Atlas Copco AB
Q3 2021 Earnings Call Transcript

Published: 21 Oct 2021

[Operator:]

Ladies and gentlemen, welcome to the Atlas Copco conference Q3, 2021. For the first part of this call all participants will be in listen-only mode and afterwards will be a question-and-answer session. Today, I'm pleased to present CEO, Mats Rahmström; and CFO, Peter Kinnart. Speakers please begin.

[Peter Kinnart:]

Thank you, operator. Good morning. Good afternoon, everybody on this quarterly results call for the third quarter 2021. We will start with a short run through of the results of this third quarter. But before I ask the word to Mats Rahmström, I would like to already now ask you that when the question session starts to kindly please only ask one question at a time in order to give all participants the possibility to raise their questions. If there's more time left, and of course, we can come back and give you the opportunity to ask some more follow up questions. Thank you. And then I leave the word to you Mats.

[Mats Rahmström:]

Thank you so much, Peter. First quarterly reviews are exciting. To no surprise to all of you, we have a vacuum pump to the same industry on the front page. If we then go to slide number two, we can look at Q3 in brief and as you have seen orders received on the very strong level, 36% growth and MSEK33 billion, yes we can say that the compared due to the corona year. But last year, I think it was 34. So, not the bad quarter for us. We could see growth in all business areas. So it was not only semi and in all geographic regions as well. Sequentially, of course, semi and some other segment continue to develop quarter-to-quarter, equipment in the most, we can see sequentially that is slightly down. And so this is flat. Revenues, there are big challenges in the supply chain. And I must say that with a considering what we see, we are quite pleased with that number and all the efforts going into that to please our customers. Profitability 21.6 adjusted and comparable number mainly adjusted for the FTI at 22% and are pleased with that as well. If we then go to slide number 3, it repeats many of the numbers that I've said. But looking at the graph may be on the right side, you can see the last three quarters orders received being almost out of the scale and in the beginning of the year, we said that we would compare with 2019 just to make sure that we don't compare with the corona year, but as you can see now it's way above 2019 as well. Operating profit at MSEK6 billion, good number for us and the return on capital employed increased to 27%. And then, we have the geographic map on slide number 4 and it's green all over. Also of course, compared to 2020, North America very strong, double digit growth for all our business areas, Latin America, Brazil continue to be very, very strong for us, 31% growth and double digit for all of our businesses as well. Europe 27, double digit as well. And then Africa Middle East, we had two of the bigger ones compressor technique and developing well and then in Asia very, very strong performance on 47% development. As you remember, China and Asia had recovered a lot in Q3 last year as well. So we see this as very strong, also we can see in all business area strong development. On page 5, we can see the organic growth for a number of quarters. For you that follow us a little bit closely, maybe one and a half year ago, we discussed a little bit to keep going into this slower period. We talked about keeping our investments as digitalization which we have done in the product portfolio and also making sure that we continue to invest in our resources in sales and value selling. And we do see a strong correlation to the newer product portfolios and how that develops in a positive way. So, we are happy that we have the strength at the time to continue to invest in our customers’ productivity. We go to slide number 6, as you get to bridge and maybe the only new start is the currency impact -2 for orders and -2 for revenues. Then you have the pie chart on slide number 7. Of course, with 93% growth for vacuum technique and they are great gaining ground in the group. And 18% for compressor technique, 17% for industrial and 23% for power. So this is just for you to see the balance of the different business areas. Then we go to each business area. We start with compressor technique on slide number 8; very solid continued order growth year-on-year. And sequential, we can see an order decline for equipment, but service being flat on. They actually had record revenues and 7% growth. So we're pleased with that. And then, I think super strong operating margin and also return on capital employed 24.1% and the 94% return on capital employed. And as you can see on the orders received, even if it was a slight decline from Q2, it's still the second best quarter we have had on orders received. Vacuum technique on slide 9. Of course, looking at the graph, it really stands out the incredible development. 6 billion and as you can see now it's quite huge development there. So continued growth, 93% and this was above our own expectations and we discussed this three months ago. Really strong development of course in semi, but also industrial. We continue to gain ground in service linked to the given uptime on our products of course. And revenue in par with last quarter up organically 24%. Of course, we would like to deliver even more to our customers. But that is still a good number for us at this point in time. Operating profit at 24%, of course supported by the volumes that we see, but also that with a 93% silence for operations you can imagine that we would have challenges in our supply chains and operations as well. Return on capital employed very good development at 24%. We go to industrial technique on slide 10. Continued growth as well at 17% and you can see both automotive and general industry being strong and continued growth for service. Sequentially, though that we could see that general industry together what we discussed before to semi is one of the segments that stands out a little bit here. And revenues down at 7%. And operating margin, including this acquisition that we have done that's the bottom line at 20.7 and the return on capital employed at 15, which is also linked to the recent acquisitions. On page 11, you have Power Technique. Of course, though seasonality in the business, but still strong growth at 23%. The revenues increased organically with 13. I'm very pleased with operating profit margin at 16.5% and also the development on return on capital employed at 25%. So good performance from them as well. And then to summarize, in the process to highlight this on slide 12. If you go down to the EBITA and in our case, it's a amortization on intangibles only to give you guidance on that is 22.9 that you recognize the number at 6 billion and 21.6. I think I should hand over to you, Peter.

