Alfa-Laval Ab

Welcome to our earnest call for the third quarter. Let me start with a couple of introductory comments as always. We had another strong quarter with elevated demand in the marine sector and the book to build on 1.17 for the group. The service growth continued on a high level of 11% in the quarter. The strategic focus on the service business since many years continues with investments in both infrastructure and people. And finally the cash flow was strong in the quarter 3.75 billion SEC. The operational stability in the supply chain is on a good level after several years of work in restoring a normal level of operating working capital has given positive results with maintained customer service levels. And so with that, let me go to the key figures. Orders were a bit stronger than expected with good demand in all three divisions and sequentially stable compared to the second quarter. Invoicing is on a stable growth track supported by a record strong order book, but part of the project invoicing was on the low level in Q3, specifically in the energy division. The project execution is stable and good, but the facing in terms of forecasting and recording percentage of completion creates a little bit of volatility perhaps between quarters. The margin strengthened in the quarter both year on year and sequentially, a positive mix, and strong margins in several business units compensated for the slightly lower invoicing level. Now let's go to the divisions, starting with the energy divisions. A strong quarter for the division, returning to order intake growth despite a weak EVAC market as previously guided. Several end markets were growing in the quarter, including process industry and demand for data center applications. While demand for energy efficiency remain a strong structural driver of the growth, the key verticals in the energy transition does not develop in the speed needed to reach the climate goals. Still, the order intake for what we call clean energy applications continue to grow from a low level with the most promising steps in the pipeline for carbon capture applications. The margin was solid in the quarter with a limited negative effect from the low utilization levels in braced heat exchangers related to the heat pump market. Significant efforts to ensure operational performance together with growth in adjacent applications had a positive impact. There will be no speedy recovery in the European heat pump market specifically, but as previously guided, the third quarter was likely the low point in the demand cycle for this time. Moving on to the food and water division. As expected, the order intake declined compared to the last year due to the elevated level of large product orders from this map in Q3 23. The rest of the portfolio grew in the quarter on a solid level, supported by a continued recovery in the short cycle business, including service. The weaker market conditions in China reached the bottom of the cycle in Q3 last year and returned to slow growth paths since then. The positive trend continued in the third quarter on a higher level and the market sentiments are overall more positive in China at this moment. Most end markets had a good development in the quarter, but biofuels remained low compared to last year. The project pipeline is, however, getting stronger, and the investment level both in ethanol and other fuels is expected to recover in the medium term. The margin was good in the quarter with better utilization in the short cycle businesses, and a strong project execution level above our financial targets. And with that, let's move to the Marine Division. The demand in the tanker market continued to drive the order intake to record levels, especially related to cargo pumping systems. All business units in the division grew, and the order book in the division now stands at 26 billion SEC until recently, normal level for the entire group. One strong demand most likely will remain for service and new applications for decarbonization. It will not compensate fully for a more normalized demand level in cargo pumping moving into the fourth quarter. The margin recovery continued as expected. Compared to the earlier record levels in 2019 at about 21-22%, the existing portfolio is back on historic levels. The difference compared to 2019 is related to the high margin scrubber retrofit portfolio, which is no longer in the invoicing mix, and the slight reallocation of corporate costs, which is higher on divisional level, but neutral on group level. And with that, let's go to service. So service continues to grow in all three divisions and most of the service scopes, including spare parts. We are comfortable that the service strategy works and will continue to invest in the growth plan going forward. The service margin is stable for spare parts and other comparable service scopes, but the mix is gradually tilting somewhat towards service works and invoicing from our service centers. This has for some time had limited effect on service margins, although it remains a healthy and accretive business, obviously. Then finally, a few comments on key markets. And as you can note, China is currently developing well and strong and is on a 12-month basis the largest market in Anfalabal by far. Although both energy and food and water has a cautiously optimistic view going forward, the shipbuilding market has been the main driver of the growth. As shipyard capacity is getting fully booked, the order levels from China will perhaps normalize somewhat up to a slightly lower level. The U.S. has been strong in recent times, but the order intake declined in Q2 24 a bit unexpectedly, and the third quarter was also a little bit on the weak side. Given the strength of the U.S. macro and the current order intake weakness, is considered mainly as delayed final investment decision in part of the product pipeline, especially related to the food and water division. Otherwise, US looks solid. Some weaknesses in both India and Southeast Asia were present in the quarter, but prospects are looking positive going forward, especially in India after the completion of the election process and the return of the investment levels in the ethanol business, among others. Market conditions in other geographical markets were generally stable to positive. And with that, I hand over to Fredrik for some further details on the financial performance. Thank you, Tom.

