Atlas Copco AB (OTC:ATLKY) Q4 2022 Earnings Call Transcript

Atlas Copco AB (OTC:ATLKY) Q4 2022 Earnings Call Transcript January 26, 2023

Atlas Copco AB misses on earnings expectations. Reported EPS is $0.12 EPS, expectations were $0.13.

Operator: Welcome to Atlas Copco Q4 Report for 2022. Now, I will hand the conference over to CFO, Peter Kinnart. Please go ahead.

Peter Kinnart: Thank you, operator. Good afternoon, ladies and gentlemen, to this quarterly earnings call for the fourth quarter 2022 for Atlas Copco; welcome to the call. Before we start with the official part in the presentation, I would already now like to remind you that when the Q&A session starts, we would like you to strictly stick to only 1 question at a time in order to make sure that all participants in the call will have an opportunity to raise at least 1 question. Should, of course, we have made full circle, of course, you can get back in line for other questions to ask afterwards. So thank you for that in advance. And with that, I would like now to hand over to Mats Rahmström, our CEO, who will guide you through the earnings presentation.

Mats Rahmström: Thank you, Peter. Hopefully, everyone can see a very nice picture. And if you read the report already, you will see that the Gas and Process division did really, really well. And this is 1 of their products. Yes, this is thick with natural gas application. So this is about to be shipped to 1 of our customers and this is what they look like when they say refer to bigger machines sometimes. So if we start on the Slide number 2. We said in the heading that we had a mix demand and orders received were SEK36 billion. After 8 consecutive quarters with growth, it was minus 7% organically. But if you look at the graph, you can see that this level SEK36 billion is still what we would refer to as fairly strong, even if this SEK currency should be down but it’s still a strong orders received compared to historical data from 2019 and forward.

CT to grow 3% organically. Industrial Technique driven by the electric vehicle transformation was very strong at 18%. Power Technique was down 6%. But if you recall, Q4 last year, they actually had the best quarter which is unusual for them which is normally in Q1. So this tough comparison, so they did very well. The down was the VT, Vacuum Technologies which was linked to the semiconductor industry. Breaking it down a little bit in vacuum. We can see that it’s memory that is the weaker part, more activity on logic. And at the same time, we can see that the Industrial division and the Scientific division is doing really well. On industrial compressors, we say flat. And here, we include the bigger oil-free machines and oil-injected machine and we can still see a positive trend on the bigger machine with a single digit and a declining trend on the smaller machine with a single digit as well.

As I mentioned in the beginning of the call, Gas and Process, it did really, really well. All in all, they represent approximately 10% of revenue for the year and this is mainly linked to different sustainable application, liquid natural gas, carbon capture and applications like that. And ITBA Industrial solutions, very closely linked to the EV transformation but also General Industry did quite okay. And pleased to see that we continue the journey, strong journey on service for all business areas. So OpEx was still strong among our customers. Sequentially, as expected, down, slightly down. And then we could also see that we had considering the number of issues we have in supply still, I was happy to see that we had record revenues at SEK40 billion and 16% organic growth.

CT, up 15%. Vacuum Technique also up 14%, Industrial, 16% and Power Technique, 24%. So that was really, really good. Then if we change to next slide and the confirmation of the numbers but you can also see the operating margin. We did SEK7.8 billion and a margin of 19.5 and adjusted for the long-term incentive program, SEK8 billion and 20%. The SEK7.8 billion is the second best quarter we have ever done, of course. CT, very good at 23.6%. And Power Technique also very good at 18.2%. And then to some disappointment, I think, on VT for ourselves, we still have a lot of operational issues at 18.2 and Industrial Technique had some onetime cost this time, so they ended up at 18. If you then go to the full year which is on Slide number 4. Looking at the graph, of course, it was an exceptional year for us, helped by currency but also strong organic growth.

So record orders at SEK158 billion, 8% organic growth and revenues at 141, plus 12 and the operating profit also at a record SEK30 billion and a margin of SEK21.4 billion. And you can see equipment order growth in all our business areas with the exception then of Vacuum Technique and that is still linked to divisions in the semi. Continued strong growth for service which is beneficial, strong presence and success in all regions. And this year — last year, as you say now, we did 30 acquisitions. For those that were at the Capital Markets Day, the 17 of them that are the character more of a roll-up, distributor getting access to markets and segments and there were 13 of those were new technology platforms that we buy into widening our scoop of supply.

