion's share today in a quarter like this is more electric tools and then we see from than [ air ] tools. That's a very good transformation for value creation for us and for the customer. But to go with those, we also see that more and more of the general industry, there are also lacking labor, so they also tend then to look more at automated stations and that's why we have added, for example, screw feeding [indiscernible], soft [indiscernible] to go with that and workstation could be economic solution around the station.

So we're trying to go away just from selling the tool to sell a solution to the customer in terms of more equipment. And it stood out this quarter as strong for us, and that's why I spent a little bit more time on that, and maybe I should not confirm that, that is the case. We can give it a few more quarters. But this development this quarter was very positive for us. And of course, that it also takes that you change the competence level at your sales force and your distributors to be able to sell a bigger solution with more automation.

If you traditionally only know how to sell a tool, you need to upskill a little bit and to learn about the digital functionality, the electric tools and then some other portions. So all in all, and if you look at the station in GI, normally we sell the tool, now we sell significantly more equipment in the same station, and that is our ambition as well. .

[Operator]

The next question comes from Daniela Costa from Goldman Sachs.

[Daniela Costa, analyst]

I have just one, and I wanted to ask if you could remind us in Vacuum technology, how do you distribute? Does it all go direct to you go through distributors? Just trying to sense, I guess, we see some other varying comments across the value chain where some peers are calling up the bottom of the cycle or not. So how early do you see it? Or do you see -- will you see the shift indirectly? Basically, that's my question in terms of the visibility on VT.

[Mats Rahmström, executive]

On VT and the semi business, which is the lion's share of our business in Vacuum, that's 100% direct sales, well-educated salespeople, quite complicated to understand the customer process. It will continue to be direct, and we'll take scope in each supply. Semis for sure direct. In Industrial and Scientific, there we have distributors involved, but it's also a lot of direct sales, but that's a smaller part than the semi business.

[Operator]

The next question comes from Andreas Koski from BNP Paribas. Please go ahead.

[Andreas Koski, analyst]

Just 1 quick question on Compressor Technique and the order intake pattern there. Looking back historically, Q4 orders are normally close to Q3 orders. But in Q4 last year, we saw a significant sequential drop of 14%. I just want to confirm that normally, there is no seasonality in Compressor Technique from Q3 to Q4.

[Mats Rahmström, executive]

I mean normally, I would say no, but there is some sort of seasonality if you look at the complete business, of course, there is more push for that they want their orders, so more push for revenues and some are holding off to the new budgets in the new year, but it's not significant. We normally don't talk about it, but that is a little bit of that in the Q4 versus Q3.

[Andreas Koski, analyst]

Okay. So in Q4 last year, it was sort of an exceptional event when we dropped 14%.

[Mats Rahmström, executive]

I don't see that it was dropped 14%. But...

[Andreas Koski, analyst]

[indiscernible] vs 18.8%.

[Mats Rahmström, executive]

Can we get back to you on that one?

[Andreas Koski, analyst]

Yes, absolutely.

[Mats Rahmström, executive]

I'm looking at the graph in front of me, and I don't see that.

[Peter Kinnart, executive]

I think it's fair to say that there is typically a bit of a softening order behavior towards the end of the quarter in Q4. It's not huge, but there is a little bit of that. But again, nothing that it would be along the lines of the numbers that you are mentioning. But we will come back with a bit more details. .

[Andreas Koski, analyst]

Yes. So this was specifically for Compressor Technique.

[Mats Rahmström, executive]

Yes, we get back to you. .

[Operator]

The next question comes from Gustaf Schwerin from Handelsbanken.

[Gustaf Schwerin, analyst]

Just a follow-up on the general industry in Industrial Technique. Can you actually say what the share is between direct sales and distributors today? I assume a majority is still through distribution.

[Mats Rahmström, executive]

We have not shared that, but it's a mix of both. I'm sorry, I don't want to share it fully.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Peter Kinnart, executive]

Thank you, operator. There's no additional statement that we want to make at this point in time. We would all like to thank you for participating in this earnings call for the third quarter of 2023. And thank you a lot for all your questions that you raised during the call. Thank you very much, and have a nice day.