So, let's start with a quick recap on orders received. Quarter three closed well above expectations, mainly driven by marine ship contracting. However, we have also recorded good order intake in many of our transactional businesses, and in particular in the food and water division. Energy efficiency continues to drive good demand in the energy division with a good order intake development in data centers, but a continued lackluster demand in HVAC. Currency has a negative impact on order bookings with 3.9%, while organic growth is almost 15% in the quarter, yielding a quarter order intake of 18.9 billion a year to date order intake of 5 56.1 billion. Book to bill in the quarter was 1.1 7 adding to the order book which now equals 52 billion of which 15 billion is expected to be in was this year and the remainder in 2025 2026. The order book is judged to be on a good level with current and expected input costs. In a calendar year, quarter three is typically the lowest quarter for revenues as holidays disrupt and shorten invoicing routines. Having said that, we continue to see a growth trend in comparison to quarter three last year with 2.8%, which after eliminating currency impact actually is a healthy organic increase of 6%. total for the quarters 16.2 billion in revenues and year to date. It's a growth of 6.3% equaling 48.6 billion. Sales in the quarter generated a gross profit of 5.8 billion across profit margin of 36% which is 2.8% better than the corresponding quarter last year. The latter as a result of a good service revenue mix of 31%. A higher factor in engineering results that entirely offset the lower capacity utilization rates of our braced heat exchanger factories. S&A cost of 2.5 billion marked an increase of 11% of which more than half is related to increased number of employees. R&D costs increased in line with our ambitions and innovation programs. Operating income at 2.7 billion, which after the financial net and taxes yields an EPS of 4.77 crowns, an increase of 11% to round off a strong financial quarter. Adjusted EBITDA margin is about 17% for the first time since quarter one 2022 at 17.3%, which is 0.6% higher than the same period last year. where currency has only a marginal negative impact. Instead, we have a substantial positive contribution from service mix, a good factory and engineering result, and good project execution outcomes on our projects. Good cash flow from operating activities at 3.7 billion continues to build on a strong EBITDA contribution, and quarter three A quarter 3, a cash positive change in working capital stemming primarily from accounts receivable. CapEx was slightly above guidance levels in the quarter at $0.7 billion, bringing the free cash flow to a level of $3 billion. No acquisitions or disposals of notes in the quarter, while financial activities mainly reflecting the continuing servicing of debt. Debt has decreased further in Q3 with another 1.3 billion since Q4 2024 and almost 5 billion since Q3 last year, excluding leases now at 0.39% of LTM EBITDA and including leases 0.61%. The current debt position continues to build our ability for future acquisitions without exceeding our debt target thresholds. Finally, to some guidance, quarter four investments are expected to remain on similar levels as we have seen in the previous three quarters with an indicative range between 0.4 to 0.6 billion. Currency impacting quarter four is expected to be low as major currency pairs stay within current ranges. And with that final bit of financial guidance, I hand over back to Tom for a view on quarter four.

Thank you, Frederik. And then let me come to a couple of comments on the outlook for Q4. In general, as you may have noticed, we feel that most end markets and geographies remain stable to positive for us. Also, the marine sector is in a very strong demand period, which is not expected to stop in the short term. After record level in the tanker segments with substantial order books in the shipyards and in alpha level. This is expected to moderate the order intake looking into Q4 and slow total demand in the next quarter for the group. So on a divisional level for the food and water division we expect a somewhat higher demand in the quarter for energy division We expect demand to be on approximately the same level as in Q3. And for marine division, for the comments from earlier, we expect demand to be on the lower level in Q4. And with that, we are happy to take any questions.

Ladies and gentlemen, we will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Questioners on the phone are requested to disable the loudspeaker mode while asking a question. Anyone who wishes to ask a question may press star and one at this time. And the first question comes from the line of Magnus Gruber from Nordea. Please go ahead.

A couple of questions from me. First, congratulations. You did a good set of numbers. I just wanted to continue with the marine segment. You call out sustained high vessel contracting in the tanker segment in particular. Is that Q3 specific? And is it all tanker segments? And the orders you gathered in the marine pumping business in the quarter, is that related also to orders or contracting that you saw in Q2?