So quite pleased with the development there. And then, the Board of Directors proposed a dividend for the year which is an increase of 21% . Change to Slide 5. And then you have the confirmation of the numbers I just mentioned. We go to Slide 6. So this is all received in local currency. Starting with Europe in the light blue, we can see 3% up and this is helped by the acquisition in Europe but CT was flat, VT down, Industrial Technique was positive and also Power Technique was positive. So quite okay for Europe. Then you can see the only bigger red number is then Asia, where we were down 10%. But actually, it was only Vacuum Technology where we have the main part of our semiconductor sales that was down. All the other business as was up to double digits.

So quite successful quarter for most of our business areas. More activity in Africa and Middle East, strong compressor development in the rig and also strong for Power Technique. And South America, up 3%. We had strong compressor technique mainly. And in Americas which is flat, CT very strong. Semi, down and Industrial Technique, up and also PT down, they had all these strong orders last year for rental companies. So they were down as well. So a little bit of a mixed picture. Slide 7 then confirms the 8 consecutive quarters and now minus 7% for this quarter. We go to Slide 8. And there, you have the bridge still helped by the currency on orders received 10% and revenues at 14%. But of course, with the changes we have seen in currency, it’s still revaluations in the result.

Page 9 gives the pie of the development. Of course, the declining part here is Vacuum Technologies that was growing over the last 2 years, a strong development for Power Technique with the acquisitions they have done and also for Industrial Technique. And of course, bigger piece is still Compressor Technique with 44%. Then we are at Slide number 10 which is the Compressor Technique business. If you look at the graph, we have had 4 quarters with very strong development on orders received, although this growth was 3% then versus last year, sequentially down but still on a very, very strong level. And as I said earlier, the project business with the bigger machine is still positive development and a smaller business is down single digits and very, very strong business for gas and process and it looks like that trend has continued throughout a number of quarters now.

Continue with a very good development of service and its growth in all regions. Record revenues and an operating margin at SEK23.6 million. I was happy with the acquisitions in the quarter. We talk a lot about being more local for local. And — was an on-site gas for industrial application, happy with that. And Shandong on medical gases as well. So being present locally to our customers that gives us an advantage. We as well which is called the H2 Power or Hydrogen to Power. It’s a modular system that you can use for pipelines, for hydrogen, for example. So strengthening the portfolio of products for the hydrogen market. We switch to Vacuum Technique. Same thing here, although orders were down 33%. If you look at the graph, we can still see that we have a good level, significantly above 2019, 2020.

And — but we cannot keep up. And we know this is a partly cyclical business. And if we look at the semi outlook a little bit, we also look at different parameters. And of course, you see that the expectation for CapEx is down for 2023, although that level that is indicated by our customers is still probably the third biggest year in CapEx investment. So it’s not that it’s completely dry out. I think there is a lot of orders to fight for this year as well. And we have seen memory and some other projects being moved further in time even into the 2024 and therefore, we’ve also seen some cancellations. Pleased to see that our journey to strengthen the Industrial business and the Scientific business continues and it’s mainly driven by innovative products that we bring to the market.

And a solid growth for service that also helps us out. Record revenues, the still, as you can see in the result, a number of problems with specifically electronics. And also the service level that we give to customers time to work on the orders on hand that we have that we run double shift, we run weekends. And then we are running out of components. So it’s a very inefficient way of running operations. And you can see either as a service to our customers to make sure that we get products to them on time. But I think we are reaching a level now that we can make this a little bit more efficient in the coming quarter. We have a positive price development in Vacuum. It doesn’t compensate for the inefficiencies that we have in our operations, as you can see, with an operating margin of 18.5%.

And we are at Slide number 12, Industrial Technique. They came in very strong with 18% growth. It’s actually growth in all divisions. It’s not only out of but also in General Industry. If we look at the CapEx spend in the auto industry, it’s driven by the transformation to EV and hybrids. Solid group for service that continues also all those same here, difficulties will mix, 16% up on revenues. And with some onetime effects, spot market, I might to is more operational but you can see the margin at 18% . Power Technique. If you look at the graph, it doesn’t look like they had a sequential down but is that we had the LEWA only 2 months in Q3 and now Q4, so they are down slightly. And this is also if you look at Q4 in 2021, you can see that they had the best quarter there which is now benchmarked and that’s why we say it’s down but it’s actually quite a strong number for orders received.