[Peter Kinnart:]

Thank you Mats. And as you can see on the net financial items, there has not been really any movement that was worthwhile mentioning resulting in a profit before tax of 5.9 billion. The tax, income tax expense ended up being higher than last year, which is of course, on the one hand due to the increased profit from the operations. But also you see a slightly higher tax rate related to some impact from the UK tax increase expected on our deferred tax liabilities in pensions. We, at this point, see in the near future, probably a slightly lower tax rate for the coming quarter. But in the long term, we would rather see the taxes are going up as nominal tax rates are increasing. Basic earnings per share are at 3.74, as mentioned the return on capital employed 27% and the return on equity increased to 30%. Going to slide 13. Looking at the profit bridge, where we move from 19.2% to 21.6%. As you can clearly see the main impact contributes to this effect is the organic impact over volume price mix and others that contributed mostly to this. We had a slight positive impact from currency which is actually slightly better than what we had anticipated in the Q2 call. But at the end of the quarter, the dollars changed to an extent that it actually turned positive. Looking forward, we would expect rather flattish development of the foreign exchange impact, all things remain equal. Acquisitions were slightly dilutive, mainly coming from very recent acquisitions like Canadian pump and compressors, but also in industrial technique as main contributors. But that was not so surprising, as we typically see higher costs in the beginning of the acquisition in order to invest to be able to harvest later from the synergies. Items affecting comparability was costs related to restructuring in the industrial technique business area in 2020. And that I think is explaining the development of the profit bridge. Going to slide number 14, you see a bit more detail on the different business areas. My conclusion here is that you see basically the same development across all the business areas mainly that the volume price and mix is the main contributors to the positive improvement of the margins in the respective business areas which maybe one side comment to be made on vacuum technique where given as Mats already mentioned the spike in growth of over 90%. It is not so surprising that for the vacuum technique business area, it has even been more challenging than for the other business areas to cope with the supply chain constraints and the very fast ramp up. Going then to the balance sheet. A very few fundamental changes to be noted here. On the one hand on the asset side, I would say that the working capital has gone up slightly which is of course very much linked to the volume development that we have seen. In fact, we would rather like to see a bit higher inventories as it probably supports a better output going forward. Otherwise, on the asset side, obviously the cash is the big item that stands out compared to September 30 last year, thanks to the very strong cash generation. On the liability side basically, the main change is on the equity coming from the results and on the non-interest bearing liabilities, which is on the one hand, accounts payable that has gone up, similar to the working capital on the asset side. And also there is still pending payments of the dividends or half of the dividends, which will be paid on the 28, October of 4.4 billion approximately. Going to the cash flow on slide number 16. The operating cash surplus has developed positively, thanks to of course, the operating profit going up together with the increased revenues. Otherwise, the main difference between this quarter and the same quarter last year is change in working capital where last year, we were enjoying a very positive development on particularly inventories and receivables, which we were not repeating this year and in fact, the working capital remain rather flat. And that is also then the reason why the good improvement in the operating cash surplus is basically offset a little bit by this changing working capital if we compare to last year ending at 4.7 billion operating cash flow compared to 5.1 billion last year. And I think that summarizes for the cash flow. Then I would like to hand over back to Mats with regards to the near term outlook.