Well, let me answer the question a bit generically first. We have been in a situation for a number of years where we've been feeling that the pent-up demand for increased scrapping and increased ordering of new ships should at some point in time come. And of course, the timing of that has always been uncertain. And now we are in that period. We still don't see scrapping to increase because the freight rates are positive almost across all of the end segments. So all the ships that are available are keeping running. But obviously the order books at the yards are now filling up and we are, you know, now last year, this year on the order level of about 2,000 ships per year with a fairly strong tilt towards the alpha sweet spots including the tanker side. If you look at so and in principle we don't think this demand situation will change a lot and if you look at the bookings at the yards the orders that comes to us early at the time of the contracting even if the delivery dates are a couple of years out they come to our cargo pumping unit very early and so we are signing up the tanker orders earlier than the rest of our product offering. And so what we see in the order books in Q2, in Q3 is an effect of that. It doesn't mean that the entire contracting is in our order books at this point in time, but on the important cargo pumping segment it is. And if you look at the numbers for product tankers, we are in this year specifically So far this year, already about three times the water volume of product tankers than we have been on average over the last sort of five, six years. So we think this is a bit of an elevated level, but market demand, so that will need to be adjusted in the next quarter, maybe in the next few quarters. But overall, we see a very healthy demand situation for tankers and product tankers over the years to come. So we're not particularly concerned about volatility. We're certainly not concerned about volatility on invoicing over the next couple of years. But you will see fluctuations between quarters in the years to come based on this.

Got it. Thank you so much. And that was a good segue to my next one. How should we think about the delivery time within marine business now in the context of the type of your capacity to that diverge dramatically from the past? Anything you can do to help us on the invoicing would be helpful.

Well, I will hesitate to be too detailed on long-term invoicing. But my general comments that also from the previous question is that, We're provided now for pretty solid order book for deliveries in 25 and to some degree into 2026. So we don't expect a lot of volatility on the invoicing line as such. So without guiding you on what everything is going to be in 2025, we are moving in with a nice level of short cycle business on the service side. And we expect that the you know, the high level of orders on early cargo pumping orders is to some degree going to translate into other product segments as we move forward. So we feel we have a reasonable stability in the growth trajectory for the marine missions business as we look into 2025. Fantastic.

That's good to hear. And then finally, if we can squeeze one in, the audio broke up a little bit. Did you talk about an adverse mix in service ahead to some degree?

Well, yes and no. I think I just wanted, I didn't indicate it as a major issue for how you think about the margin development in the group. The overall growth, what I thought was prudence to say was that we have been growing, you know, well above our historic averages for a number of years. And to some degree, I flagged even moving into this year after very strong growth last year that we may see a temporary moderation on the service side. We were a little bit unsure whether we saw some pent-up demand service demands from past the COVID period or any abnormality in terms of the demand. But in effect, the growth has continued on a very solid level. One of the reasons why it does that is that our service scope has been broadening as we are building capabilities and people. And of course, the main driver of the margin strength of the service business for everybody in industry is the spare part side. So as the mix in the service side is tilting a little bit towards services, that margin doesn't hold completely. I just felt it was a fair statement to make.

Absolutely. No, thank you so much. Thanks for taking.

Now I have the next question coming from the line of Claes Berglund from Citi. Please go ahead.

Thank you. Hi, Tom and Fredrik, Claes at Citi. So as you described, Tom, the lower guide in marine is obviously driven here by short cycle pumping. There's obviously much more than tankers, where the lag from shipyard contracting typically is nine to 12 months, and that's obviously yet to come through. If you take out tankers, do you think the orders outside can increase sequentially here going forward in the coming quarters? I'll start here.

Well, I'm not going to guide you too clearly, but the momentum in the marine business in Q3 was positive on everything, on Storm Geo, on Alfa Val Classic separations, on new fuel systems, on decarbonization and sustainability solutions. And what's maybe not obvious to everybody is that we are, you know, we have taken the whole decrease of the retrofit period of pure ballast and scrubbers over the last few years and that period is now out. So when we compare year on year numbers, we have a quite significant pure balanced planned negative delta that we are compensating for in other parts of the business. So I feel the momentum is very good and I completely understand your questions. I hesitate to be too detailed, but the momentum is in the third quarter was strong, even leaving the company aside.

All right. That's good to hear, Tom. My second one is on this lower revenue recognition. I was late on the call. There's a lot of companies reporting this morning. I think, Fredrik, you said third quarter is always the lower revenue quarter. I agree. But did we also see any customer push-outs, i.e., customers being a bit hesitant, perhaps around the upcoming U.S. election, et cetera? Thank you.

So, no, we don't see any extraordinary push-up from customers. There's always some element of push-up by customers in any year, but nothing extraordinary or nothing that stands out in quarter three or any quarter this year. And my comment was actually more a sequential comment to quarter two, that quarter three is traditionally... a lower revenue recognition month simply because vacations and there's disruptions to the routines. But in the end, it was a growth organically between quarter three last year, quarter three this year, as we would expect from the backlog that we're carrying.