You see big demand in Europe, maybe not surprisingly to generators that we help out in many areas and also specialty rental which is good for the mix, continue with the success and broadening the portfolio of what they do. And also, we’re getting better traction for our service business in Power Technique and record revenues, 24% up. We have also here secured a second supplier for Engine which has been 1 of the problems earlier for the smaller machines. We are internally quite pleased about that and a very strong margin for them at 18.2% . And the recent acquisition LEWA is doing quite well as well. Return on capital was 25% . Then we come to the process profit and loss. We give you the EBITDA at 20.7% and you see the operating margin then at 19.5% .

And now, I think I hand over to you, Peter.

Peter Kinnart: Thank you, Mats. Starting then from the operating profit of SEK7.8 billion , we had somewhat higher financial — net financial items. This was basically related to financial exchange rate differences on revaluation of mostly cash positions across our different subsidiaries in the world, mostly dollar related. Then we ended up with a profit before tax of SEK7.6 billion, 19% of revenues and a tax expense of SEK1.6 billion of that which is then an effective tax rate of 20.5%. And that was actually a rather low tax rate, one might say but that was mainly driven by partly, let’s say, onetime effects that occurred but also a very positive contribution from the innovation income reduction plan, et cetera, that we are making use of with all the R&D efforts that we are doing across the globe, of course.

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When it comes to the effective tax rate, I would also give you, let’s say, a little bit of a heads up when it comes to 2023 that based on the change of the nominal tax rate across the globe, et cetera, that you would expect this tax rate to go up rather than down. And we believe that the tax rate will be somewhere in the lines of 22.5% to 23% approximately depending, of course, also of the business across different tax territories. The profit for the period after tax is then SEK6.1 billion compared to SEK4.9 billion a year ago with basic earnings per share of SEK1.24 compared to SEK1 in last year which is, of course, corrected for the redemption and the share split. The return on capital employed reached 29% compared to 27% last year. Admittedly, the change from 27% to 29% was mostly attributed to currency-related improvements and the return on equity landed at 32% compared to 30% a year ago.

If I then move on to Slide number 15, where we will take a closer look at the profit bridge for the fourth quarter, explaining a little bit how we moved from 21.2% a year ago for the same quarter to 9.5% this year. Then you can see, of course, that currency had a slightly positive effect, much less positive than it had been prior — I will come back to that in a second. The acquisitions were also dilutive. As you can see, based on the profit margin on the acquisition revenues. But then the biggest impact came then from the drop through related to volume, price mix and other. And that was mainly resulting from the continued stress in the supply chain that we are experiencing. I think we have also mentioned that in previous communications that we did not see really any improvement in the supply chain.

This is very much related to electronic components, particularly also other components in different business areas, some different ones but the main problem that we are still facing are the electronic components. We also — we have seen continued strengthening of our pricing efforts. And that has been very helpful. But unfortunately, it has not — it has been strong enough, at least, to compensate for what we refer to as structural cost increases. We have seen whether it is material prices, labor costs that, of course, have also gone up as well as energy costs that were quite a lot under stress lately. But then the supply chain constraints caused a number of effects, including, for example, spot market buying that we continue to do in order to secure certain components for our electronics but also quite a significant impact on efficiency in our operations, both for the manufacturing part as well as for the service operations.

Of course, in December, there was also some impact from COVID, for example, due to the fact that particularly in China, then quite a lot of absenteeism have to be noted. And then last but not least, maybe in this list, there’s also an impact from our very focused efforts in product development which we, of course, continue to consider a very important investment in the future. It is not only the R&D we do in our existing platforms that we have been for many, many decades but also all these new initiatives that we have shown in the Capital Markets Day that will, of course, also require product development in order to make sure that we have the portfolio to be able to be competitive. And then maybe a last point on currency. If I compare the current quarter to the third quarter this year and you would look at the same bridge for that period, then you will notice that the currency in the third quarter was quite positive.

And that in this quarter, it is close to 0 almost. And that is mainly related, if not exclusively to the revaluation of balance sheet items, particularly receivables as well as trade liabilities. And that had quite a significant impact, as you can see in the financial statements in the quarterly report as well. And that, of course, didn’t give us the same kind of support in the margin as it has done in the third quarter, for example. When it comes to that currency, what is the outlook for our currency development. We do believe that even in the first quarter, it is likely to continue to be positive but even less so than it has been this quarter. So we expect, based on the current exchange rates, that the currency impact will continue to diminish steadily over time but most likely still be positive at the end of Q1.

