Alfa Laval Corporate AB

Thank you. And again, welcome to our second quarter earnings call. Let me start, as always, with a few intro comments to the report. First, demand was clearly strong. We are at 27.7 billion SEC in the first half of 2022, organically up 14%. And a new all-time high of 14.4 billion SEC in the second quarter. with a strong support from a growing portfolio of sustainability solutions. The margin remains stable at 16.5, despite volatility in commodity prices and supply chains. In all, the operating conditions improved gradually during the quarter. Finally then, although the group is increasing its readiness to meet the negative macroeconomic situation, market conditions are expected to remain favorable in the short term. I will return to that issue later on. Now, let's move to the key figures. As I indicated, order intake strong at 14.4, and organic growth both year on year and sequentially of around 9%, a bit above our expectations as you saw from the guidance last quarter. Invoicing also grew 9% organically, but still lagging behind the high order intake. We do expect to see a gradual improvement in the supply chains and consequently in invoicing during the second half of the year. On a divisional note, starting with the food and water division, we had another strong quarter after the record first quarter this year. Adjusted for the large brewery order that we booked in Q1 this year of more than 700 million secs, This was in a sense an even stronger quarter driven by service volumes and transactional business. The supply chain disruptions for the group are mainly affecting the food and water division with a negative effect on margins as we are not able to fully ship according to plans with an increasing inventory of finished goods. Finally, then, on food and water, the antitrust process for DSMET is now completed, and we have all of the needed approvals in order to close the transaction. We do expect closing during the third quarter and possibly rather soon. I'll remind you that on a 12-month rolling basis, DSMET will add approximately 4 billion SEC in volume, and some in the region of high single-digit percentage margin, excluding medium-term synergies as we go forward. Moving on to the energy division, we had a new record quarter in oil intake at 14.5 billion sec. The oil intake is, in a sense, a turbo effect driven by two factors. First, we continue to see growth in energy efficiency solutions And together with an emerging pipeline, although still small, of projects in hydrogen and carbon capture, we see the energy transition playing out favorably for the order intake in the quarter and going forward. That, in combination with a return on the CAPEX investment cycle into traditional gas markets, is now also leading to an increased order intake in especially natural gas in the US and also to a degree in other geographies. As we have indicated several times, we are moving on a strategy to become energy solutions independent on fossil by 2030. But in the meantime, we have expected one or two further investment cycles of which we have now entered the first. Regarding the margin, We kept it strong also in the second quarter after the first quarter, which was positively affected by inventory revaluations. It reflects a reasonable balance between commodity prices and our price adjustments to customers. Then the marine division. Order intake was back on record levels compared to 2018. I remind you that this is including a compensation for the approximate $1 billion SEC we had of scrubber orders per quarter during the peak of the retrofit period. You should also note that orders grew in a weaker market for ship contracting. This is a reflection of the growing importance of Alfa Laval's portfolio of sustainability solutions, supporting ship owners to reach their decarbonization targets going forward. Margins remained on the lower level compared to recent years due to old backlog prices and mixed changes from scrubbers to the less profitable pure ballast business, given that we are sharing, as you know, the profitability in that business with our joint venture partner. As mentioned last quarter, the margin challenge will require some patience to work out. In service, this was an exceptional quarter with organic growth of 20% from an already good level. It is a reflection of good market conditions, but it's also a result from five years of investing and building a competitive service offering to our customers. Although we are pleased with the results so far, we will continue to build our service capabilities and capacity over the next few years. Then some final comments on order intake. We had, as I mentioned, a new record despite the relatively small impact from large orders, reflecting solid business conditions in almost all regions and end markets. We may see some quarterly variations in our order intake over the next quarters, but short-term end markets are expected to remain on a good level. In terms of regions, obviously in this situation, essentially all regions were positive and indeed very positive. And you may notice that even Eastern Europe was stable despite the negative impact from eliminating orders from Russia. Excluding Russia, Eastern Europe grew by over 40%. So let me round off. by saying that we have executed well during the five years on our strategy to regain technical leadership, customer focus and service. Going forward, we are increasingly focusing in building additional businesses in sustainable solutions for all three divisions. We will provide you with an update on the portfolio progress at the next Capital Markets Day in late November. And our vision is, if circumstances allow, that we will host you in Copenhagen for you to more physically experience what we are doing in products and solutions for the next five, ten years to come. And with that, I hand over to Jan for some further details.