Yes, very clear. Then my third and final one is on the energy guide of stable. I think, Tom, last quarter you said that third quarter could be a low point and you saw some solid demand head Obviously, in data center, oil and gas segments outside of the heat pump segment. You're guiding for flat demand here into the fourth quarter in energy. I'm keen to understand the moving parts, please. Thank you.

Yeah. I mean, we came out stronger than we expected on the energy margin side based on how we compensated in the braced heat exchanger side. had a reasonable mix invoicing in the quarter. So if we were a bit slow on invoicing in some parts, it was probably some project execution in the energy side that was a bit lower. And it didn't affect, if anything, it affected our margins almost positive. So, you know, the quarter came out strong. We had a lot of project order bookings in Q3 in the energy innovation. We had a record pipeline of projects for welded units, partly driven by the investment boom in gas and partly the fact that we are converting some green energy projects into that unit. So that gave a good basis for the fact that we came out with organic growth year on year in the energy division. in what we thought would be our most troublesome quarter. And so that outcome was quite good. We expect the project ordering to be less in the entity division in Q4, and we expect the other transactional parts of the business related to some of the underlying trends that we have been talking about and you referred to to grow. And so that puts us on a net-net, but I would say from business cycle point of view, we feel we are moving into a stronger quarter Q4 than Q3 and it's entirely related to project bookings in Welder that you see a flat guidance.

Thank you. The next question comes from the line of Max Gates from Wong Stanley. Please go ahead.

Thank you. Good morning. Could I just ask on the marine business, could you just remind us in your pumping systems business where revenue capacity sits today? I remember from when you acquired Frank Moen, it was, I think, around 4 billion. I'm just wondering kind of how much capacity you've added here and what is the maximum this unit can actually physically do in revenues?

It's a very good question and you're quite right when you refer to the historic number. Let me talk a little bit around that business because I think there is an important context. I think we thought about the business when we acquired it back in 2014 as a high margin business Maybe a little bit volatile in the demand cycle. So, we didn't see a lot of structural growth. That wasn't the predominant reason for the acquisition. And so, it was in our books for many years, a four to five billion SEC business. We have been in a very elevated demand situation for a period of time now. And it started in offshore. And offshore has, you know, doubled since we acquired it. We, it was a low margin business when we acquired it. We are getting it into, well into Alfa Laval normal margin territory at this point in time. We have a strong order book. We have a broad service business linked to offshore in the North Atlantic. And so, you know, at this point in time, it's a business kind of twice the size that it was in the past. We don't consider it at this point in time super cyclical. We have a good pipeline going forward, and the investment projections in the North Atlantic look stable. So that's that part of the business. The cargo pumping part of the business, as you well know went a little bit dry for us when it came to our order book and it came back very strongly and we see now a number of years going forward when when demand is going to be significantly higher in terms of booking but also in terms of deliveries we will we haven't lost a single order because we don't feel we can support the timeline we are taking exceptional steps, not only in the supply chain, but also in the commissioning of new systems in preparation of what needs to happen in a number of Chinese shipyards right now. So we will be able to follow the market for every single order. And where will it take us revenue wise compared to historic level? It's clear that for a number of years now, we're going to be on a significantly higher invoicing level than we were used to in the four to five. And that will most likely also lead that we will guide you on some future investment decisions for our facilities in Norway that we are preparing at this moment.

Okay, that's helpful. Just the second question would be on the energy division. It looks like you'll do kind of around 20 billion sec of orders this year. Could you give us a rough feel of how much of that will be data centers? and also just a feel for maybe not quarterly data center growth rates, but maybe trailing 12 months or year-to-date, just on how those orders are growing?

I think data centers is becoming gradually a more important part of the energy division mix. I think as a component supplier or a subsystem supplier, the data center orders are coming into our books a bit later than for some others in the sector. So we've seen for us the data center growth while discussions with end customers have been ongoing for a long period of time, the actual frame orders and order recognitions has accelerated the last two quarters and maybe especially the last quarter. So we feel we are in that phase at this point in time we're looking at data center applications that are directly booked under that code specifically in those projects is probably around 10 of our energy division order intake i will not exclude that we have some uh equipment that ends up on data center applications and we are just through the supply chain and not recognizing uh the order code So I would say it could be slightly higher, but that's about where we are.

Okay. And just, that's helpful. And just final quick one. I thought your comments last quarter on the US were quite interesting. You were kind of maybe not putting words in your mouth, but a bit sort of puzzled on, it wasn't exactly clear what was happening in the US. There was maybe a little bit of uncertainty. Could you just give us a sense of kind of how you feel and how things have developed in the US and whether kind of that uncertainty has continued and is it specific to any product types or end markets that you will particularly call out?