If I then move to Page number 16, then there’s a little bit more detail of all the different business areas. I would say in — you can see currency support that is still positive. The acquisitions are dilutive as well. And we have there also a small negative drop-through or, let’s say, a margin that is positive but then affecting the operating margin negatively from one quarter to the other slightly. In Vacuum Technique, we see, of course, quite big impact, both currency as well as acquisitions, are here slightly negative. But the biggest impact here is again from the volume price mix and others. And here, when we talk about pricing efforts, we have been more successful than before in implementing price increases but not to the same level as we see in some of the other business areas which is a little bit typical of the segment with very few customers and rather long-term contracts with strict clauses in those contracts, allowing very little room to change the prices also particularly because of this — copy exact concept that they tend to implement.

Then on Industrial Technique, we see basically no impact from the acquisitions very small negative impact from the currency and then a bigger negative impact also here on volume, price, mix and others. In Industrial Technique, also here, the supply chain constraints have been — continue to be challenging. Also here, spot market buying is used quite actively in order to secure the electronic components, for example, is leading them to the drop-through as we see it here. And then finally, Power Technique with, I would say, nothing less than a fantastic performance from 16.3 to 18.2, with a small positive currency effect here, slight dilution from the acquisitions, of course, especially considering the size of these acquisitions. This is maybe more important for Power Technique in the total margin but then a very strong performance from organic revenue volumes.

And with that, I think that summarizes the comments on the detailed profit which is on Page 16. Then I go to the balance sheet on Page 17. I think if we compare to the last quarter, then there are no dramatic changes comparing year-on-year. A big impact that we see in the movement is, of course, the currency impact here as well by about SEK14 billion. That was a bit higher even in the third quarter. So that has come down over the last quarter by about SEK3 billion. And that SEK14 billion is predominantly almost half linked to the intangible assets. And then the rest is, you could say, largely linked to inventories and receivables in relatively equal terms. Of course, the balance sheet is also affected by the fact that we did a number of acquisitions over the years.

So if you compare December 31 last year with this year, there’s quite a significant impact there. Then if we go to the liability side, on the equity, there is, of course, an increase which is related to our profit that we have generated over the year but then also a translation difference on our holdings in subsidiaries that is quite substantial as you can see in the details of the quarterly report. The interest-bearing liabilities went up due to some increase in short-term funding and the noninterest-bearing liabilities are predominantly almost exclusively linked to the increase of trade payables which when we look at the third — fourth quarter, you could say that the increase in working capital in the fourth quarter has mainly been on the receivable side related to the high level of invoicing while the inventories increase has been fully compensated by an equal increase roughly in the payables.

Then I move to Page number 18 to give you a few insights on the cash flow. A few important points maybe to comment upon here or to start with the high operating cash surplus generated to the operations of SEK10.3 billion compared to SEK7.6 billion the same quarter last year, quite a substantial difference. We also see that the taxes paid are a little bit higher than what we saw last year. That is mostly related to timing difference, I would say, in how these payments are executed. And then the change in working capital which was SEK1.4 billion compared to a positive of SEK0.5 billion a year ago. On the working capital, I think it’s important to compare also to the SEK7.4 billion for the full year. So there is still an increase in our working capital, as I said, mostly linked in the last quarter to the receivables but the pace of the increase is much, much lower than it was at the early stages of 2022, where we saw much to see more significant amounts.

That gives us a cash flow from operating activities of SEK6.8 billion compared to SEK8 billion. And then we also see, as we have in the previous quarters, the increased expenditures on the investments in property, plant and equipment related to the many initiatives that have been initiated around building additional production capacity mostly on the Vacuum Technique side but also in Compressor Technique and other smaller initiatives across the other business areas. In total, I would say that the expenditures on investments have doubled this year compared to the previous year looking at the full year numbers. And that then gives us, in the end, total cash flow — operating cash flow of close to SEK6 billion compared to SEK6.7 billion last year.

And then we have spent, let’s say, roughly SEK1 billion of that operating cash flow into acquisitions throughout the fourth quarter, bringing the total acquisition expenditures for 2022 to SEK11 billion almost. On Slide 19, just a few highlights on the earnings dividend and redemption, historically. Earnings are at SEK4.82 per share as you can see here and the dividend that will be proposed to the Annual General Meeting for approval will be SEK2.30 per share. That dividend will be paid out in 2 installments as has been the case over the last number of years. Equal installments of SEK1.15 per share each time. The record day of those payments will be May 2 and October 20, 2023. And that would give us a total amount of SEK11.2 billion that would be paid out to the shareholders in 2 installments of SEK5.6 billion each.

