This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Welcome to Alfa Laval's first quarter earnings call. We are sending from the studio in Lund, Fredrik and I. So welcome to this hour. We will keep a tight deadline today. We have our AGM following this. So Fredrik and I, we need to take off as we conclude latest at 3 p.m. our time. With that, let me go to the presentation and a few introductory comments as always. And I think this time, let me help you frame the quarter a little bit. First, on the demand side, we obviously had a very strong demand driven primarily by global sustainability trends, together with the cyclical rebound in LNG and offshore applications. The demand trends are expected to remain positive, but we do not expect to repeat the elevated level of order intake in the next quarter compared to this one. On the supply side, you may remember that in the supply chain imbalances we had in 2022, they resulted in a restructuring program that was launched in the second half of 2022 in both the Energy Division and in the Marine Division for particular areas. With a strong order intake in these areas of low utilization in the fourth quarter and certainly in the first quarter this year, and the good progress we have in the restructuring program in the weak parts of the portfolio, we are expecting that these parts of our business will continue to gradually improve margins as of Q3 2023, as earlier indicated. The large capacity expansion project that we initiated about half a year ago is moving on as planned. The current demand trends are reinforcing both the need and opportunity related to the investment program and the longer term growth of Alfa Laval as a group. And with those comments, let me move on to key figures. As I said, the order intake was exceptionally strong in the quarter at the new record level of 18.4 billion SEK. And despite good invoicing, the order book reached a new high of 42 billion SEK or a book-to-bill of 1.3. The margin, the beta margin grew in line with invoicing as it should and it was a good outcome given all the volatility in currencies, commodities and supply chain challenges that we've been working with during 2022 and to some degree also in Q1. On the divisional level, let's start with the food and water division. The order intake remained on a good level of 5.8 billion SEK in line with invoicing in the quarter. Compared to last year, we added Desmet as an acquisition. And on the other hand, we also have a distortion with a 65 million US dollar brewery order that was booked last year. So the comparison versus last year is a little bit difficult to make. All together, we feel the Food and Water Division was relatively stable in terms of order intake with an exception of some weakness in China. Since the second half of 2022, we have commented that the demand has been somewhat soft in the Food and Water Division specifically. The margin was solid in the quarter for Food and Water Division with all units performing well on a margin level based on good volumes and based on solid growth in service across the board. Going to the energy division, it was a very strong, solid and clean quarter across all of the business units. The demand was strong in all parts of the portfolio and the order intake was well balanced, covering all product groups. The big utilization issues we had in 2022 for welded heat exchangers, particularly driven by the cancellation of the order book in Russia, are now gradually being resolved with some positive margin effects expected from Q3 and onwards. The margin was elevated in Q1 just as it was last year. There were some reval effects in the quarter as it was last year. Last year we indicated to you that the one-time effect was around 180 million SEC in the quarter. This time the net effect is approximately 150 million SEC. You should not expect that to repeat. But as we said last year, there are many moving parts as we move into the next quarter, including price adjustments and PPV adjustments. So it's difficult to take it out as an individual number. However, for the year, you should expect a similar margin development in 2023 as you saw last year. In other words, the N-unit division market in Q1 will not be expected to be repeated in Q2 and onwards. Still, the underlying profitability in the energy division was better than last year, and with a good order book for the starting point, is solid and positive for the divisional outlook. In this context, I would like to remind you that the large CAPEX project that we decided on end last year and partly beginning of this year, that capacity expansion project is mainly focused in the energy division. As part of this project execution we expect costs of around 100 million SEK per quarter being charged to the P&L during the remaining quarters of 2023 and in 2024. That takes us to the Marine Division. Order intake was exceptionally high, despite ship contracting remaining on a fairly modest level. All parts of the portfolio, except the planned ramp down of ballast water applications, developed well. Structurally, sustainability applications and service continued on a very steady growth in the quarter. And in addition, project orders in both offshore applications and cargo pumping were at high levels. Although the market trends and forecasts remain stable near term, a repeat of this rather elevated order intake for the Marine Division is not expected in the second quarter. The marine margin remained on approximately the same level as during the last quarters, which is a low level compared to historic levels. and in line with our guidance as before. With the old order backlog in boilers being gradually resolved and the order intake in cargo pumping gradually improving utilization rights in our supply chain, we expect a gradual margin recovery as of Q through this year, as we have