Yeah, no, your memory is correct. And I was a little bit surprised because I was in the US in the beginning of the year with a whole pile of our customers and everything was booming and everybody was sold out. So I didn't expect any big changes. was clearly weaker than we expected Q 3 was a step forward. I think the remaining uncertainties that we have was is the closing of the larger projects in in the food and water division and I think in a little bit of that is related to and the position of the speed of investment decision into biofuels and the life which we are booking in the food and water division. But you know they they still in general has been, we feel, a slower decision making on large projects in that sector. On the energy side, it's OK. Our marine business is OK. It's relatively small on equipment. It's a bit bigger on service. So we are just monitoring where we are going on the food and water large projects. That's the remaining uncertainty we have. But overall, we feel reasonably OK with the situation in the US.

Okay, great stuff. Thanks Tom.

The next question comes from the line of James Small from Redburn Atlantic. Please go ahead.

Good morning everyone. I've got three questions if I could. One of them is on the brazed heat exchanger business. Could you say what capacity utilization is today versus the peak? Should we go one at a time?

For us, the question hasn't been what the peak was. It was what our business plan was. So we kind of were running. If you remember about a year and a half ago, I think it was we were going 24-7. We were booked for Christmas Eve. We did everything we could to support our customers best we could, and we still fell short. So basically, we went into an investment program where we, for this size of equipment, I think we more or less doubled our capacity. And with that investment program more or less coming to completion, we completely fell from the all-time high level in heat pumps to well below half. And so we are completely off from from the the capacity it's uh and we obviously have taken steps to you know delay the program as much we can and sort of you know but in in principle uh we we are uh you know for the heat pump side uh probably off about 80 compared to you know the capacity that we planned for uh to throw a number this has partly been compensated by working with adjacency the Conditioning market is pretty good. Our channel partners, we had to limit supply in that channel for a number of years when demand was high. And then we see growth in completely other applications, data centers being one of them. So although it doesn't go on exactly the same product specs for the unit as such, we've been able to manage what could have been a really problematic situation you know, at the margin drop that has been significantly smaller than we calculated with when we went into this problem. That's great.

And if I could switch to pumping systems, Tom, I mean, just thinking about how FRAMO, you talked about offshore versus marine, I have some understanding of the great marine margins of old and how much they fell. Just versus the sort of the past peak, if you like, and how far we got to a year or so ago, How far back are we currently? And I'm just trying to gauge how this plays out, really going back to Max's question, as revenue comes back up to the past high water mark and presumably goes above it. When do you think we meet the old peak marine pumping system margin? Is that now or is that a year or two years' time? And then maybe we can go beyond that, just trying to think about the shape.

No, I think... know we are kind of we are kind of operating that was that was my what I tried to say earlier we are we are operating essentially all of our existing businesses including from all at the level of the peak at this moment I think what if you know can things change absolutely and it probably will there are few areas where we have profit improvement programs in place and working to drive it to a better place. But I think what will be the driver of the marine margin, if you want to sort of think about how you work with it, I think it's mixed changes in the invoicing. There are various profitabilities in different areas, so depending on how they grow in the invoicing mix, it will affect the margins one way or another. Right now, it's clear that, you know, pumping system is well loaded going forward, but it is also a long order book, so we will not completely go super growth quarter after quarter on the cargo pumping side. But I hope we will sort of keep a similar level of growth in the rest of the portfolio. But I think it's the mix side that's going to decide whether we can move the marine margin up a notch or two.

Just to clarify, if I could, because I'm a bit confused. I got the sense that you were saying earlier that the offshore pumping had improved its margins over time. Are you saying that the cargo pumping margin is now back to where it was, or just the whole pumping? Because if you had an increase in offshore, you could still be behind where you were in cargo, if you get the gist.

Yeah, that question is almost too insightful for me, wanting to give you an answer, but I mean, you are kind of correct. Okay, I see. But I would add to this that from a mixed point of view, in the promo business specifically, the invoicing on offshore as a share of the invoicing is probably somewhat higher. And so, but in and of itself, it is a well functioning, you know, supportive kind of around the average margin of the Marine Division at this point in time. I think on the COGO pumping, we are back on the old level. It could be that the ramping still has a little bit of a step to go looking into Q4. But I'm just hesitant to guide you too optimistic on the question on the leverage we're going to get out of that. But if you want to be very positive, there may be a little bit of truth to your analysis it possibly could go slightly higher. But let's see where we go in this ramping and how the facing of the completion of these projects will happen. Very helpful. Thanks very much.

The next question comes from the line of Sebastian from RBC. Please go ahead.