Thank you, Tom. And I will start with covering sales as usual. We expected invoicing in Q2 to be higher than the same quarter last year. We realized sales of $11.8 billion. which represents an increase of 19%. Please note that we had positive FX translation impact in sales on Q2, and excluding this, sales were up 10%. Invoicing in the quarter was negatively impacted by the supply chain situation, and especially the lockdown situation in China. However, invoicing gradually improved as the supply situation stabilized during the quarter. With regards to sales in Q3, my outlook is as follows. Considering the record high order backlog and the somewhat improved supply chain situation, I do expect invoicing in Q3 to be higher than the same quarter last year. Then looking at the gross margin, so the gross profit margin in Q2 came in at 37.8 compared to 38.2 last year. The overall mixed price impact was positive in Q2, as the negative impact from executing orders primarily in the marine division that was priced prior to the material cost increases was offset by an overall positive capital sales after sales mix, as the service invoice was strong in a quarter, as well as price increases coming through in a good way. We had a fairly good load and capacity utilization in most of our factories, with the exception of some sites in China that was impacted by the COVID lockdown situation, making the overall load volume impact negative in Q2. The PPV metals impact was neutral in the quarter, as higher raw material cost was offset by positive impact from metal hedges maturing in Q2. The FX impact on the margin was negative in the quarter. Finally, the acquisition of StormGU had a positive impact on the gross profit margin overall. Now over to my outlook for Q3. The starting point is 37.3% reported in Q3 last year. We expect a neutral price mix impact with a similar pattern from Q2, i.e. price increases and favorable capital sales service mix to offset the negative impact from increased material costs on the order backlog in marine. Based on the assumption of a gradually improving supply chain situation, We expect a good load and capacity utilization in our factories in Q3. We expect this positive volume impact in combination with metal hedges in place to offset the negative impact from higher raw material costs. Finally, we expect a continued negative FX impact on gross profit margin also in Q3. Then looking at the S&A expenses, They were up 12% in Q2 on a comparable basis. This increase is reflecting the overall high business activity in the company, the inflationary pressure, but also that we are selectively adding resources in our current business with high growth, but also in some of our more long-term business development areas. We do expect to gradually offset the higher S&A costs by increasing sales volumes as we execute on the large order backlog in the next quarters to come. Finally, given the economic uncertainty, we are, of course, closely monitoring our cost structure and resource situation to be able to act fast in case we see signs of an economic slowdown. As you have seen, the EBITDA margin came in at 16.5% below last year, mainly due to the lower margin in the marine division. However, the profitability and the energy and food and water divisions were on a good level considering the high cost inflation and the overall challenges on the supply chain. Then looking at some of the key figures, as I said earlier, on a comparable basis, S&A were up 12%, and R&D expenses were up 2%, versus last year, reflecting the overall higher business activity in the company. Net other cost and income increased by 68 million versus last year, excluding the restructuring cost that was booked in Q2 last year. This increase is mainly explained by the higher royalty cost paid to our pure ballast joint venture partner, Marine, and also higher costs related to ongoing changes to our manufacturing footprint. Financial net Excluding FX impact was negative 78 million in Q2. The FX gains losses in the finance net were negative 90, giving a total finance net of a negative 168 in Q2 this year versus a negative 113 last year. Please note that we had temporary higher interest costs in the quarter, which was related to the refinancing of our corporate bond program this year. The tax rate came in at 26.9 in the quarter, slightly above our guidance of a tax rate of 26. Finally, net income and EPS was higher than last year, partly due to the higher operating income and partly related to the restructuring cost booked in Q2 last year of $204 million. Then over to cash flow statements. So cash flow from operating activities was 192 million in Q2, well below last year due to an increase in working capital. The increase in working capital of about 1.2 billion