[Mats Rahmström:]

As we all understand, it's not super easy to look into the future coming from quite a number of strong quarters. But as we see right now is, we still see quite a high activity level from customers in the sales process. So pleased with that. On the other side on the Q3, then the sequential development for equipment, which has a negative trend, the constraints in supply chain. It's a challenge not only for us, but also for our customers. So maybe that doesn't blow confidence in the business outlook as much resistance very strong Q3. But we still had to see little bit what comes out of this. But this is the best we can see at this point, high activity level. But maybe not as high as we have seen in Q3. I think that rounds off the short presentation of the quarter three results. Before I hand over to the operator to help us have a smooth question-and-answer session, I would like to repeat once more to please stick to the principle of having one question at a time so that everybody has the opportunity to ask their question. Thank you very much. Operator?

[Operator:]

Thank you. Our first question comes from the line of Klas Bergelind of Citi. Please go ahead. Your line is open.

[Klas Bergelind:]

Thank you. Hi, Mats and Peter. It's Klas Bergelind. So the first one I have this on the, how you ended March talking about sequentially weaker demand in Europe and Asia in CT in particular and the way you guide and the volumes are always a bit weak during the third quarter sequentially because of seasonality, but it seems like given how you guide the weaker demand from the third into the fourth there is underlying weakness, otherwise, I guess you would have been guiding for flat demand sequentially. So just to confirm, this is the bottlenecks that are also impacting your customers. So you're seeing basically into the fourth quarter slower underlying demand in Europe and Asia. I just want to confirm if I got that right?

[Mats Rahmström:]

I mean, you connect activity to demand and I guess that's correlation that you could do. But we still see that in the high activity level. But otherwise, you are spot on. We also know that there is seasonality, which takes it down, but if we see from the high level right now and any link to the constraints in supply chain, you also see a number of activities in China, of course. And that's why we guide as we do. So you're pretty much spot on.

[Klas Bergelind:]

Cool. Yes very, very quick follow up on that. So are you implicitly saying VT flat and rest of the business continue sequentially down or are you making any sort of comments on VT and assembly within that?

[Mats Rahmström:]

No, we don't guide in that sense, as you know, but we are out there trying to catch every order we can on VT of course, having seen the 93% up and the main part being in semi, of course, we are pleased with that and we will try to stay close to the customer. So I think if the business will be there, we will most likely get our share of that and that's very positive I think.

[Klas Bergelind:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Andrew Wilson at JP Morgan. Please go ahead, your line is open.

[Andrew Wilson:]

Hi, good afternoon everyone. Thanks for taking my question. It's really I guess the follow up on Klas’s follow up in that sense, and just on the vacuum number, one thing we've seen is super, super strong in Q3. And I just wanted to know if there's anything that you would point to us in terms of that being exceptional. So particularly large, particularly large orders or similar or whether if we look forward and appreciate things number move quarter-to-quarter but it's just the run-rate that we can feel comfortable with as we kind of look out over the coming quarters?