Yeah. Hi, gentlemen. Thank you for taking my questions. My first is, yeah, again on marine. So we hear the strong order intake for cargo pumping. I was wondering, when is the delivery expected for these ships, for the orders that you got in Q3? You must have the timelines already. I was wondering how far out we have to look here. And then, is Alfa Laval still accepting all the tenders for pumping, even if the lead times are extremely long? To me, it feels like it increases the risk that you have to hedge costs, hedge steel prices, hedge labor costs and so on. I was wondering how far out you are now planning and whether you keep accepting these orders would be my first question.

Yeah, we are accepting all orders. To my knowledge, we haven't let go of a single one that we had the opportunity to win on conditions that we think are reasonable. It's difficult to give you a precise timeline but 25 is but there are few there's almost no capacity at the odds nor at our place to take rush orders at this point in time but we have squeezed in the odd rush order from Q3 into deliveries next year but I think that that door is pretty much closed. So 25 is down 26. So we're looking at 26 and maybe some flow into 27 on that. So that's where the order book is. Your question on the risk on the order book is relevant and good. If we look at our overall order book of 52 billion, the one that is longer than typically is the marine one. So for the rest of our business in food and water and energy, that looks normal. So it's the normal volatility. And what I would say on that was that we had some problems across the board when we had the hyperinflation period and we were not fully managed to compensate for that in the contracts. And we are getting a little bit of the opposite effects now. We have better commodity prices and some positive deviations on project and product execution. And that was clearly visible in the food and water division, for example, in this quarter. So there is some elements of risk and opportunity in the cycle for the way the order book looks. We have done a review in the marine division on all of the long contracts in terms of our exposures and what degree we are able to negotiate some variability or renegotiation opportunities. So we think we got it under good control. We are hedging on material costs. And the long order book on the cargo pumping, it is a solid margin business. So even if we have some exposures on a couple of percentage points, it doesn't really change underlying attractiveness on the water book. So we feel good about it. We're increasingly monitoring contractual risks in long-term contracts, but I think we have an okay balance on it.

That's very clear. Thank you very much. My second question is on energy. If I run rough numbers, it seems that the product business is down eight, nine percent year-on-year. I assume this is mainly the brazed heat exchanger business, so you already indicated the low utilization for the Italian plants. At the same time, you seem still reluctant to do anything on the capacity there. Is it fair to say that you are hopeful that the heat pump business is coming back in the next 12 months, because otherwise you would probably at least consider capacity cuts there. Or maybe you do capacity cuts, but it's only temporary. Maybe you can elaborate a little bit on your expectations there. Thank you.

Yeah, on the capacity side, we struggle in China, in Sweden, in Italy, and in Richmond in the U.S. So this is a broad-based problem in the supply chain. We have done two things when it comes to limiting the financial impact on the capacity problem. One is that we simply as much as possible have slowed the full implementation and commissioning of the new capacity. And so we're not carrying the full depreciation and the full cost of those investments in the P&L as of yet, although obviously we carry some. And then we used all the variable opportunities for limiting direct costs especially in Italy, where we use the Cassa Interazione solutions. And I think the team has done globally a fantastic job in trying to modify the short-term financial impact. So it has been not as big as we thought, which means that in terms of revenue growth, we will see an impact in the years to come. The margin effect, the positive consequence is not going to be that big as the downturn was softened. But when we took the investment decisions, we... So let me first comment on the heat pump. Our view is that starting slowly in Q4, we will see a gradual ramp up into some sort of normal levels coming into Q2 next year. That's sort of when the whole inventory reduction program is over and we get some stabilized market on some sort of level I don't expect that that level necessarily will be higher than the peak but of course we will the peak included a lot of inventory building so I think we will have a probably a normality level restoring somewhat below where we were at the last peak and from there on we will see the growth directory when when we made the investment decision we were aware that we took a risk on the heat pump market but one reason that we felt comfortable is that the same size and technology will be used in for example in hydrogen applications and we are at the moment investing more into hydrogen technology than we ever done before as you know. We will showcase what we're doing in that area at the Capital Markets Day in San Bonifacio just a month from now so I really encourage all of you to come there we will try to give you a good view on on what we see happening on the heat pump side, but also in the energy transition side. And that's the basis for why we feel that, of course, the timing of the capacity investments put it at around 250, 300 million euros. The timing wasn't perfect looking back, but we are still comfortable that we will move into the new close gradually over the next couple of years.

Understood. Thank you so much for your help. Much appreciated.