indicated in the previous quarter, well in line with our earlier guidance. That takes us to service. The service growth remained at elevated levels in all three divisions and grew organically at the very high level of 18% versus last year. I have commented on this before in terms of both the underlying demand being strong, but we have during the last five years made significant improvements and investments into our customer service capabilities. It is now clearly yielding results in terms of high growth levels. On a regional perspective, North America is the only negative territory in this quarter. However, it is mainly affected by the large brewery order, as I indicated earlier. The business sentiment in the US remains positive at large. For the rest of the regions, it is an all positive situation with especially strong demand in Asia, corresponding to almost 45% of our intake. May I also repeat our guidance for Russia briefly. We stopped all new orders as of March 2022 and wrote off all of the sanction related already booked orders since then, amounting to a number well above 100 million euros. As part of a controlled wind-down process, the business activities are gradually closed down from Q2 onwards, with essentially one open project remaining in the food and water area to a value of approximately 1.5 million euros in fisheries remaining possibly until year-end. Our approach to deliver on the contractual non-sanctioned orders has been driven primarily by respect for our employees' security and the legal system in Russia. Let me just finish this by giving you a brief overview on our top 10 markets. On a rolling 12-month basis, China took over as our largest individual market from the US in the quarter. The difference is not big, but nevertheless, it is a historic moment. India is back on the top 10 rather logically. We see strong demand development in India as a whole. And in general, you can see a rather stable growth level on the last 12 months versus all of 2022 in most markets. And it reflects fairly well how we read the current economic environment for Alfa Laval as we're moving forward. And with that, let me hand over to Fredrik for the financial update.
spk07: Thank you, Tom. And hello. Order intake, as mentioned, reached an all-time high in the quarter. We're off 39% total growth. Of that growth, 25% was organically driven, 7% structurally, and 7% by currency. Base business also set a new record level in the quarter. Noteworthy is that that puts Alfaval on a 9.5% compounded aggregate growth for the last three years. Invoicing in the quarter has remained strong and on a high level. Gross profit margin landed at 34.5%, which is below last year, however, sequentially higher than Q4 and then on a comparable basis for the whole year last year. S&A costs are in line with expectations given acquisitions, expected inflationary increases and increased activity levels in a growing business. Cost to sales ratio reflected a positive development landing at 15% down with 2% from the same quarter last year. R&D increases are mainly related to inflation and increased activity levels. Operating income in money terms is 68% above the same period last year, which then increases the earning per share to 3.6 compared to 2.2 crowns per share last year. A strong first quarter. Improving or rather less disrupted supply chains have facilitated more deliveries to our customers. New capacity resulting from the multiple CapEx programs has also boosted our delivery capability. 15% organic growth, 33% in total growth. Nevertheless, backlog continues to increase with a strong book to bill in the period. Adjusted EBITDA is 31% above last year in money terms, on about the same level in margin as previous Q1 and improved sequentially. As previously noted by Tom, the development of the EBITDA margin on a divisional level is positive across the company. Adding some further detail, the development of the EBITDA margin has had a dilutive effect from acquisitions of 0.6%, which was in line with expectations and in line with project business. Currency had a marginal effect, while the organic impact coming from a favorable mix and pricing had a positive impact of 0.5% EBITDA margin. Commodity prices and inflationary prices are well offset. And finally, restructuring programs to address capacity imbalances are well underway and will start to have a meaningful impact in quarter three. Working capital continues to burden cash flow, where inventory levels are the main contributors. We have initiated multiple activities to address purchasing volumes and optimizing inventory levels to reflect the current remaining supply chain disturbances and uncertainties. We expect capital expenditure to accelerate during the coming quarters, bringing 2023 close to the top of our guidance, some 3 billion SEK. Financing activities is negative, as we have chosen not to refinance one of our commercial paper tranches that matured in the quarter. We expect a strong cash flow development during the year. Order backlog stands at 42.2 billion SEK, of which 24.8 billion SEK are for delivery in 2023. 17.3 billion SEK are for delivery 2024 or later. That represents a 59% increase year on year. And the current backlog corresponds to 5.3 months of the current sales. Quarter four, book to bill, was 1.3 billion, 1.3, sorry, and energy backlog was at 10 billion, food and water backlog at 15 billion, and marine backlog at 17 billion. Finally, a reminder of some of our guidance on CAPEX, we guide the market to a 2.5 to 3 billion SEC investment pace over the next three years. We guide on a currency impact on EBITDA for 130 million in quarter two and 375 million for the full year. And then we have amortizations of almost a billion in 2023. We expect the tax rate to be between 24 and 26%. And with that, I hand over back to Tom. Thank you, Fredrik.