[Mats Rahmström:]

No, but if you look back a number of quarters, of course, as I said also early in the presentation that we were celebrating a level of 6 billion, which we're very quite pleased with and had a very good operating margin on that level. Of course, it is an exceptional level to the business, just takes off 93% growth organically for us. I mean, I think the question would come anyway in how much pre-ordering is it and of course everyone likes to get in-line to get their product. And for us, it's extremely difficult to know if customer order for an actual project where it adds a few pumps as a backup. So I think we all have to wait and see. And I think you can trust this that and I think they've shown it over and over again that they are quite good at adjusting cost structure when needed and deliver a good margin then. Although, as you can see that we are shadowed of course with machining capacity, supply capacity on the semi side, it's almost like you've been running flat out for a couple of quarters and we get another quarter that is even better, of course, and then it's suddenly at the point when you have used all your ideas, you have gone from 80% utilization to flat out, it's difficult to yes, okay, let's do another shift because there's no other shifts to add, there’s no extra machines that you wouldn't need to be able to predict 12 to 18 months ahead of time that this would have happened and we couldn't predict that. I haven't seen anywhere else that this would really take off like this. So it's unusual scenario. But I think we are ready for what will come in our way. But it's uncertain.

[Andrew Wilson:]

Thank you.

[Operator:]

Our next question comes from the line of Daniela Costa of Goldman Sachs. Please go ahead. Your line is open.

[Daniela Costa:]

Hi, good morning. It's mainly a follow up I guess to some of the questions earlier. But given the visibility you have at the moment, I guess into this, how the supply chain issues are and would you say that this demand is something you were expecting to 2022 is very big or those gaps that you see now in terms of deliveries or is there a risk that that demand never materialize those don't turn into in this to what extent I guess are also this field more dependent on your suppliers rather than yourself?

[Mats Rahmström:]

Yes. I mean, as you could see from the quarters, we've been another 5 million orders on hand. That's a challenge for us considering that both VT and CT were at record levels in terms of output. I also would like to know exactly what supply we will get from everyone, but it is a scenario right now, where you have, if I take some of the core components, it's still difficult with the electronics and chips. It's difficult with electric engines, it's difficult the diesel engines. And those are some of the core, but then what happens right now is that even you become shortages of commodities, which could be a ceiling and hovering a contact zone or anything like that. So it's actually quite difficult. So if I only would predict on the core, it might be more helpful. But as we see, when we talk to our business right now, no one is saying, well it's getting easier, but they don't say they're getting worse either. But they foresee Q4 to be very challenging. And then Daniela, I think I need to get back to you in three months time to say okay, will this continue into 22 or not. But right now, we see Q4 to be difficult on the supply chain as well.

[Daniela Costa:]

Thank you. Can I do a follow up?

[Mats Rahmström:]

Go ahead.

[Daniela Costa:]

So and then maybe just asking on, when your customers as well, I guess they are also having brother supply chain issues in their projects. Does that have anything to do with also the difficulty in doing the fulfill deliver now or is it just purely upstream?

[Mats Rahmström:]

I think, we didn't fully understand the question. Could you please repeat Daniela?

[Daniela Costa:]

Sorry. I think there's also some echo. I was asking whether like the gap between sale orders and sales and you mentioned obviously all the supply chain issues in terms of like getting, I guess, inputs into your product, but I was wondering, if there is any delay in terms of like being able to recognize sales because your customers also have other associated supply chain issues and they can't maybe take the product or is it, when I said upstream was, is it all getting to your products or customers lead?

[Mats Rahmström:]

I haven't heard that. I actually think that customers are quite willing to accept deliveries right now. And they are also on the level where we from time to time need to go back to the customer to say that they have redesigned something to make sure, and then we check with the customer. They are also willing to do that. So no, I don't think that is a big issue. If they have products it is probably delivered to.

[Daniela Costa:]

Clear. Thank you.

[Operator:]

Thank you. Our next question comes from the line of James Moore at Redburn. Please go ahead. Your line is open.

