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 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, the intake is 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 sec. 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 Dismet 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, Dismet 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 order intake at 14.5 billion sec. The order 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, a project 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 one 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 shipowners 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 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. 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%. 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 effects, translation impacts 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 a 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 on executing orders primarily in the marine division that was priced prior to the cost increases was offset by an overall positive capital sales after sales mix as the service invoicing was strong in the 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 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 metal 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 percent 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 percent 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 60.5 percent 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 percent and R&D expenses were up 2 percent 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 costs paid to our pure balance joint venture partner, Marine, and also higher costs related to the 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 higher temporary higher interest cost 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, a net income and EPS was higher than last year, partly due to the higher operating income and partly related to restructuring both 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 in the quarter was mainly due to an increase in inventories, partly offsite by increasing customer balances. The inventory increase was driven by the strong volume growth, but also to secure deliveries to our customer 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 included capex investment of 311, slightly higher than last year, as expected considering the previously announced capex program to support our organic growth. The financial net paid was a minus 134 million in Q2 and again negatively impacted by 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 bond that would have matured in September this year, but was repaid already in June. This means that 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 a 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 sick 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 positive, 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 percent higher than at year end, 21. On a comparable basis due to a positive book to bill ratio of one point twenty three 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 three point one billion compared to the period last year, which then led us 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 seven point six. On top of that, you will need to make your estimate on change in info out orders, FX effects and so forth. For your reference, the level of info out orders during the second half of twenty one was nine point one, sorry, nine point nine 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 two and a half billion positive. And by that, I hand back to Tom for outlook statements.

Thank you, Jan. The outlook, as I know you struggle 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 a long term strategy in the right way. After first half twenty two, which has been above our expectations in terms of our 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 you might have, 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 one, 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 market today. And with that, we are done with the presentation and we open for questions.

Thank you, ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Once again, press star one to ask a question. And we will take our first question.

Hi there, this is Nancy from Golden Facts. Thank you for taking my question. So just one from me. My question would be kind of given your sort of sequentially lower demand outlook and possible concerns around kind of the current macro outlook, I was wondering, would there, is there any sort of risk or change in your thinking regarding your capex plans?

No, not at the moment. The capex plan is probably moving a little bit slower than we expected due to, you know, the same bottlenecks that we see in supply chains as we have for our own business. So we are moving a little bit slower than anticipated with that. I think regarding the capex for next year, those decisions are already made and they remain very valid. We may take a somewhat cautious approach in terms of how we pay certain of those investments, although not the ones that are related to immediate capacity constraints. So answer is probably 60, 70% no, we go as planned and some judgement on the remaining pipeline with decisions coming up over the next 12 months.

Okay, makes sense. Thank you. And just a second question, if I may. I just wanted perhaps if you could offer a bit more colour on the kind of dilutive backlog that you're currently working through, especially sort of marine and energy, do you able to offer roughly know how much of that is kind of been delivered on or how much more is there to go?

I think the backlog is not a major issue in energy any longer. And for the marine, we do still have part of that lagging, it's getting smaller by the quarter. So I would say by year end, that's not the meaning of full factor how other components are going to move. Let's leave that. So I always recommend you not to look at the individual parameters and adjust completely. It's a complex world with many moving factors there. But from a backlog point of view, I think for the marine division by year end, we're pretty much out of it.

Great. Thanks very much.

And once again, as a reminder to ask a question, press star one. And if you find that your question has been answered, you may withdraw your question by pressing star two. We will now take our next question.

Good morning. This is Johan Eliasson from Kepler Shiver. A few short questions here. Sorry if it's still on the marine segment. But I learned something new in this report about carbon capture. This new product you talk about, the power pack, it seems to be a significant driver of orders in the quarter. Could you size those orders already from this product? And how do you see it playing out going forward? Thank you.

And now the e-power pack is still a very small part of the business. We are in the startup. So carbon capture with respect to marine is non-significant. In the energy division, we are still a little bit bigger than we still have not those effects in the order books. For the marine, what you are seeing, to take just one aspect, is a clear growth in multi-fuel solutions, which does require more advanced equipment set up on board. And that together with continued good demand in pure ballast and then gradual improvements in a number of other areas accounted for the order intake growth in the marine division. And I should say that note that the service side on the marine is very strong in the quarter. I think from our point of view, it's a reflection of high freight rates in many areas, somewhat aging fleet and consequently a need for owners to keep those assets in good shape. So if you want to have any specific comment on the marine order intake, I think it's the service side that stands out.

