Atlas Copco AB (OTCPK:ATLKY) Q3 2022 Earnings Conference Call October 19, 2022 8:00 AM ET
Company Participants
Mats Rahmström – President and CEO
Peter Kinnart – CFO
Conference Call Participants
Guillermo Peigneux – UBS
Lars Brorson – Barclays
Daniela Costa – Goldman Sachs
Mattias Holmberg – DNB
Andrew Wilson – JPMorgan
Klas Bergelind – Citigroup
Max Yates – Morgan Stanley
James Moore – Redburn
Rizk Maidi – Jefferies
Andreas Koski – BNP Paribas Exane
Gustaf Schwerin – Handelsbanken
Operator
Good day and welcome to the Atlas Copco Third Quarter 2022 Earnings Call.
All participants will be in listen-only mode. [Operator instructions] After today’s presentation, there’ll be an opportunity to ask question. 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
Thank you, operator. Good morning, good afternoon, good evening, everybody and 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 results, but before I hand over to Matt, I’d already now like to ask you that in the Q&A session starts after our introductory presentation to please only ask one question at a time in order to make sure that all participants in the call have the opportunity to raise their most important question. If we get through all the questions, then of course you are more than welcome to pull in another question.
Thank you. So then Mats, over to you.
Mats Rahmström
Thank you, Peter. I will start with the picture actually on the instruction. This is one our recent acquisition at LEWA 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 three pieces in the middle, these are the pumps that we sell and you can see it’s really industrial pump environment and this, in this case have dosing [ph] 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 acquisitions fits very well with what the like in Atlas Copco and what we’re good at.
With that introduction, I would go to Slide number two. So it was on orders received, we were up 6% organically and very strong performance from three of our business area; 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 continue to do well and the minus mainly related to the semiconductor industry. Related to the semiconductor industry and all in all, that was close to SEK40 billion, which is an 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 here, positive is under 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 on all business areas; compressor technique up 13%, vacuum 27% really remarkable and industrial technique 14% and power technique 20%. We have a number of acquisitions in the quarter, 11 of them, and for the year, we are at 21.
We can go to Slide number three to look at the profit and the first two, yes the orders received and revenues and the third point is down the operating profit, which increased with 40% versus the quarter last year and with the 22% margin down, we had the record operating profit at almost SEK8.4 billion. Extremely pleased to that development.
Here, of course, has support from currency to get to this level. At the same time, we have the delusion 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 four very strong quarters on quarters received and also sequentially we can see that we manage at least two step by step improve of performance as well.
We can go to Slide Number four, which gives a little bit of the geographical stock in Asia. It might look down in the light blue there says 4% up and this is the part of the world that we have most of our sales to semis. 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, was this fairly strong performance from all the business areas, but maybe this is the area where we see that business is, could be at least a little bit softer. South America strong performance on record levels for all 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 the product filled that fits the application in all these areas. We go to Slide Number five, and that’s more a confirmation that we now have eight quarters with growth and the last quarter, that’s for that six.
Slide Number six and here you have the bridge first on orders received, and you can see the help you had from currency there 13% with organic 6%, annual revenue down 15% on currency and 18% organic.
Go to Slide Number seven and here you should see the pie shark with the business areas, although the fantastic performance from compressor technique 21% growth. That share has declined somewhat in the group. I start, even though with some of the compressor technique, we can see very strong development around LNG application back 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 with pumps with [indiscernible] but also a very strong business for many of the product lines and I think specialty rental also have very good performance in the quarter.
Industrial technique, they benefit from the CapEx spent on the EV transformation in the auto industry. It’s assembly, its flexible automation, but also battery manufacturing as well, and vacuum technique although minus 23% we should remember how much growth we have had in semi over the last two years and industrial and scientific vacuum are doing really well as well.
Go to Slide Number eight, which is compressor technique. I’m quite amazed with the continued strong order growth at 21% and you can see that we separated a little bit the larger compressors that we see in gas and process as we, oil free are doing better than the smaller ranges of products. It’s more product 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 product deals for hydrogen which is of 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 and create new products, which is very, very good. Revenues on record levels up 13% and an operating margin up 24.2% and here of course, supported by the growth, the currency, but held back somewhat on the supply chain constraints, a very good return on capital employed 3%.
They continue their journey on acquisitions. I think Oxymat, which was quite in Denmark, onsite area strengthening our position there, very interesting and then they continue with the rule up on distribution to get access to both product, but also distribute sorry, service. And one that stands out a little bit is the one in Germany where we have both 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 cars.
We go to Slide Number nine, which is vacuum technologies and then we can see then the decline which I prefer to is this in semi equipment and we could see that trend already in the previous quarter. That memory is not performing as well as test logic on the other side from our perspective, it could be equally vacuum in towns dependent more on the process around those products.
Service continue to grow as well and we expect that to continue considering the amount of products we put in the market. For semi, 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 operating margin at 23%. They are challenged both by the supply chain, but as we discussed before as well, price increases are more difficult when we have long term contract and long leads.