[James Moore:]

Yes. Good afternoon everyone, Mats, Peter. My question is on revenue recovery next year really without being precise. I am just trying to understand how that could look. So I think this year, you've done 96 billion of orders and 81 billion of sales. That's a very unusual gap. So we're seeing very good orders. But you can't get revenues out and invoice because of a supply chain constraints that's very clear. My question is two folds. Do you see 4Q revenues having the same degree of constraints and as you look into the full year 2022, if China reopens, supply chains open up, would you expect revenues to catch up in that year, such that they then close that gap and have a strong revenue year? Or would you think a spin into 2023?

[Mats Rahmström:]

I think it's a very good question. But also one that as it goes over uncertainty obviously. I think what we see today is that the supply chains are in the very short term, definitely not going to get much better, if not, maybe slightly even worse. So that's probably for Q4 at least, what we expect. I mean reading what's out there then I see also that there's many people talking about that it moves also into 2022. Of course, if tomorrow all the supply chain issues evaporate then we should be able to invoice and produce an invoice significantly more than we have been able to do so far. But it's hard to evaluate exactly, of course when that is about to happen. So I'm not sure if I can give you a very concrete answer to that question in that sense.

[James Moore:]

I guess there's another side to that, that you would invoice significantly more. But it goes back to your previous point that you're running at 100%. So how much do you have to CapEx and higher in that situation, the supply chains did hypothetically free up, would that be quite a limiting factor and would it take a long time or could you do that quickly?

[Mats Rahmström:]

Well, I think when we look at the supply chain issues today, we strongly feel and that is what we hear from the different business areas that the one big limiting factor to do more is basically the supply chain issues and also manage the capacity at hand. So if supply chains would become more easy to handle then we would be able for sure to have more output than what we have today.

[Peter Kinnart:]

I think when we ask the question specifically to our teams, it's like 80% of the issues we have is from our suppliers and 20% of the constraints from ourselves. I mean, as long as it is assembly processes, we can always add people, we can add the shift. The problem is, of course, when we get into shortages in machine capacity, since the ordering time for new machines is quite long today. That said though, of course that we have invested during the year, of course, a lot in vacuum and to see if we can start to catch up and build on our capacity going forward because if you look at the longer perspective on semi, of course, we don't see at this point, the early impact on cloud services. We don't see it on 5G. We don't see it on connected products. Of course that can be bumps in the roads that we have seen before. But the underlying demand for this product is strong and probably so for many years to come. So we are trying to match capacity versus our future scenario.

[James Moore:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Guillermo Peigneux at UBS. Please go ahead. Your line is open.

[Guillermo Peigneux:]

Hi, good afternoon. Maybe one longer term question regarding electricity prices. I guess I'm trying to link between 80% of the life cost of a compressor associated with electricity energy prices, and the fact that we have a massive increase in electricity prices in Europe especially and if one is correct, I think about 10% to 30% of the electricity consumption in the manufacturing unit is actually due to the compressed air. So I was wondering whether you are basically seeing any increase for activity because clients trying to assess this problem as well in compressor technique, which is a very recent problem or is something that at the moment, you don't see as a concern inside for your customers as well?

[Mats Rahmström:]

Do you want to go?

[Peter Kinnart:]

Yes. I think if I understood it well, I think it's about of course, the rising energy price and how that affects the compressor technique business area. Given the fact that there's a long standing tradition of constantly looking for energy efficiency in the product that we are launching quarter-by-quarter in a way higher energy prices are basically a positive for us as we would be able to reduce even more the payback time for the investment for the customers.

[Guillermo Peigneux:]

Yes. And are you seeing any of your customers asking questions about that? That's I guess, my question.

[Mats Rahmström:]

I think that it's always part of the sales conversation. I mean, I think we normally say 70% to 75% of the running costs or the total investment is the running costs for the compressors. What we do see more and more maybe related to that, but that questions we have always had, but we do see more questions regarding the Co2 footprint that we can give the customer not only financially, the better compressor, but also with less Co2 footprint and that is materializing and becoming a part of the science discussion these days. And I will say that that is accelerating quite quickly, which we see actually beneficial to us as long as we introduce the most energy efficient products and the cost is always there as an impact and as Peter said, if the prices on any goes that will be short and the payback for a more energy efficient product.