And with that, I conclude the cash flow and the dividends and I would like to give the word back to Mats Rahmström for the near-term outlook.

Mats Rahmström: When we look at the near-term outlook, then we are trying to qualify then the activity level between Q4 and Q1 among our key segments in the market. And as you can see then that we said that the activity level will remain at current level. This is, of course, an uncertain environment that we operate in right now. With the pandemic in China, we see the inflation and the energy prices. And of course, some of the new regulation that has not helped full impact and like the . But based on what we see in the activity level right now and the quotes we have out, this is support this statement and the forward-looking statements. And then, I think we can open up for questions.

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Q&A Session

Operator: The next question comes from Klas Bergelind from Citi.

Klas Bergelind: Mats, Peter, Klas from Citi. So if I had to ask one, I’m going to focus a bit on Vacuum Technique in the backlog. When we met you at the recent CMD in November. I think are said that he felt the backlog was supported, that there hadn’t been any cancellations. Now I think you alluded to, Mats on the memory side, that there has been some cancellation. To what extent is this widespread across several customers? Do you have any indication whether these cancellations will intensify? Or was this more of a one-off?

Mats Rahmström: It is right that we have seen cancellations. And it’s in the area of SEK1 billion for the group. And the lion’s share of that is within semi. And the first one, of course, to move production days have been with customers that are focused on memory. And I don’t want to speculate but I think we have seen a number of — a handful of customers that have delayed into 2024. And then, of course, they cancel that project with us. And it’s not lost business, you would expect to get that back when they reactivate those programs again.

Operator: The next question comes from Andrew Wilson from JPMorgan.

Andrew Wilson: I just wanted to try and, I guess, pick up on the VT and the IT margins. You’ve obviously provided some kind of detail around some of the challenges and some one-off effects in IT. But I just wanted to pick up on VT, I think sort of — on your comments on the margin. I think you talked about now getting to a position where you felt that some of those challenges would be behind us. And therefore, I guess, should we expect the Q1 to already be moving back to, I guess, the sort of levels of margin that we’ve seen in Vacuum more than maybe the last sort of 12 to 24 months? And then I guess, similarly, on IT, you alluded to some onetime effects and I appreciate some of that is probably supply chain. But again, should we again in the Q1, expect IT to sort of move back to, again, the sort of trajectory that, that was on prior to the Q4?

Mats Rahmström: If we start with Vacuum, then. There are a number of issues with electronics. And since you are aware, we have quite a lot on orders on hand still to be delivered to our customers. And to gain those and win those orders, of course, we have committed to delivery dates. And we have and have done our utmost to deliver on those states to customers they are running. That means that we are running evening shift, double shifts, weekend shifts. And then we utilize our staff, of course, in an inefficient way because suddenly we don’t have components. And that is actually what happens physically on the floor. And then we have the option then to say, okay, should we not take this cost to support our customers or should we — actually I’d say that we would do back to more normalized shifts.

And I think over time now that we’ve seen a little bit less of activity and demand. I think we will normalize a little bit to operations. But the biggest challenge is still for us then to deliver on time with the lack of secure supply chain for electronics. Then you might ask a little bit why is it too much difficult here? Why don’t we fix it easily? Peter mentioned it before that many of these big customers work with something called copy exact. That means that we cannot change any components in a product without getting qualified by the customers. So to get the second source for something, we actually need to bring that component and get that qualified at customers. And of course, then we are limited to 1 source as well. So it’s not easy bargaining with pricing either.

So I think it will take a little bit more time to recover. And we have compensated ourselves for some of these things that is more related to pricing or components material but not fully to this adjustment that we think is more on our side than our customer sides. We don’t for that price increase to our customer. Maybe you want to comment on IT?

Peter Kinnart: Yes. On IT, I think it’s a mix of different things. There is, I think, similar to what we see in VT, although it’s, of course, a different segment. But also there, the pricing component is not as strong as it is in Compressor Technique and Power Technique, for example and that is also again related to the segment and the limited — the very concentrated customer base in motor vehicle industry particularly. The supply chain issues are also there, quite important. And again, the electronics is also there, the key issue. And so with the pricing that we are able to push in and which we are improving compared to the last quarter and the previous quarters, we still are not fully — compensate there for these kind of effects that we see.

And then on top of that, there are, as you mentioned, a couple of onetime items which are more related to difficult procedures that we do in the last quarter of the year and that required us to make some adjustments across the different divisions. And in ITBA, those, I think, were a little bit more significant. And therefore, we took we felt that it was relevant to mention them in the explanation in the quarterly report as well.