spk08: And then let me just round off with a few comments on the outlook for the next quarter. And may I first say that the weaknesses we see in some consumer driven segments and in construction and some other areas of the global economy are not yet affecting Alfa Laval's end markets in any meaningful way, perhaps with some modest exceptions in the food and water area. However, even with good structural demand trends going forward, the all-time high first quarter is not expected to repeat sequentially. On a group level, we expect demand to be sequentially lower. And on a divisional level, we expect demand in the food and water division to be somewhat higher, in the energy division to be somewhat lower. And in the marine division, after the 7 billion plus order intake, we expect the demand situation to be lower. And with that, we're open for questions.
spk02: Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. Please limit yourself to one question. One moment for the first question, please. The first question is coming from Nancy Ni from Goldman Sachs. Please go ahead.
spk06: Hi, good afternoon. Yes, and thank you very much for taking my question. I suppose I'll just start with one question first then. I'd like to sort of touch on your pricing, if you could sort of help us understand just how much of the kind of order growth and the margin improvement you saw this quarter was due to pricing and also how much of that was sort of carried over from the price increases you did last year versus any new pricing. Thank you very much.
spk08: Yeah, it's a good question. And as you point out, when you look at the growth numbers, you need to be careful in terms of understanding what is volume growth and what is value growth here. Our feeling around our pricing is that we are keeping pretty much an even level with our price increases and the cost inflation we've seen over the last two years. So we are fairly balanced. Last year, There are variations between product groups, but we made up to three price increases in order to compensate for a very problematic situation. And this year, we expect it to slow into a more normalized level. We see some commodities going down, some transport going down. But on the other hand, we see escalations in titanium, in molybdenum and a couple of other areas that are very high and somewhat problematic. So the situation is still not stable, but we think it's going to soften a bit this year compared to last year. We think we are pretty much in balance with the cost increases that we have. Obviously, there is a When we talk about reval effects, they will obviously not repeat themselves into the rest of the year. On the other hand, we have overhang from price increases last year and the price increases we did this year that to some degree are compensated up for that. So that's about how the metrics looks for us.
spk06: Okay, great. Thank you. I'll jump back in the line.
spk02: The next question is coming from Klasberg Lindo.
spk03: from city please go ahead um yes hi tom and frederick closet city so thank you for the 150 million in in the the rival effect uh can we talk about the the margin and energy did you say tom that you expect same margin year over year for for 2023 you obviously have a similar um inventory evaluation on both sides you still have welded moving through the backlog which is lower margin, is this because of a higher margin in the new greener verticals or are the cost savings linked to welded progressing better than expected? I'll start there.
spk08: Right. As you know, we are a little bit cautious when it comes to guidance on margin development. But given the elevated level we had last year and this year in the energy division specifically, we are trying to help you guys out a little bit how to look at it. The reason we have that big effect is that with the cost inflation we have and the big standard cost changes, this effect becomes much bigger these years than it has been historically and hopefully what it will be in the future. So we will have... this sort of elevated level a bit resolving itself, I hope. Now, the guidance we were giving as to the margin development this year is that the shape of the curve, if you like, will probably be similar this year as it was last year. Last year, we were at 22%, 23% in Q1, and we were coming down gradually to 16-something. I'm not giving you an absolute guidance number, but I'm just saying that the shape of that curve as we move into this year here, you should probably expect that to have a similar shape as it did last year. And then there is a number of pluses and minuses in terms of what's going to make it better and potentially what's going to burden it as we look for the comparison versus last year.