[Guillermo Peigneux:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Alasdair Leslie of Societe Generale. Please go ahead. Your line is open.

[Alasdair Leslie:]

Hi. Thank you. Yes, just a question on margins. You kind of maintain the very high organic operational level to the compressor and an acceleration in industrial as well, I’m just wondering if can you give us more color on the drivers for each of those businesses, particularly the mix impact for IT and if you could comment on vision within that whether that's all good underlying profitability improvement? And it looks like the supply, especially supply chain headwinds, the impacts of those largely contain to that and do you kind of expect to see a rising impact on some of your other businesses, compressor IT, VT perhaps in Q4? Thank you.

[Mats Rahmström:]

Maybe starting with the last part of your question, I would say that we see the supply chain constraints across all the business areas without any exceptions and we have all our teams fighting on a daily basis to try to solve, sort out these problems that they encounter and many of them like pop out sometimes a bit out of the blue. So it's across all the business areas. It's not that the others are not affected by it. But it's fair to say given the tremendous growth that we have seen from an organic perspective within vacuum techniques that of course, the supply chain constraints are even more severe for them let's say. So we would not say that we would see that expanding on the other business areas compared to what we see today. But we also would not see a fundamental improvement initial term there either. Then when it comes to ISRA, ISRA is of course, as you know, has been acquired more than 12 months ago and is part of the industry technique business area and we only disclose basically the information related to the business area performance. But what we are happy to say about ISRA at least is that the integration activities are going well and according to the plan for the moment let's say with good integration between the general industry, motor vehicle industry and ISRA R&D people, as well as on the sales side we are working closely together to of course, leverage on the combined capabilities of the solutions that all the different divisions provide. So I think that's with regard to ITBI, that’s how the ISRA integration is going. And then I'm not sure if I still remember the first part of the question with regard to the flow through.

[Peter Kinnart:]

Maybe to add on ITBI as well then of course, ISRA is still the low thing of the bottom line, as we said, if you can see as well. But in this quarter also we have the positive mix in there.

[Alasdair Leslie:]

I was just wondering whether that's so positive mix comment at, kind of alluding to ISRA or there is something else perhaps.

[Mats Rahmström:]

No, I think it's more related to the biggest segment in the industry.

[Alasdair Leslie:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from line of Andreas Koski of Exane BNP Paribas. Please go ahead. Your line is open.

[Andreas Koski:]

Thank you. And good afternoon Mats and Peter. I have a question on your comments about the sequential weakness. Do you think that sequential weakness is entirely related to supply chain issues? Or do you think they have started to see some sort of underlying slowdown? Thank you.

[Mats Rahmström:]

I mean, maybe both these things go hand in hand, I guess. If those manual the quarterly reports that I'm sure you follow as well, and everyone is challenged to the same thing. So I think that is one thing. Separate I think, on China the shortage is the biggest car market in the world. And you see the shortages of chips, of course, the impact in that whole industry, not only in China. And at the same time, you can see that they have these difficulties with energy. So you can see shutdowns. And of course, if you have shutdowns, it's not good for the business confident. So there might be a number of other factors. But the biggest one we see is the constraint in the supply chain and even making it difficult on what I would call commodity part on the daily fight to make sure that they can supply our customers.

[Andreas Koski:]

I know you don't have a crystal ball, how long do you think those supply chain issues will be going on now? Why would they ease in Q4, Q1 next year?

[Mats Rahmström:]

No, we don't have a crystal ball as you said. In some cases, I think, you need to increase your machining capacity to get more components out. And that is a bit dependent on where we are in the cycle and of course, how the orders received will look like in Q4 and Q1. So I would only be guessing. So I wouldn't be able to help you much there.

[Andreas Koski:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Gael Bray of Deutsche Bank. Please go ahead. Your line is open.