Mats Rahmström: And maybe you can say in general, when it comes to electronic supply with order volumes that we place with our suppliers today, we’re constantly really pushing the envelope to the maximum of their capacity. So it is difficult for them without machine investments to catch up. And of course, if volume will go down to something more normalized, we wouldn’t have any issues. So we have sort of — it’s really that pushing to a new level of supply that is struggling to get that right.

Operator: The next question comes from Daniela Costa from Goldman Sachs.

Daniela Costa: I’ll stick with 1 as requested. I was wondering if you could give us some visibility on how much your backlog extends, really? How many quarters or months you have across your business? The reason I’m asking is, when we look at your book-to-bill, it’s 1 of the lowest, I guess, we have to go way back probably 2009 but obviously, you might have accumulated a lot. So as we look about thinking how we should model the next couple of quarters, can you shed some light on how much visibility ahead you have in each of the businesses now after what you’ve accumulated given the supply chain issues?

Peter Kinnart: I think on the revenue side, of course, we continue to push very, very hard to get as much output as we can out of the factories because as you, of course, know, we do have quite a significant orders on hand position. And we have those commitments to customers. We will do everything possible to continue to get the maximum invoicing and output based on the expectations of our customers. So if we can continue to boost revenues, we will not hesitate to do so. Then on the orders, of course, it will depend quite a lot on the activity level in the market and that we expect to be similar to the previous quarter.

Daniela Costa: Sorry, I might not have expressed myself maybe correctly. So as for your point on what you have on hand, how much does it cover far out in the future? Is it — does it cover 1 year of visibility? Does it cover 6 months? If you could give some color per provision? Because we have the orders but we don’t have the backlog, especially if you had some cancellations.

Mats Rahmström: We, of course, well aware exactly what we have orders on hand per division and per — but we are not willing to share that fully with the market at this point.

Operator: The next question comes from Andreas Koski from Exane. The next question comes from Vlad Sergievskii from Bank of America.

Vladimir Sergievskii: Let me ask about more conceptual question on longer-term margin . How feasible do you think it is to expect them to recover to the historical 24%, 25% range which is above even compressing margins, given that you’re obviously deliver into a relatively more concentrated client base and the proportion of aftermarket is lower than what it is in compressors?

Mats Rahmström: For us, it’s, of course, the benchmark for us to get back to the table that you have seen in the past, there’s not really any reason why we shouldn’t be able to — there is no structural changes in the marketplace. The only caveat — a caveat here is that we have the pricing that we work with and in some time — in some cases with the copy exact, we also delivered the same product. And of course, there is as much as the market accept as a price increase. I mean sometimes, it takes a generation of products then with better efficient, better value generation to get back to the same gross margins as we have seen in the past. And I think that might take — so it’s not done overnight thing. And I don’t think you will see it in Q1, if that’s what you’re expecting.

I think it’s just like Atlas Copco is grinding away on both our operational issues. And of course, on pricing. And I think the more of the short term is more that the fixed operations and adjustments in our profit and loss. So we take it step by step. And of course, we you see that as a benchmark presence to get back to those levels.

Operator: The next question comes from Mattias Holmberg from DNB.

Mattias Holmberg: Mattias Holmberg, DNB, here. I was curious to hear a bit more on the comment that you’ve seen activity levels in several end markets weakened in the quarter. If you can make any comments on the cadence, perhaps if the run rate was improving or worsening through the quarter? And also, if there were any specific end markets in addition to what you said here that could be interesting to mention?

Mats Rahmström: I mean if you look at the different businesses of ours, of course Q4, from an orders received perspective, we expect it to be sequentially down every time. But the main difference in demand is, of course, in the memory sector’s on semi. And the strong side is all the sustainability applications, both in Compressor Technique but also then in Industrial Technique with electric transformation. So I would say from our perspective then, we are in a strong position when it comes to changing application to more sustainable applications. We have more products than we have had in the past. So even in the slower climate, I think we challenge ourselves at least to grow in those segments. But the main downside in the report is on the semi side and specifically on the memory side.

Mattias Holmberg: Nothing on if the run rate was worsening or improving through the quarter?

Mats Rahmström: Well, I think China, I think, is the only one. I don’t know exactly. We have the numbers on Asia in front of us but — of course, we had at its worst, we had 48% of our people and I think that relates to our customers and to our suppliers as well. So I assume that there was very little activity. And we can see in some of our factories that we had very little output during December as well. And I think that we need to give China and Asia really look at that in the beginning of the year because we are normally down in China and it seems like they have new funding coming into the new year. So for us, Q1 in Asia will be extremely important for our performance in 2023.