spk03: Yeah, very clear. My section one is on the marine margin. Obviously, low factor loading pumping systems. You have some FX hedging as well, but now we see the strong growth on the pumping system side. It's both FSPO, but it also seems to be on the merchant side. You also have the cost savings kicking in more in the second half. Can you talk about how the pumping systems orders are likely to move through the backlog? Did you say better factory load from the third quarter? Because I thought lead times out of backlog was a bit longer than that, until you see the revenues kicking in.
spk08: Yeah, and I think your assumption in the end there is correct. Normally lead times do take a little bit of time. And actually this year we have some in for out coming even from Q1. So I would say like this, we have guided all along that we expect demand imbalances and restructuring to continue. create a better situation for us in cargo pumping and the marine division from Q3 onwards since already last year and we are very much strengthened and reinforced in that belief based on what we have in our order backlog now that is what will be invoiced during the rest of the year and we feel confident that we've turned the page as of Q3. Q2 is going to be an intermediate quarter so we see exactly where we are our guidance have been expect us to be on about the same level as we were Q4, Q2 but you know we feel quite positive about both the cargo pumping that we are through the worst and it's gonna come to better level but we have also worked through the boiler backlog to a large degree and we are looking better and more stable in that business in marine division as well as we come into the second half.
spk03: Great, very quick final one to you Fredrik. So it says that you have 400 million per year in investment in energy. So is this up extended? Because I thought that most of the step up that you announced last quarter was CapEx-linked, if we can sort of understand the split there a little bit better.
spk07: Yeah. So when we approve, of course, this big investment program, some parts of it are capitalized and put onto the balance sheet. And some of those investments, of course, come into the profit and loss in the form of OPEX or in the form of project costs to run these investments. And that's what we're flagging that we expect about 100 million dollars. SEC in each quarter for the remainder of the year, and even into quarter one of 2024. Thank you.
spk02: The next question is coming from Andrew Wilson from JP Morgan. Please go ahead. I am sorry, Andrew, I misclicked. The next question is coming from Sven Beyer from UBS. Please go ahead.
spk12: Yeah, thanks for taking my questions. First one is on the marine business. And Tom, you singled out again the decarbonization as a driver for orders next to the pump business. I was wondering if you could go into a little bit more detail. I guess at the moment it's still mostly the fuel systems where you benefit. We could probably confirm that one, but also if you could shed some color on the other areas like smart navigation, air lubrication, the sale business, and CCS eventually, how you see those going up from here.
spk08: It's a good question, Sven. I'll be a little bit brief on it. I think as we come to the capital markets day again, we will do a bit of an update on the development projects as such that we sort of introduced clearly at the last capital markets day. But you're right in your hypothesis that the main driver for us right now, short term, is on multi-fuel side. And that's part of our recovery in our boiler business. And it's part of the growth in the engine room when it comes to complexity. And so that's moving along well. It's a relatively high share of ships that now go on multi-fuel equipment as opposed to just on a single fuel. So that is a helpful trend for us in the short-medium term. We completed the transaction on the air lubrication project. as a product will be called Ocean Glide. We have a very strong pipeline of projects there. Very little is booked in the quarter, so you don't see any effect of that in quarter one, but I suspect you will see somewhat of an effect on that in quarter two already. It progresses well according to plan. Regarding the wind propulsion, that is still a complete development project. We are doing the first mounting of wings in the fall of this year for test trials and we still hold on to the general time plan that first commercial orders we may be looking at late 2025 or beginning 2026. So we are on target with that and the whole development portfolio as we introduced it in November is keeping a good pace.
spk12: And are you seeing benefits on the smart navigation side already?