[Gael Bray:]

Thanks very much. Good morning, everybody. Is it fair to say that the supply chain constraints lead to a revenue shortfall of about five or six points this quarter versus prior expectations or that the expectations you might have had before the quarter itself. And I was wondering if these tensions and shortages have mainly materialized in September. So really only one month being impacted or whether it already visible throughout the quarter?

[Mats Rahmström:]

No, if I understand the constraints, of course has been quite an ongoing issue in terms of the possible output. Of course, there's a number of businesses that has projects in the auto industry, in the semi industry that is expecting deliveries later on. But that is extended lead times. And if I had all the components I wanted and all the labor I wanted, I'm sure we could have invoiced maybe one or two more billion easily. But I think that's as close as we can get at this point and it's not really the focus for us to sit and try to predict that we are going everyday into this trying to make sure that we can help our customers to get their products on time. But I would expect it would be in that range if you have like a more normalized situation.

[Gael Bray:]

Just to be clear, so this was really an ongoing issue and the supply chain challenges have not really amplified towards the end of the quarter?

[Peter Kinnart:]

No, exactly that is precisely what Mats said.

[Gael Bray:]

Thanks very much.

[Operator:]

Thank you. Our next question comes from the line of Sebastian Kuenne of RBC. Please go ahead. Your line is open. Sebastian, if you are on mute please un-mute. Your line is open.

[Sebastian Kuenne:]

Out of respect for management and analysts, I will only ask you one question. So in VT the book-to-bill is now reaching 1.5 and 1.35 for the nine months. Could you explain to us what the theoretical capacity would be at VT and explain what that plans are for capacity expansion at VT? Thank you very much.

[Mats Rahmström:]

I'm looking at Peter, I'm sure I don't have those numbers available. But, what I could confirm is that during the last three quarters, we have continued to invest in machining capacity mainly to be installed close to customers where we have our operations. By doing so, we are trying to catch up. But even though with added capacity, the lead time for machining it still will take time before we catch up on what we have on hand. And I'm not sure what the normalized situation and max capacity. I mean, it's an all-time high impaired with last quarters or two quarters right now. So I guess that level is a level right now that is challenging for us. And then we need to add new capacity to get to next level and hopefully sort out some of the key issues with subsidize.

[Sebastian Kuenne:]

Thank you very much. I’ll get back in line.

[Operator:]

Thank you. Our next question comes from the line of Joel Spungin of Berenberg. Please go ahead. Your line is open.

[Joel Spungin:]

Good afternoon. I just wanted to ask very quickly, it's a broad question, but I didn't give any color. But thinking about the supply chain issues that you faced and through Q3 how they impacted the service and the new equipment side of the business in a different way? Or is it just being uniform across both parts of the business? I'm just curious to know, when hopefully they start to reverse out how it might affect the revenue going forward.

[Mats Rahmström:]

No, but that is you're right there. As soon as I said that service was flat, and of course many of our customers are running their operations in the high utilization mode. So it's also impacting the logistics and the spare parts availability for those teams. So we cannot operate as efficiently as we would like to. I think that's the answer that we could have more service sales as far.

[Joel Spungin:]

And that's true across all four business units.

[Mats Rahmström:]

Yes, most likely. Our PT maybe not suffering so much, but it's a smaller part of our business, but IT for sure, CT we know and VT, yes. So the four at least would probably see benefits of having better access of parts and better logistics.

[Joel Spungin:]

Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of James Moore of Redburn. Please go ahead. Your line is open.

[James Moore:]

Hi, thanks for taking the follow up question. I wanted to get back to your outlook for sequential demand fall in orders in the fourth quarter, which doesn't surprise me. But your answer to Klas at the start, I didn't quite catch. But I guess my question is, we just had very high vacuum orders. Is the comment really a vacuum comment? And if you had to do a comment on compressor which you don't do, would you think about compressor orders in the fourth quarter being roughly similar to that to the third or would you also see a sequential drop in the compressor environment, the demand?