Operator: The next question comes from Max Yates from Morgan Stanley.

Max Yates: I just wanted to ask about the compressor division and the regional trends and specifically on Industrial because I was slightly surprised to see that kind of orders have grown in Asia and Africa but had decreased in all of the other regions. I would have thought because of the disruption in China that Asia would have been a bit weaker. So could you maybe talk about in your sort of shorter-cycle businesses when you look at what is happening in Europe, what is happening in North America? Are there anywhere kind of in your sort of small and midsized compressors where you are seeing weaker activity? And how would you sort of characterize how that has evolved? Because it looks like from the outside that volume growth is now negative and particularly in places like Europe that is now declining in your short-cycle businesses. So could you talk a little bit about how that’s evolved for industrial compressors specifically?

Peter Kinnart: I think for industrial compressors, especially the smaller ones, we have indicated that we have seen a single-digit decline. And I think that’s particularly in Europe, something we have seen. And it’s often, of course, related to the fact that this business is also going through indirect sales channels, distribution channels which normally have built up a certain amount of stock and the moment that they see some kind of hesitation in decision-making processes of their customers, they will typically be very hesitant to place new orders. And as a result of that, of course, that will have an impact on — for those type of machines. Also typically, even with direct customers, you would have quite short decision cycles and, of course, an owner that is feeling the impact of maybe lower confidence level in the economy.

We’ll be feeling that very quickly in his own pocket and therefore, will be also quite quickly to decide against a new investment rather soon. Whereas on the large project, of course, we see typically longer discussions, also multiple departments involved more technical evaluations. And then those decisions have usually already been taken and continued to be executed even at a significantly later stage. I would say Europe was the main area where it was softer. North America, a little bit less and then Asia still.

Mats Rahmström: These smaller compressor could also be influenced if we have announced price increases to distributors that actually place orders a little bit early before those to stock up a little.

Max Yates: Do you have any sense of inventories across your distributors? Are you able to check with them kind of what inventory levels they’re running with? And do you get the sense that those are elevated and that might be part of it as well? Or is that not really the case?

Peter Kinnart: No, we don’t really have information on that with our distributors. But it is generally a fact that, of course, as business is growing they tend to build up stock. They want to be able to deliver fast to their customers. That’s usually 1 of their main sales arguments as well that they have it available and they can simply deliver it immediately. And so typically, they will have a significant stock amount when the business is really booming. And then, of course, when things start to turn in the other did they will, of course, be hesitant to order. And what typically happens is that the customer would order from the distributor, the distributor would deliver but would then not be inclined to replenish that stock right away. And so he will wait for the next order for that type of machine to come before he will order to us, let’s say, in this case.

Mats Rahmström: When we say that we don’t know, we mean that we don’t consolidate it on our level, of course, the local customer center and the sales teams are well aware of what they have in inventory.

Operator: The next question comes from Sebastian Kuenne from RBC.

Sebastian Kuenne: Sorry for drilling again into the cost issues. What surprised me a little bit was the fact that you seem to those cost rises for suppliers for electronics only now, where many other companies saw it already in April, May 2020, so more than 2 years ago. What has changed now in Q4 that it makes it so different? Why do you have to buy spot market now? And why was that not the case in the past? Maybe you can shed some light on that issue?

Mats Rahmström: I think that is probably a miscommunication from our side or a misunderstanding on your side. I think we had talked about the spot market buying several quarters and it’s been a factor for us to make sure that we can supply to our customers. We have the choice between not supplying or buying to extremely high prices of electronics and it’s been ongoing for quite a number of quarters. I think it’s been in our report as well.

Peter Kinnart: And also, if you compare the bridge for the Q3 with the bridge for the Q4, then you will see that the cost impact in relative terms at all that different from what it was the previous quarter. The big difference between the 2 quarters is actually more related on the currency side. With that being said, I don’t want to indicate that we are hiding behind currency to not talk about some issues that we need to tackle. But I think this is quite similar from my perspective as it has been in last quarter and previous quarters, I think — so I think that is nothing new really that we see this quarter. But it seems to be quite persistent and continues to affect our profitability also this quarter.

Operator: The next question comes from James Moore from Redburn. Please go ahead.