and a quarter was mainly due to an increase in inventories, partly off-site by increasing customer balances. The inventory increase was driven by the strong volume growth, but also to secure deliveries to our customers during the supply chain challenges. The operating working capital as a percent of sales is expected to gradually come down as the supply situation stabilizes. Investing activities including CapEx investment of 311, slightly higher than last year, as expected considering the previously announced CapEx program to support the organic growth. The financial net paid was a minus 132, 4 million in Q2, and again, negatively impacted, but one-time effects from the refinancing of the corporate bond program, where we issued two tranches of 300 million Euro bonds in February to refinance the 500 million bonds that would have matured in September this year, but was repaid already in June. This means the total cash flow in Q2 came in at the negative 241 million. Finally, our net debt position at the end of June stands at 9.3 billion, with a net debt to EBITDA ratio of 109. Then looking at the FX impact on EBITDA, so the transaction FX impact in the quarter was a negative 25 million, and the translation impact was a positive 115, giving a total net positive FX impact on EBITDA in the quarter of 90 million. Looking at the projection for the full year, we do expect a negative FX transaction impact of 40 million, primarily as our average Euro 6 hedge rate for 2022 is lower than in 2021. On the other hand, if the closing rate at the end of June remains, we would expect a continued positive translation impact that would more than offset the negative transaction impact for the full year. Then, regarding the order backlog, so at the end of June, we had a total order backlog of 29.5 billion, which is 21% higher than at year end, 21, on a comparable basis, due to a positive book-to-bill ratio of 1.23 during the first half of the year. The order backlog now represents approximately eight months of LTM sales. For shipment in the remaining part of the year, the backlog amounts to 15.1 billion, an increase of 3.1 billion compared to the same period last year, which then lets us move to the sales bridge for the full year. Starting, as usual, with the sales year to date, which has been 22.5 billion, And as stated in the previous slide, the backlog for shipment in the remaining part of the year is 15.1, which adds up to a total of 7.6. On top of that, you will need to make your estimate of change in in-for-out orders, FX effects, and so forth. For your reference, the level of in-for-out orders during the second half of 21 was 9.1, sorry, 9.9 billion. With regard to the FX impact, that's, of course, hard to It's uncertain. However, if we use the closing rate at the end of June, the estimated FX translation impact during the second half would be approximately 2.5 billion positive. And by that, I hand back to Tom for Outlook statements.

Okay. Thank you, Jan. The Outlook, as I know you struggled with during the week and other industrial companies, is... perhaps a bit complex, but let me first say that in the order book, in the pace of Q2, we don't see the first indicators of a business downturn as of yet. And while we remain vigilant regarding the economic development and the possibility of a downturn, we continue to focus on executing the order book and drive our long-term strategy in the right way. After first half 22, which has been above our expectations in terms of oil intake, the demand in the third quarter is expected to be somewhat weaker sequentially, and that holds true for all three divisions. To a degree, this is an explanation by normal seasonality and to a degree based on the way we look at our current pipeline and expectations for the quarter. Finally, then, we have announced this morning our next CFO in a separate press release that you might have seen. Fredrik Ekström is a long-term Alfa Laval manager with a strong background in business control. He switched to a leadership role in the business line quite some years ago and has been instrumental in the leading person to drive the successful development of Business Unit Brace, which many of you know from its participation in the heat pump and air conditioning market. As we have previously announced, Jan remains in place, including for the Q3 report, and Jan Fredrik will find a constructive handover during the next quarter, so that from November 1, Fredrik will have left his operational duties in the existing business, and found a good way of introducing himself into his new challenge as CFO. So I hope you welcome him as well and you will meet him, if not before, at the Capital Markets Day. And with that, we are done with the presentation and we're open for questions.