Now if you take the next one, which is Slide Number 10; that’s industrial technique, very strong order intake again, 21%. We believe automotive can be divided in two 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 and lion’s share of the business is coming from the new EV market and the battery as well, and I think we have been asked many times about the potential in an electric vehicle versus a traditional combustion engine vehicle and that can just confirm that is equally or higher potential per vehicle when go to EV or hybrids.
Service continues to develop well. Record revenues, still very challenged on the electronics, but we’re scrambling there and spot market buy to satisfy lead times to our customers and operate in more than 21.4% and eternal capital at 18%.
Go to power technique; there we have well continued growth at 16% that portable compressors are doing really well and generators as well but even better the specialty rental and service continue to grow as well and we have had a very good start with the two compact positions as well.
And revenues 20% organically; strong for us and very strong margin for this end market at 18.9% and driven mainly by the organic revenues of course and diluted from the same challenges as everyone else has with supply chain, and which I mentioned already, the acquisition earlier was completed in the quarter.
Then on Slide Number 12, you have the profit and loss, and they give you two indications that you have the for reference, you have the EBITDA as well, which is at 23.2%, and then what we report on operating profit at 22 %.
And by that, I think I hand to you, Peter.
Peter Kinnart
Thank you, Matt. I will continue on the income statement on the same page. Net financial items minus element in the income statement, but the change compared to last year is due to positive financial exchange differences basically.
On the — then we have of course profit before tax of SEK8.5 billion and then an income tax expense of around 22.6% of that. So that is roughly our tax rate for the moment, and we also expect that that will be more or less what we’ll see in the last four of the years when it comes to the income tax rate.
Then the profit for the period adds up to SEK6.5 billion compared to SEK4.6 billion a year ago, which is 43% up and resulting in basic earnings per share for the quarter of SEK1.34 billion compared to for the shares split adjusted, of course, SEK0.94 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 Number 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 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 cost 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 peak.
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 development 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 drop to 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 are 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 Number 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 SEK19 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, well, most notably, of course, the change in our intangible assets, thinking of the acquisitions of 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 people also in compressor technique basically.
And then I think the two 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 26 October, we will pay out the second part of our dividend, SEK0.95 at that point.
And then last, but not least here, 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 trades payables 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 one 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 Number 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 SEK10 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 as a fourth 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 SEK5.7 billion compared to SEK4.7 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 [indiscernible] And with that, I conclude on the cash flow, and I hand back to you, Mats, for the outlook.
Mats Rahmström
Thank you. I have time to guide the customer activity level, as we call it, between the Q2, Q3 and Q4. There is no huge science in this — buying business area to see what the signals they get from by customers.
And this time, we said that we think believe that we can somewhat compared to the high level that we have seen in the third quarter. And of course, we have had three very strong quarters and in some what you might want to read in that we haven’t seen any signs of recession type of scenario.
And we still think that in the growth number of course we have for strategic programs, long-term strategy like in gas and oil fields, it looks fairly positive. We’re also gaining market share in what we call resilient technologies linked to the sustainability, which we believe is the future proof of 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 there’s many investments in that sector.
On the negative side, we have seen the slowdown in general industry. That could be industrial tools, could be industrial vacuum, for example, industrial compressors that we see slower growth or no growth see.
And there’s still some hesitation about the corona linked to mainly China. There is an uncertainty today and recently introduced was also this Shift Act that you are evaluating to see how that will impact the semiconductor business globally.
And of course, the Russian and Ukraine war makes it more challenging in Europe in many ways as you know, it’s probably not so good for business. And that’s why we have concluded a somewhat less activities for us 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 can do going forward. This is on November 17 here in Stockholm. And if you like to register for that, you need to do that for of October 31. Should we then open up for questions?
Peter Kinnart
Yes, Mats. Thank you very much for those comments. Operator, I would like to hand back to you. [Operator Instructions]
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Guillermo Peigneux from UBS. Please go ahead.
Guillermo Peigneux
Thank you. And good afternoon, everyone. I wanted to ask about, obviously, Batten 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 risk 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
Thank you. On the ramp-up — but we can see that, of course, there is long lead times from many of the suppliers, so 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, of course, very difficult right now to start a new line with something and you need to coordinate all the efforts from all the 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 a follow-up question on that normally is if we believe that we have 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 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 we can see that anyone plays doubling 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. Please go ahead.
Lars Brorson
Maybe just on that, can you remind us, I think when I 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 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 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 or the other side of the backlog that you’ll be invoicing this year?
Mats Rahmström
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 three countries, so it’s a significant part is, of course, China.
Peter Kinnart
Okay. Thank you, Mats. And then I will move on to the other question on the drop through for Vacuum Technique 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 strong 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 and 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. Please go ahead.
Daniela Costa
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 as 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
Thank you for the question. Yes, 2020, I think on the negative part 2020 that we might not see in a net 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 when we explored 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 to the OpEx continues and then that will support the service business.
And myself or 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 — customers will continue to invest in that and I think a 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
I might also add, for example, that the strategy of client in the service level and the service organization has been quite successful. And of course, we also have 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. Please go ahead.