spk08: Yeah, we have since the acquisition of StormGeo, it's been growing well in line with our acquisition plan and from a margin point of view, well in line with the profitability targets as well. So we are very pleased financially with an acquisition that was a little bit out of the box for us compared to what we normally do. The work now is very much focused on how we use that platform in navigation and in routing to also include the decarbonisation monitoring on board ships and integrate it with our other equipment when it comes to helping ship owners to reach their objectives of cutting carbon emission with 50%. We are taking it step by step, but this is not a straightforward, easy project. So we have some work to do. There are a number of, let's say, software or software as a service type of applications trying to find its path to the bridge. We have one option and I'm not sure we're going to see a lot of industry or company specific platforms with ship owners in the future, we may see a consolidation somehow that makes it easier for ship owners and captains to monitor the ship performance in navigation as well as in related areas.
spk12: And then you said the ballast water business is obviously winding down. How big a share of the order intake was it still in Q1?
spk08: It was... Do we... I actually don't have a full number. Let us go back to that. But it was significantly smaller than it was the first quarter last year. It was a meaningful change. 400 million SEK. Okay. It was 400 million SEK in the quarter. 400 million. Yeah. Okay. Thanks very much, Tom. Thanks.
spk02: Now the next question comes from Andrew Wilson from JP Morgan.
spk00: Hello again. My first question, I was going to ask around China. Obviously, you've had a very good period in China and I think that includes a large order that you had in energy. But I guess just interested more generally in terms of kind of sentiment around on the ground post, I guess, reopening, post on the disruption around COVID and just kind of thoughts for China as a market in 2023, Tom, perhaps.
spk08: Well, I'll give you sort of our verticals. There may be variations on the theme in other industries, but for the energy side, as you sort of indicate, we had a good quarter and the sentiment is good. The pipeline is good. It's partly related to the fact that China drives their climate policy quite intensively. And on top of that, they are continuing to build energy independence. And so that drives also some refinery type of investment programs in China as well. So on the energy side, we look at it very positively in the years to come. On the marine side, depending on the cycle, we're obviously positively affected by what we saw in Q1. And I think the marine cycle, depending on how it evolves now, essentially it looks rather good. And we see, you know, idle yards being ramped up again, both in Korea, but mainly in China. And so I think on those two sides, there is a positive undertone for us. On the food and water side, we have been for the last three quarters been somewhat on the low side. We are looking into whether that is partly our specific segments that are affected or whether we have missed out on something. In general terms, we are somewhat positive as to the second half of this year. We may have seen a bit of a shutdown type of effects in our food and water market. We see a little bit of moderation in the pharmaceutical market where vaccine producers and others have been quite strong in order for separation technologies. So there are some swings here in China that have been moderating the water intake in the food and water division. But I think that's the color I can give you. We are not crystal clear as to the root cause of our food and water number in China.
spk00: Yeah, that's really helpful, Connor. Thank you. And I just wanted to ask, on the marine side, I mean, I appreciate this is a difficult question and there's only a limit to what you'll say, but clearly the guide lower sequentially makes sense given that the Q1 was just so fantastically good, frankly. If I'm trying to think about really what the messaging is there, if I look at consensus orders for 2023, it's around 20 billion. Obviously, the Q1 puts you way, way ahead of that. And then if I kind of tie that up with your last comment about feeling better about marine in China. Can you just help us sort of, you know, what are you sort of messaging in terms of lower? I appreciate lower than seven billion is directionally. But I mean, is this kind of a five run rate? Is this better than that? It obviously feels like there's more optimism there than maybe last time we spoke.
spk08: Yeah, I think we feel better of the marine cycle today than we did three months ago, six months ago. As you know, there is a lot of volatility in this market. So I'm a little bit, let's put it like this. As for invoicing this year, we pretty much have booked the orders that we will invoice. So at 17, as Fredrik said, at 17 billion in order backlog, you know, whatever comes in now is 24 and onwards. And we feel that the outlook for the Marine Division is relatively good in, let's say, a year's perspective or so. That's where we are at the moment. And so how it will fall exactly in Q2, I hesitate. we came as high as we did was that some of the orders that we expected down payment in Q2 came in towards the end of March. So end of March was a really high booking period for us in the marine. And so we would have thought that part of that would have flown over to next quarter and it didn't. So that's why we really are somewhat convinced that we see a change, but the sentiment moving into Q2 is better than it was last year. That was a wobbly answer, I know, but, you know, I'm trying to guide you as well as I can.