[Mats Rahmström:]

I think, I’ll run on Klas’s comments was that seasonality if you read the number of years that there is some impact on Q4. I think that was what we commented. And I think that's somewhat we can compare to third quarter is more extended than only VT, I could believe we will see that in other business area as well.

[James Moore:]

But I always thought in the past you often commented on a seasonally adjusted basis. So I was thinking that you're not trying to signal that it would be worse than the normal seasonal drop?

[Mats Rahmström:]

Correct. Normally be led into that you will know that there is seasonality, correct and Klas confirmed that there is seasonality in the numbers as being expressive. Maybe I am just confusing you.

[James Moore:]

No that clarifies it. Thank you very much.

[Operator:]

Thank you and we have a follow up question from Sebastian Kuenne of RBC. Please go ahead. Your line is open.

[Sebastian Kuenne:]

Yes. Hi gentlemen. On the raw material cost headwinds, could you confirm that the pricing environment is currently actually better or wanting ahead of what you have on cost increases, basically passed through costs or even faster than, yes they are faster than the cost increase with rising cost. Thank you.

[Mats Rahmström:]

That would be our, of course leading in many of our segments. But it's more than openness and understanding for price increases. We do go out with price increases. But then, I would say that the main part for us is still value creation on new products, bringing in new products to a new price level. But we do also increase prices on existing ranges. So that we can confirm. If it's truly a match or not, I guess you need to look at the bottomline in the coming quarters down to see that but of course we are trying to match that.

[Operator:]

Thank you. The next is follow up from Joel Spungin at Berenberg. Please go ahead. Your line is open.

[Joel Spungin:]

Yes. Hi, I just want Peter just a quick one. I think you talked in your prepared remarks about the inventory levels and how that had increased and that was obviously a positive in the current environment. Is that a set of process that's sort of now done or do you expect that you'll need to continue to invest more to grow the inventory levels further from here?

[Peter Kinnart:]

Do you mean our inventory level, sorry.

[Joel Spungin:]

Yes.

[Peter Kinnart:]

I mean, right now, networking capital and inventory might not be the highest priority, even if you see yourself as a company trying to generate a value creation. Right now, we would prefer to have slightly higher inventory on some parts. But as soon as we are through this, we will continue with the efficiency program, shortening lead times, being closer to customer, looking for our customers. So our intention is to take advantage of not only a bit, but also the capital side of the business to continue to build value for the company. But right now, of course, we're trying to find a component wherever we can find them. So maybe not right now that we go after this in our organization, and then they also challenge trying to find the components.

[Operator:]

Thank you. And we have a question from Sebastian Kuenne of RBC. Please go ahead. Your line is open.

[Sebastian Kuenne:]

Yes. Regarding IT industry division, so order is roughly 50% of the business. Could you explain a little bit how big the portion of EV and battery that block EV battery is as a portion of Q3 orders? I mean, are we talking 5%, 10%, 25%, let’s say what's the development there? Thank you.

[Mats Rahmström:]

I don't have exact numbers. But I think it's significantly more than that. And maybe the easiest way to get a view on that is just have to look at the CapEx for some of the bigger car and truck manufacturers, how they invest and main part of our investments is on the CapEx and the new from an operational standpoint, if they invest in foresight programs, then we do get orders for that as well. But I think the newest is linked in one way to batteries, new models and hybrids. And if you define hybrids and electric, I don't know but I think it's significantly more that is related to this new generation of course in terms of hybrids and electric and that is also what I see, when I look at buying more and more and advance investment whether found right now. So I think you can correlate that very much true to our investment on new lines, new CapEx.

[Operator:]

Thank you. And as we’ve no further questions coming through at this time, I'll hand back to our speakers for the closing comments.

[Mats Rahmström:]

Thank you very much operators for helping us, guide us through the question and answers. As there are no further questions, I suggest that we can close the call here. Thank you so much. Thanks for calling everyone. Bye. Bye.