Mattias Holmberg
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 sort of 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
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
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
I think that’s a little bit too early to say that the customers are taking decision 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 brand 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 the efficiency of the product itself and also this year to platform and that is, of course, also linked to the financials in terms of energy costs.
So I think, it is actually speaks in our favor to distance ourselves from the copycats out there, but also help our customers under that they have in Scope 3.
Operator
The next question comes from Andrew Wilson from JPMorgan. Please go ahead.
Andrew Wilson
I still wanted to ask on our 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
Yes. 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 we 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.
Its 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 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 a little bit bigger group well positioned for the transformation is what you see in 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. Please go ahead.
Klas Bergelind
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 server semi equipment weakness and relatively stable industrial demand quarter-on-quarter. Your China exposure is pretty big in BT. 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 book 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 feels very secure to deliver solid sales growth into next year. Sorry, there was a lot of questions in one, sorry.
Mats Rahmström
I’ll try to take them 1 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 bigger machines, bigger projects, more strategic projects. And then we will see how that plays out with after that.
On the Ship 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 I ask we don’t have 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 that limiting factor to us.
So the direct impact where we 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 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, but could be significant if we can see our customers in other parts of the world cannot import or sell to Chinese I think that’s the best I can do on that right now for you, Peter.
Peter Kinnart
Yes, I think you had a question about the backlog and if there’s any preordering in that, and I think — but we have discussed about the order 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 distributor side potentially to, let’s say, stay ahead of maybe price increases, but I would say that is minor compared to the bulk of the business that we are running.
Operator
The next question comes from Max Yates from Morgan Stanley. Please go ahead.
Max Yates
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, so 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
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 very 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 refineries and some oil and gas in there, but it’s not the lion share anymore.
Max Yates
Okay. But, 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
Carbon capture for most companies is still a project business, and I said that at the smaller part, but if you then rank natural gas as one of the resources that is something in part of the transformation that’s significant for us. .
And the hydrogen is also more on project business, but there is a number of product 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. It meets everything from transport to [indiscernible] on, I think those experimenting in the products in many different segments.
Operator
The next question comes from James Moore from Redburn. Please go ahead.
James Moore
Can I clarify an earlier answer and then ask one? Just on 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, 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
The contract with the different OEMs could look quite differently. So that might be not 1 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 bit a 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 — of course, the second question?
James Moore
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 US, Europe, China, that we might see something that’s different, if you get the question?
Mats Rahmström
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 cash. I mean our presence with these key accounts are so — and the relationships also closed, so we — if they continue to develop the business, we will for sure have our share of [indiscernible] is that we be 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. Please go ahead.
Rizk Maidi
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 ease on the supply chain constraints, please, I’ll…
Peter Kinnart
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 for the spot market buying in 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 were actually complete disappear, we would normally use our regulatory channels to buy these items.
So we would rather absorb that for the time being, then 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
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 our overall CT?
Mats Rahmström
If you refer to the gas and process business is approximately 10% of the CT. .
Rizk Maidi
And the large industrial compressors as well, Mats, within the industrial application?
Mats Rahmström
We haven’t made that reference [indiscernible]
Operator
The next question comes from Andreas Koski from BNP Paribas Exane. Please go ahead.
Andreas Koski
I would like to ask on higher funding prices. Could you please give an indication of how much of your organic order growth?
Mats Rahmström
Andreas, it’s very difficult to hear you. It sounds like you’re in a box.
Andreas Koski
Okay. Give me 1 second. You hear me better now? .
Mats Rahmström
Yes. Yes.
Andreas Koski
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
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 market, 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 [indiscernible]
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 a little bit more room to be able to dose those price increases to the market.
Andreas Koski
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 of around SEK15 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
I don’t — I’m looking at, I don’t have a number on that in every our factory is running at full capacity right now, and it’s a little bit 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 to 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 at this point.
Andreas Koski
Okay. And lastly, do I understand it correctly that preordering stock in this quarter…
Peter Kinnart
Andreas, sorry, can I please interrupt to give the opportunity to 1 or more of your colleagues to ask what still as we have only very few minutes left. Thank you, Andreas.
Operator
The next question comes from Gustaf Schwerin from Handelsbanken. Please go ahead.
Gustaf Schwerin
Just a follow-up on the Eurobond on equipment. On the Chinese exposure that you have in Vacuum, you have a rough split or how it looks between domestic and foreign players as there seems to be some exemptions like layer similar from TSMC, Samsung already?
Mats Rahmström
We are looking at each other. What is that you like — we didn’t fully understand what you’re looking for.
Gustaf Schwerin
It looks like in the bands, there are some exemptions for foreign players in China, seen announcements from like TSMC and Samsung already that they’ve gotten, I think, it’s a one-year exemption from this brand. 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
In our case, it’s from the new Ship Act. It is very limited impact on us. It is the product that we get from the US, which is which goes on the shops, which is a 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, and 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 part. That concludes the question.
Peter Kinnart
We are out of time now. So sorry, Andreas, for interrupting you, I just want to give one 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 we’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.
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