Okay. Previously when the rates have been so high, the comment has sort of been that they don't have time to take them out to do the maintenance, but now they simply have to. Is that sort of the conclusion we can draw from the quarter, for example?

I think in all aspects, markets are adjusting now to the reality we live in. We learn to cope with the limitations that we have. I think there was a factor before of not only wanting to utilize the ships, but also waiting times and clogging at ports were a problem. So I think scheduling is now working in a way that we see some sense of normality and maybe a bit of a pent-up, as you say, a bit of pent-up demand that is coming through at the moment.

And on the offshore side, you mentioned being good as well. Is that sort of idle capacity being refashioned again to put into work or are there any sort of other drivers specifically in that segment?

It is a clear capex boom in offshore, so it's not service-related as such. It is new capacity coming online and it's a very clear investment cycle in the offshore as a whole.

Okay. Is that gas-driven or is it sort of some impact from offshore wind as well?

I think wind is a very limited aspect of this. This is to a degree gas, to a degree oil. So the energy price as such has been on the up-cycle since some time back is really playing into the equation here.

Okay. Thank you very much.

We will now take our next question.

Hi. Good morning. It's Aurelio from Morgan Sallie. I had a couple of questions, please. The first one is around the margin development in the energy division. Obviously, even if we exclude the one-off effect that you had in one key, the margin seems to be quite strong sequentially. So I wonder if you could break down how much of that is on to pricing and how much is done to mix. But any comments around that would be helpful.

Well, I would, that's a difficult question because it depends on what base you're looking at and all of that. But what we can say is that compared to Q1, we largely eliminated the revaluation as a factor and for the rest, it's obviously a combination. What I would say is that we have, as a result of the Russian situation, as a result of the previous oil and gas crash which left us with weak order books in certain areas, and as an expectation of moving ourselves to a less fossil-driven energy mix to something else, we do have changes and to some degree challenges in the energy division which remain. So both in the energy division, we have certain parts of our business that are not performing according to expectations, and we have the same situation in the marine division in some areas where we are left with changes that need to be addressed. So we're looking at those in both those two divisions. Leaving that aside for the energy division specifically, we clearly are in tailwinds with respect to all energy efficiency-related businesses, and that is the big volume and profitability drivers for us right now. I think on the pricing side, largely we are compensated for the cost inflation that we've seen. That's the order book that we are building now. It's difficult for us to track on projects and all individual articles exactly where we are on the pricing versus the costing side, but as a whole, we see that coming through in an acceptable way.

Thank you. That's helpful. And my second question is around your invoicing in the second quarter, because you mentioned some supply chain constraints and obviously China was locked on. Quite interestingly, China sells for up sequentially, so I wonder how much of your, how much the 9% could have been, have you not had any supply chain issues or China lockdowns? I'm not sure if you can quantify those impacts.

I think we are starting to learn how to operate in China inclusive in lockdowns. So while the beginning of the quarter was complicated for us, we came out from a production supply point of view quite well. In China, we managed to move employees into factories in a closed loop type of cycle, operating at decent capacity even during lockdown periods. So those effects were not so big, but to the extent they were there, they were certainly impacting food and water more than any other part of our business in the second quarter. I think the bigger effect is still related to electronic components, and electronic components has its largest presence in rotating equipment in food and water, and consequently the finished goods inventory and the possibility of increasing shipments in second half is mainly related to food and water, whereas for the energy division, which is more metal related, I think we've been in better balance all along between order intake and shipments. So, you know, we indicated last quarter we had an increase of delays, and I think we indicated 600 million were sort of tracking behind schedule. I wouldn't say that that number has changed very much. It's probably at around the same level now. So that's why we're saying that we think we've hit the bottom in this. We see better operating conditions through the quarter, and we expect that to remain during the second half. Thank you very much.

We will now take our next question.