spk00: I completely understand. It's difficult. It's very helpful for us in just in, obviously, from such an exceptional level. Lower has quite a wide range, so it's very helpful. Yeah.
spk02: The next question is coming from Max Yates from Morgan Stanley. Please go ahead.
spk04: Thank you. I guess my first question is just around the pumping systems business. And I mean it looks like you're winning kind of clearly very good orders for the number of ships that are out there. So I guess my question is just trying to understand Do you think you're taking some share here? I mean, particularly in things like offshore, you seem to be doing kind of the majority of the FPSOs out there. Is it a case of you're selling more on them? Is it taking share? Is there any kind of color you can give? And would you agree with that, that you do seem to be picking up kind of more than you have historically from a share perspective?
spk08: Yeah, on the tanker side and the cargo pumping, there I would say there is no change in share. We've always been holding a strong market share in that area. We still do. So it's just a matter of ships being ordered, booked and converted into the order book. So there is no change other than the cyclical rebound of the product tanker market that is having a positive effect in Europe. in Q1. On the offshore, we have, I think, a combination of two things. One is that the investment level in the offshore business is at a high currently and probably remains so for a period of time. And I think, secondly, we are more competitive in that area than we've been. We spend a lot of time effort in product cost development, competitiveness and to some degree product extensions that may have a bit of an impact going forward. So we feel good about our presence on the marine side in the offshore.
spk04: Okay. And maybe just a quick follow-up on the P&L costs that you said you expect to take in relation to the investment program, the $100 million a quarter. I just wanted to double-check. You said most of the expansion is in energy. And basically, are these costs above the line part of why you are talking about flat margins for energy yields?
spk08: Yeah. Is that the right interpretation? Well, flat market is your own estimate. It's not my comment. But what we were saying is that about compared to, you know, we always have some If you think about our result development over a couple of years, we've spent a number of years with elevated R&D. We spent a number of years in Salesforce development and building our platform. And that was a cost level that we're burdening our P&L between 2017 and 2019-20. Now, when we get the growth, we have to run big capacity expansion programs. And part of those expansion costs will fall on the P&L above the line. And compared to historic level, we estimate in the energy division that that will be on the level of about 100 million SEK per quarter in above the line costs. So when you look at sort of the underlying gross margin, the underlying positive volume effects, some of the turnaround work and improved utilization in certain areas, you need to balance that with 100 million and whatever else you put into the PPV and other assumptions in your margin development.
spk04: Sorry, did you not say stable margins in energy?
spk08: Yes, I did not say that. I think what we said was that you should expect a similar margin development curve as you saw in 2022, that is an elevated level in Q1 and a somewhat more modest level on the margin during the remaining three quarters. It doesn't mean that it will match those numericals per se. You will have to make a number of adjustments based on the commentary that we have been given today. That will be your calculation.
spk04: Okay, very clear. Thank you.
spk02: The next question is coming from Sebastian Kühne from RBC Capital Markets. Please go ahead.
spk13: Hi, gentlemen. Out of respect for my peers and the request from the company, I will limit my questions to one subject and then go back in the line. On page 16 of your presentation, you show the expected deliveries from the backlog that you have. And if I run the numbers, at the same time last year, you expected 18 billion deliveries in 2022. And now this has jumped to nearly 25 billion for 23, which would then indicate some 30% growth year-on-year for the rest of the year. These numbers, is this the deliveries you actually think you can do for the rest of the year, or is this just booked as a delivery? So is there a risk that this will flow into 2024 because you just don't have the capacities? Thank you very much.
spk07: Yeah, I think your question is the quality about our backlog here. And the backlog is set according, of course, to the agreed delivery with the customer. And we make an assessment, of course, of that backlog or that request from the customer based on where our supply chains are, based on the capacity, based on the number of orders that we have in the manufacturing units. So I would say the quality of the backlog is high and we expect limited slip. of that backlog into 2024. Thank you very much.