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

Hi. Good morning. Congrats on the numbers. I'm wondering if we could talk about food and water for a second. Understand that a dozen large projects have executed well, but how should we think about kind of margin and revenue mix normalization over the next few quarters? I'm trying to parse out the different factors and how the division's performing. Start there, thanks. Yeah.

Let me move back a year. A year ago, when Fredrik and I were sitting here, we were a bit worried for 2025 from the point of view that we knew that the high level of project orders would decrease a bit during this year and it is especially on the fats and oils and the biofuel side and so the large order book would probably decrease somewhat during this year. At the same time we were unsure where we were going to go on the short cyclical side. We saw early signs in China maybe a bit of a recovery but we were in volume terms compared to the peak in the short cyclical business down approximately 20%. And so, you know, then we had been going through a level of good growth on the service side for a period of time, and we were unsure whether we could sustain that level. So, when we looked, you know, to a year forward at that time, we were a bit concerned, you know, how will the invoicing base for 2025 look like? And we said the most, and I told you guys that the most important things for you to look at and that we are monitoring is where is the short cyclical business going on the food and water side? Because on the project side, you know, we are pretty much, we think we're going to be okay. But on the short cyclical, that's going to be the basis for how we look at 2025. And we were sort of prepared that we may have to prepare ourselves cost-wise into a more troublesome 2025. As the year has played out now three, four quarters later, the short cyclical side has continued to grow. The third quarter was by far the best one that we had for a long period of time. We see a return on the pharma business side that was sort of slowed after the accelerated level during the COVID period. Service has continued to grow despite the fact that it's been very high over a number of years. And our project execution looks very good at the moment with high margins than we normally have been guided for in the project business. So we feel quite good. If we look at the quarter, as we indicated in the comments on the Q4, the orders are lower after the exceptional levels they had last year. all of the other units within about food and water division group. And so we feel when we're looking forward into 2025 that the unit that normally should be the stability in the food and water division is maybe going to play that role a little bit.

Super helpful. One unrelated question. We're starting to see some sizable projects around industrial heat pumps. So BASF as an example. I'm just wondering if you give us a bit of color on the role you play in these very large installations and how big a market opportunity that is for you.

Yeah, and for us, the opportunity with the large heat pumps is, of course, mainly on the gasketed heat exchangers. But for some of the really large ones, for example, you quote the one for BASF now, There, the media started also getting aggressive, and there we were starting to look a lot at our welded range as well. So now it's become a little bit of our welded range and our gasketed heat exchanger range. That's primarily what's going into the really large heat pump projects.

Helpful. Thank you. The next question comes from the line of Andreas Koski from BMP Powerbus Exchange. Please go ahead.

Thank you. Thank you very much and good morning. Starting with a question on food and water. So we've seen weakness in death meth. Would you say that the death meth orders are now close to a trough? And is that the reason why you're guiding for somewhat higher demand for the food and water division in the fourth quarter?

No, it's not. The death meth orders is actually not too far away from the, you know, the normal. I think we, we guided you when we bought the company that sort of the order level a normal year would be somewhere north of 300 million euros and we were twice that last year and so we said you know it's not we don't expect that you know this level of invoicing you know the corresponding invoicing growth that suddenly the company is twice the size it would be problematic to say the least so But the order level is not that exceptionally low. It may be somewhat lower than on a normal year, but I think it's, in my recollection, Desmet is coming in on an acceptable level. And we don't think that's going to change in Q4. So it's not driven by... product bookings when we are guiding. It's the continuous momentum on the short cycle thing and in general in several end markets including dairy, including pharma, including a good product structure and product launch pace in the food and water. We feel good about that part. Our feeling though is as we look into 2025 the situation for biofuels including ethanol So for the food and water division as a whole, both on the Smith side and in our traditional food systems, we expect the investment activity on the biofuel side to increase. So we are not calculating that into the order intake for Q4 at this point in time.

That's great.

Thank you.

And then, did you have any delays in deliveries during the third quarter? And the reason why I'm asking this is because you have the backlog now of 15 billion that will be delivered in the fourth quarter. And if I look at in-for-out orders last year, we should be at the total revenue level of around 20 billion in the fourth quarter. And I don't think you've ever done above 18 billion in the past, so it would be a strong new record high if that plays out. And do you have capacity for that? So, or is it because you have produced product that was delivered in Q3 and will be delivered in Q4?