Hi, gentlemen. It's Sebastian Kühne, RBC. I have a question regarding the price-volume blend, and I want to understand that a bit better. So year on year you have 20 percent revenue growth, but when I look at the gross margin bridge, it indicates that volume didn't really support. So is this 20 percent growth mainly pricing? That would be my first question. Secondly, in marine, just to drill down a little bit more, April and May saw poor closures in China. Could you kind of quantify again the impact that you had on your revenues? Is it part of the 600 million you just mentioned? And lastly, on input costs, steel prices, when do you expect steel prices to become a tailwind, given that in North America steel prices halved, and now we see nickel prices dropping quite sharply and also actually being down year on year. So stainless steel should become cheaper. When do you think this becomes a tailwind? Thank you.

Let me start with the pricing. I think that's a very relevant question. You should be alert on that issue, I think, in general and certainly related to Alfa Laval. We're not giving a precise number on a complex portfolio of transactional projects, mixes of invoicing and numerous product lines. So we have variations. But our expectation is that when you look at the organic growth number, whether it's, especially on the year numbers, we feel that we are probably on high single-digit price effects. And so if you look at price versus volume, we are probably somewhere north of 50% of the growth in volume and somewhere south of the 50% in terms of price. That's about how we feel about it. If you look at the sequential growth numbers, of course, the pricing effects is less between Q1, Q2, but there's still an element of pricing also in that, although at the smaller level. So I think that's as good as the guidance that we can give. We certainly don't have price increases of 20%, although I wish that would have been true. On China, it's difficult to break down. It's not, as I said in the previous question, the main issue for supply chain is not the Chinese lockdown. It is component availability and to some limited degree logistics related. And that's why I feel that as we return to a slightly more stable sourcing situation, we have moved incoming goods through working process to finished goods and we expect to have somewhat of a positive effect on the invoicing on the second half. And the last question was?

Positive effects from the world market. World market.

Yeah. We got it. I mean, here is how I would look at it if I were you. When commodity prices shot up in the air, you were all hugely concerned about our ability to compensate. Now, through working with price, through metal hedges, through inventory evaluations, we managed to move through the up cycle in a relatively stable way. And the bad thing with stability in headwinds is that unfortunately it will also remain the same when you have tailwinds. That is, you know, we will see over time if commodity prices are significantly and quickly reducing, we will have negative hedge hedge effects. We will have some negative revalid effects and we will clearly have positive PPV effects. And so, you know, I wouldn't bring in, you know, the commodity price issue too hard in the equation. We manage those cycles in a good and a constructive and a stable way. But we don't, by eliminating the upside, you know, on short term swings, you know, it goes both ways. So I think that's the best guidance I can give you. Understood. Thank you very much.

And we will now take our next question.

Hi, Tom and John, Klaus and Sitti. So I just want to come back to the energy margin. It doesn't seem like there is any revalid effects. It's a solid underlying margin, which is great to see. Are the new growth areas linked to energy efficiency, NICs enhancing, top invoice more out of the backlog or do you simply gain from volume leverage from low levels in oil and gas? And do you think this margin is sustainable into the second half, i.e. above 15 percent? I know it's more in for out easier to increase prices in energy against cost. But I was wondering if this is a new level. I'll start there.

Since we don't guide on margins, I will not confirm nor deny your speculation. The clear that in the quarter we had mixed effects also from a well growing service business. So all in all, the mix was good. There are always moving parts in the P&L also in energy. So there may be effects both positive and negatives in terms of raw material. I mean, the raw material dependency is high in the energy division. So it moves quickly in that division, as you saw in Q1. What I would say, though, without raising expectations too much is that the improvement in the oil and gas cycle has not materialized yet for us in terms of invoicing and consequently not on result. We are still working through the aftermath of the fossil fuel downturn that hit the order books quite hard, including the elimination of the Russian orders and the stop of taking new Russian orders from the four sides. So we are not through with that. And we are troubleshooting as we speak. Overall, on the energy division side, it looked good.

So a follow up to that then would be as you're invoicing, and I appreciate it hasn't moved through the backlog yet, but as you're invoicing more oil and gas orders, are that mix neutral or will it be mixed negative given that we are coming from 2014 levels when the margin in that business was very high? I mean, I guess might not be as high now.

No, we're not going to be back in the in the booming days. I think without guiding to, you know, and it's sometimes. I'm not sure what what is adequate. I wouldn't. It doesn't move the needle too much in either direction. I think, John, I don't know if you want to be more specific than I am on that.