spk02: Next question is coming from James from Moore. Please go ahead.
spk05: Hi everyone, it's James Moore from Redband. I wondered if I could ask a question on the energy business and looking at the very strong orders. You made the comment about energy transition and recovery in the refinery sector. And when I look at the split of orders, it looks like the two fastest growing segments are HVAC and oil and gas. And I wondered if you could talk through those two businesses to say a little bit about the color of what's driving it. I'm guessing HVAC is data center led, but if you could talk through the HVAC business and where are the regions in oil and gas? Is it particularly the Middle East where I hear from others we're seeing some strength or is it more in the North Sea?
spk08: Yeah, in terms of Hivac, I mean, there is multiple applications. Certainly, the data center business for us is strong at the moment, not least in the US. But you also have the growing heat pump business in Europe and a number of other businesses. heat recovery, waste heat recovery trends. So it is all in all a good drive across multiple end applications. So while data centers are playing a role, I wouldn't overplay the investment part in them as the fundamental driver of growth here, but it is certainly one of many contributing components. On the refinery, I'd like to point out that we see both biorefinery and traditional refinery growth. So actually part of the energy transition is visible also on the refinery side. I agree with your comment that the Middle East is certainly moving. China is moving in the same energy dependency direction too. But as to biorefinery, we see also investments coming into Europe. So it is a fairly broad-based situation, but as two important growth drivers in the quarter, Hiväcken and refineries, certainly two of them. Yes.
spk05: Very helpful.
spk02: Thanks. The next question is coming from John Kim from Deutsche Bank. Please go ahead.
spk10: Hi, everybody. Thanks for the opportunity. I was wondering if we could spend a bit of time on food and water, the syntactic and the more recent narratives. You mentioned the large brewery or the tech investments. My understanding is that that's in the back end, below the surface and small and large rivers, or more of a logical integration. Is that a fair assessment, or is there any
spk08: Sorry, but the line here was really problematic. I heard large brewery order comparison, but do you think you can clear your line a little bit or make a brief rephrasing? Because I couldn't quite pick up the question.
spk02: I think John disconnected and will call again. All right. We have a follow-up question from Sebastian Kuehner from RBC Capital. Okay.
spk13: yeah hi my follow-up is regarding dairy and edible oil investments where you see a significant slowdown it seems in demand would you i want to leave it open to you to answer but is this driven by the volume impact from the buyers of let's say dairy products that you know with inflation comes trading down and there's fewer growth investments, or is there anything else behind this slowing down? Because it seems to be quite broad here. Thank you very much.
spk08: Yeah, good question. And I think if you're looking for consumer spending impacting orders, it's a reasonable question. We actually don't quite think so. The one area where we possibly see a trend line between consumer spendings and capex investment of customers is on alternative proteins, plant-based proteins, functional foods. The change towards different dietary requirements is perhaps at the moment a little bit slowing and we see some carefulness on capex in that segment. On the dairy side, you're right that the beginning and last year beginning this year was not super strong on the dairy segment. But we think that's more of a normal seasonality or cyclicality. So we are not particularly concerned about the dairy level looking forward. If anything, maybe somewhat strengthening. Veg oil, the same. Veg oil for us tend to be rather dominated by larger projects or larger orders, I should say. And they come and book a little bit with variations over the year. So I think our overall sense from seeds to vegetable oil, HVO, refinery processes, we feel the demand side is probably fairly decent in terms of outlook for the rest of the year.
spk02: Thank you so much. We have another question from John Kim. Please go ahead.
spk01: Sorry about that. Back to food and water for a second. I wanted to understand how we should think about the quarterly development, the numbers this year, given the inclusion of Desmond. Is it fair to say that it's back-end loaded, project-oriented, margin-dilutive? Or is there a certain lumpiness to the profile we should be aware of?