Well, you know, when you say 20 billions and we have also running the calculation, it's possible to arrive that and, you know, do we get a bit nervous on that number? Yeah, we do. But it's not, you know, I think the issue we have We were maybe a little bit slow on the energy division side, but I think the main struggle for us is to get the phasing right. It's not super easy on percentage of completion project to have the revenue recognition process exactly tuned in in hundreds of projects around the world. But we do expect a good invoicing level in Q4, and we don't feel that there are any structural capacity limits. That's not what's going to hold us back. And as Fredrik was on to before, we don't feel that there is any particular customer delay processes that is hindering. We think the execution of the order book is pretty much, you know, operationally it is where it should be. We are trying to guesstimate the phasing of the order book on a, you know, what's there to, invoice in the quarter, in the next year and so forth. But that's not the science. We are trying to get it approximately right. I think, Fredrik, is that fair?

That's quite fair. I mean, just to reiterate, I mean, I think our judgment is that the quality of the backlog in relation to cost is good. We don't see any structural reasons why we shouldn't be able to deliver on our backlog. order book in quarters for and going forward. There's no operational reasons why we shouldn't be able to deliver. It is a facing question and sometimes the percentage of completion delays and sometimes the invoicing lands on a week or two later than the quarter close and that's just the way it goes. But we expect a strong quarter four given the backlog. Whether it's 20, I wouldn't put a number on it.

Understood. And then just quickly, is it possible to give us an indication of how much of the order backlog is for delivery in 2025?

You will get a clearer sense of that when we give our first report in quarter one and you see it in the form of current and backlog links. I don't want to give an indication that's going to be wrong.

Understood. Thank you very much. Next question. I think we are at the last question at this point in time.

Okay. The last question comes from the line of Bayer from UBS. Please go ahead.

Yeah. Morning guys. It's Sven from UBS. Thanks for speaking to me. Just a quick one on the service business, which has been again, quite strong. I mean, could you just give us a sense how much that is replacing maybe the push out in a new investment, right? And to what extent, you know, customers sweating the assets, using them longer, obviously more service and pushing out the decision for OE. And would that, if that's the case, I mean, would that mean if, you know, the OE comes back more strongly, that extends a little bit the service? That's the first one. Thanks, Tom.

We have been hesitant to draw clear conclusions for a long time, but I think at this point in time, we feel comfortable that we have done a job on the service side that's given us actually a different position in the service market than before. Investment in people, in leadership, in technology, in service centers, in spare parts inventory, distribution capabilities. We are penetrating our install base better. In some areas, we have broadened our service scope to multi-brands. And in some areas where we thought the service opportunity was limited, we have actually driven a service strategy that's taken us to a level of 20-25% of service content in areas where we weren't seeing the single digits before. I think there's a big part of what we are doing that is the right thing long term. We were underserving the market for a long period of time, and we are gaining our fair share and hopefully over time a bit more of where we should be compared to our installed base. So I think I would say that's probably the big part of the answer. If there is one area where we see an elevated service demand because of sweating the assets, as you're saying, It is in the marine industry where we see a lot of older vessels being maintained because ship rates are very good and delivery times for new ones is quite long. So I think maybe we have elements of over-investing in the service on the marine side at the moment. On the other hand, we are increasing our installed base. We are gradually moving moving ballast and scrubbers and other new applications more and more into the service periods of normality. So I'm not suggesting that we are super worried about the service level in marine, but I think the reason that the marine has been so high as opposed to more normalized growth rate is maybe impacted to a degree of old ships being kept on the seas. And that probably will come to an end within the next couple of years. So that would be my five cents worth on it.

Okay, thanks Tom. And the second one, if I may, is just on, because you called out China, obviously as the most important country. I do remember that in the past you had quite some refinery orders, petrochemicals in China. I was just wondering how you see the refinery market specifically, given that obviously we have this huge boom in e-mobility. We see lower gasoline demand. Do you see that in the pipeline already as an impact, or is it more focused on petrochemicals in China?

No, I think we've seen a mix change in China. China is by far the world's largest energy transition country, and that's visible also on the investment side. So we have energy efficiency solutions and we have investment that goes into the renewable side in a different way than in the past. So I think all in all and and there still has been some elements of energy independence in China with investments on the petrochemical and refinery side also now in recent time and still ongoing. So I think our sense is that slow growth in energy and slow growth in food and water from the current level, that's where we are in Q3. And we feel reasonably comfortable with the short-term development in China outside of the marine as well.

Okay, very clear. Thank you, Tom.

All right. And with that, I thought that was great to end on an energy question. I advertised a number of times already for you to come down to Verona. We will share with you on November 21st our best thinking on how we see the energy transition, not only related to Alfa Laval, but how we see and read the trends in most of the relevant sectors. We will show you a part of our laboratory initiatives in order to get efficiency in electrolyzers and fuel cells up to an acceptable level and more. So I think this will be a good one. I hope you have the opportunity to join us in Verona and San Bonifacio. So thank you very much for a good hour.