No, I think that's a fair. Okay, cool. My second one is on the is on Marine then and the margin. It's obviously very good to see that you recover quarter on quarter. I can ask you, Tom, on new orders or invoicing further out than the margin here. Obviously, you're talking about that the content are vessel is going. I guess your customers must be very receptive to price increases. Are we on new orders? Is that sort of 15, 16% back to where it should be initially? And and you said that the backlog impact should be gone by year end. We're trying to think when we can bridge the two old versus new backlog.

And as you know, the challenge is that there will be 20 new issues to order. So I wouldn't predict, you know, the the exact development of the results side. But but it's clear that and you have to remember that the the the mix aspect is a long term issue. It's not a short term issue. So just adjusting the backlog will not automatically bring us back into the historic level. With that said, I think, you know, certainly the pricing is much better adjusted to the current operating environment than than we were with the backlog in Q1 and the two degree and in Q2. So so that the in and of itself would certainly have a positive effect together with possibly somewhat better share of service in the mix.

Yeah, very good. Very, very quick. The final one is on biodiesel. It doesn't get that big even with death met at the center of the group when we back out the exposure. But we're getting some questions to what extent this can take a hit from food inflation that we see out there. I mean, it doesn't look like a big impact. But if you could comment what you've been seeing in the border pipeline discussions, if anything on biodiesel have changed at all. Thank you.

No, I think the biodiesel is still moving. It's correct. As you said, you know, one reason why the biodiesel and biofuels discussion, at least as long as it's based on on vegetable vegetable oil and residual fats, is that there will eventually be a bottleneck and an inflationary pressure in between the fuel side and the and the food side. So we think there are capacity limits down the road when it comes to the expansion of of of vegetable and animal fats as a source of supply into this chain. But we have not really experienced that. That is a big issue here and now with the with the higher energy prices in general. I think the investment case still remains solid in the biofuel pipeline.

Thank you, Tom.

And we will now take our next question. Please go ahead. Your line is open.

OK, thank you. Good morning, Tom, John and Johan. A couple of follow up questions. And sorry if I missed that. I've had some technical issues this morning on the treatment systems. Have you started to see a decline in order intake now or does the order levels remain high? And what's the absolute level compared to to to to a sale for balance with treatment systems?

The market remains stable. We expect to see a decrease in the market. So far we are pretty much flat compared to rolling twelve months.

And that's around three billion set. And on on price increases, I understand on average your price increases are high single digits right now. Is that also true for for the backlog that you have or shall we expect your price increases when it comes to sales to increase further in the second half of this year?

Well, on average, on the backlog, it will have to be somewhat low. But now we've been working with you know, throughout last year gradually. I think if you take an average, we had approximately three price increases during last year. So and most of what was done on the price increases in the beginning of last year is probably shipped at this point in time, except some larger projects there with longer lead time. So expect the average on the on the order book to be somewhat below. But but we think the the the orders that are taken in Q1 and Q2 are very much adapted to the current cost scenario.

I'm understood to the high single digit pricing, which is on the new orders that you are taking. Understood. And if steel prices or some steel prices have already started to come down, do you see a risk that you would have to lower your selling prices again if we head into recession and steel prices continue down or have they historically been very sticky when you raise your prices, you're able to keep them?

Well, we have various parts of our portfolio. And I think at the end of the day, you know, we need to be competitive in the market. And there is no reason why, you know, profitability should be substantially enhanced just by a temporary spike in in raw material prices. With that said, I just want to remind everybody that while commodity prices and steel prices have been one part of the cost inflation, you know, we've seen it in salary and wages. We've seen it in transportation. We've seen it in logistics. We've seen it in commodity, you know, in all the commodities needed for consumables in production. So the cost inflation is still moving very, very strongly in most items other than the commodity side. So I have a hard time to see that there will be a very quick and fast adjustment based on lower nickel prices alone.

Yeah, OK. That's clear. And then lastly, on supply chain issues and logistics, etc. I think we've seen an impact in the food and water division now also in the second quarter. How, yeah, what are the problems now going into the third quarter? Are you still seeing the same kind of issues or are they easing and you think it will be easier for you to ship products in the third and fourth quarter?

We as we have indicated in some places here, generally we feel the operating conditions are improving. The supply chains are getting used to dealing with the challenges that are there. So underlying, there will still be, you know, problems to resolve. But I think gradually we are dealing with them better and better in our global supply chains. And we think that shipment will increase as we move into the second half.