spk08: Well, there is an order intake pattern and there is a margin pattern. As we guided when the acquisition was done, historically, they tend to be conservative in the release of profitability in a percentage of completion during the year. And so fourth quarter tend to be conservative. high profit margin quarter for them, whereas the beginning of the year tend to be weaker. This time, we have commented that actually Desmet had the best first quarter ever, partly probably as a way of adjusting a little bit to Alfa Laval accounting principles. But all in all, it was a very good finish for them last year and was a good beginning. So the dilution effect was a little bit smaller than we have guided normally. I think otherwise our guidance was about It was 1.5% on the food and water margin specifically. That effect was a bit smaller. On a yearly basis, we also have guided that you should expect that the SMET margin, as well as our own food systems margin in project business, we are aiming to keep at around 10%, 10% plus. And we are on track for doing that with a somewhat weaker start of the year, of course, but as a full year, that's our target. When it comes to the order intake, that spreads more as a project. We didn't have a super strong order intake on the SMET side on Q1. The pipeline is okay, so we are... We indicated to you, you should look at this method around 400 million euros per year in order intake pace. And we are certainly not deviating from that guidance right now. So somewhere around there. Great, thank you.
spk02: We have another question from Gustav Schwerin from Handelsbanken.
spk09: Yes, hello, thank you. I have a question on One of the large orders, the heat exchanger hydrogen one, is that the same project that you booked in Q3?
spk08: I suppose this was the NEOM, second chunk of the NEOM, which means that we had a larger chunk of the NEOM city project booked in end last year, and then we had the second part of that project booked in Q1. So yes, that remains the largest hydrogen project for us to date.
spk09: Okay, perfect. But basically, this is the remainder of the order you announced back in October, was it, right?
spk08: Yeah, the contract negotiations covered a number of positions and parts of the project. And so this was just from a contracting point of view, a later part. But we are very pleased with the, let's say, the market share or the customer share that we have in the positions of the project as a whole.
spk09: Maybe just to follow up on that, I think you were quite clear previously that you're far from done on this project. the specific project? When do you think we'll see more orders on the separation side or more equipment in general?
spk08: Now, I think if we talk hydrogen, I don't think the issue for us is one specific project any longer. We are working really broad-based with the global pipeline in a number of applications related to hydrogen. And so we are rather positive as to how the hydrogen demand situation will develop during the rest of the year. And this was just the first project. It was an important and large-scale project, but nevertheless, we believe the hydrogen growth is here to stay for a number of years.
spk09: Okay, thank you.
spk02: The next question is coming from Joanne Elizon from Kepler Shavu. Please go ahead.
spk11: Hi, this is Johan. Thanks for taking my question. Just to follow up on the energy side here, you talk about this extra OPEX of 100 million kronas per quarter, including Q124. Could you sort of indicate what sort of volume or revenue benefit we should start to see from those investments? I guess it's primarily for the Braceteeth exchanges in Lund, if I remember it correctly?
spk08: No, it's much broader. We are doing out of the, let's call it, this is fluid material, right? So we always do investments and they come and go. But if you want to take that chunk, approximately one billion out of the four is on Lund site specifically, and both related to distribution and to production and to tool shops. and whatnot. But the other three are going to capacity extensions in Ronneby, in San Bonifacio, in Yanjing, and also in India. So we are maximizing our footprint expansion within the current brownfield areas that we are in. It covers both the gasketed plate heat exchangers and the brazed infusion bonded heat exchanges that go into the heat pump application. So it's fairly, it is a heat exchanger focused investment program but covering a fair amount of applications and products.
spk11: And can you size it somehow? When is it up and running? It sounds like it should be running then by Q1 next year. 5% addition to the energy division or what are we talking about?
spk08: It's a little bit, let's say, both confidential and difficult to give you like that. But I think what we can say is that it will allow us to continue to grow double digit in several of the product areas in the energy division over the next three to four years. That's... That's about, I think, where we are getting on this program. And after that, we will have to consider some further CAPEX, I believe.
spk11: Okay, excellent. Thank you very much.
spk02: There are no further questions at this time. I hand back to Tom Ericsson for closing comments.
spk08: Okay, thank you very much. And thank you very much, guys, for your time. I know it's a busy reporting day today. If no further news occurs during the quarter, we will be back from Lund a quarter from now with our Q2 report. So thanks a lot.
Disclaimer