James Moore: Maybe could I just have a clarification on something you said earlier. And then the question. Just on your order cancellations, the SEK1 billion, do you adjust your orders negatively to net down for the SEK1 billion cancellation? Or do you show your orders gross excluding that? That’s just a clarification. And then my question is, could you scale the impact on the margin in PT from the one-off spot buys and the obsolescence, please?

Peter Kinnart: Yes, James, I think a very relevant question. The orders that are canceled or recorded as negative orders received. So they reduced the number of the total value of the orders received and they are not excluded from that orders received numbers. Secondly, I’m not 100% sure what you mean with the second part of your question because in Power Technique, we also do have some of these effects just like in all the other business areas, in fact but they are not as prevalent and we don’t really have significant onetime items or one-offs in Power Technique.

James Moore: My apologies then. I thought it was in Power Technique which was the division that had the particular inventory adjustment, obsolescence adjustment?

Peter Kinnart: It was in the Industrial Technique.

James Moore: Could you scale that inventory adjustment impact as a percentage of revenues by any chance?

Peter Kinnart: I think for Industrial Technique, like I mentioned, we basically have done — as we do in many of our different organizations, we do, of course, typically in the course of Q4, a lot of stock takings in order to prepare also for our audit together with our auditors. And then we also recalculate our provisions for slow-moving items. In the case of Industrial Technique, across the different divisions, this was a little bit more significant than it was for the other BAs. And in ITBA was roughly somewhere around 1.5% of the Industrial Technique revenues for the quarter.

Operator: The next question comes from Rizk Maidi from Jefferies.

Rizk Maidi: A quick question on your pricing strategy. Correct me if I’m wrong but you seem to be intentionally reluctant to charge your customers from what you call nonstructural cost inflation, so that’s spot buy in inefficiencies in your own operations. Obviously, this question is relevant to Compressor Technique and Power Technique and not Vacuum and IT, where you have sort of a concentration of customers and sometimes this copy exact thing. So it just feels that you potentially leaving some pricing on the table. Please if you can have any clarification there.

Mats Rahmström: It might sound like that. But of course, we are trying to price all our products according to the value we generate for our customers. So we try our best to increase prices. But when we benchmark a little bit, we can see, you’re right with that, that there are a number of components pricing material prices that we successfully have compensated for. But then we have some other areas where it’s also difficult for our customers to accept a price increase. And obviously, these are things that the operational will arrange anyway, so we get back to the margin where we would like to be. But it’s not like we are not trying to increase our prices and we always try to price our product according to value. And the biggest opportunity for us is always the innovation, bringing new value, transforming the market to something new, this is why we can have a higher margin than most industrial companies.

So this is what we continue to do with but we are not hesitating to increase prices.

Operator: The next question comes from Anders Roslund from Pareto Securities.

Anders Roslund: I just have 1 question regarding the FX impact. You mentioned the revaluation of working capital during the quarter. Is that a one-off item? Or was it simply that the effect was positive in the third quarter and more normalized in the fourth quarter? Or — could you help us interpret the revaluation effect?

Peter Kinnart: Yes. I think if you compare the bridge for the different quarters, let’s say, the third quarter and the fourth quarter to be precise. And you calculate the impact on the margin of the currency effect between those 2 quarters, then I think you will get to a difference of approximately minus 1.6%. I think we had a positive impact on the margin in Q3 of 1.9%. And in Q4, only 0.3%. And basically, you can say that the entire difference between those 2 quarters is actually related to the revaluation of receivables and trade payables. And that is, of course, has to do with the fact that if we look at our currency basket, we were at an absolute summit when it comes to the weak Swedish krona versus very strong dollar and other currencies in the world.

That has changed quite dramatically over the fourth quarter and that has resulted in a revaluation of our balance sheet position at the period end rate of December versus period end September and that was quite a substantial impact. Is this a one-time item or is this something that will recur in the future? Well, that depends very much on the exact currency development. If the dollar remains on the current and the Swedish krona remain on the current levels, then basically there is 0 impact on revaluations but should the dollar weaken further and the Swedish krona strengthen, then it is possible that — or it is normal that we would have new revaluation impacts. Then the question is, of course, how big that will be and that will depend very much on the exact exchange rate that unfortunately, I can’t predict yet.

Mats Rahmström: We wish.

Peter Kinnart: With that, we have come to the end of our quarterly earnings call. We thank you all for your participation and for the very good questions. And we hope that we’ve been able to give you a good answer to some of those questions you have had. With that, I hand back to the operator.