That's great. Thank you very much and have a good summer.

Yeah, you too.

And we will now take our next question.

Good morning, Tom. Can you hear me?

Yeah.

Sorry. I've got some technical issues as well. Sorry, I have two quick questions if I can, please. One on the gas situation in Europe and secondly on tanker contracting. I appreciate the situation in Europe is rather dynamic. I think the long-term potential is fairly clear, both on energy and marine. But can you talk a little bit about the near-term tailwinds and headwinds associated with the gas situation in Europe, specifically on the tailwinds? Have you seen any levels of pre-ordering, if you like, across the business in anticipation of sustained and more material gas disruption in Europe? And around headwinds, are there any signs among particularly your chemicals customers that we might start to see some delays and possible cancellations? I'll start there, please.

We don't see any, other than Russia, which is cancellations from our side with a small amount also in Q2. The cancellations remains on a very on an insignificant level. So at the moment, that's not a big worry. Pre-ordering, we don't see either. I would say what we see mainly on the gas side is the expected upswing coming from partly US and partly Middle East, other than Northern Atlantic offshore activities. So to us, it's a very normal cycle at the moment, the way it typically looks when the energy markets do a comeback. The effects in Europe with respect to this is in our books not so big. The one area that we've talked about before and you guys like to monitor is the heat pump market. And of course, the transition from gas boilers in Europe in the Hivac systems to heat pumps is ongoing. It's already a very dynamic and expanding business. It remains so. We haven't seen it accelerate any further. I think everybody is at capacity when it comes to what can be done in the heat pump market, including installations. So I don't expect that that's going to change very much other than in general a favor outlook, which was already in place before the energy crisis.

Clear, Tom. Thank you. Can I ask just secondly and briefly on your Marine Pumping Systems business? I'm looking at TANQA contracting down 60, 70 percent or so to kind of decade lows. Wonder what you make of that. Is that sort of cyclical? Is there some more structural elements to that? And if more structural, what's your assessment of the need potentially to address the operations in your Marine Pumping Systems, please?

Yeah, it's a good question. And your observation is absolutely correct. The product tanker market is low. One important reason for the low contracting has been specifically the commodity prices in nickel. Product tankers are compared to almost all other ship classes, usually dependent on stainless steel. And so the cost levels and cost inflations for ordering a product tanker has just been, you know, from a timing point of view, most ship owners have decided it's better to wait. So in our view, this is not a supply demand situation. It is a cost situation and the timing. But it may well create, if things don't change in the short term, you know, some utilization parts in our cargo pumping. I would still, though, say that to a degree, although we have different production lines, our pumping business in from is at the same time going through a major growth cycle when it comes to the offshore, where we do a lot of offshore applications on the from pump technology. So it is but but all in all, of course, we may say it's in that specific business. Some utilization issues. I don't see that it will be, you know, we have. Should we come to that? We have, you know, structural adjustments going on most of the time, so I don't see it as a as a major item in terms of restructuring needs. And it is a business that we certainly are committed to and believe in longer term. So, you know, I don't expect that to generate any major restructuring activities, even if the situation would remain on a low level for one.

That's clear. Thank you, Tom. And thank you to Jan also. Good luck and thanks for the help over the last few years. Thank you both.

Thank you.

And we still have six questions left. We will now

take

the next question.

Hi, good morning, everyone. It's almost something from America. Thank you for taking my question. So I'm really interested in hearing a bit more on the recent acquisition of death. Which, if I'm not mistaken, would be around 20 percent of food and water after it's consolidated into the group. So as far as I understand, the death map seems to have more of a project engineering business, which is quite different to the current food and water divisions, which is mostly like equipment business. So I was wondering if you can talk a bit more about the strategic rationale around acquisition and what are your plans to integrate death maps and to reduce the sort of the higher volatility of profitability and generate more synergies?

Yes, you are correct. But we do already have a unit in the Food and Water Division called Food Systems, where we do a lot of vegetable oil applications. And given the vegetable oil, we're also running our biofuel activities out of the Food and Water Division from a technical capability point of view. The synergies are relating to the vegetable oil value chain, where these two entities, Food Systems and SMET, are complementing each other in the value chain from crushing all the way to a biofuel side. We believe strongly that the biofuel technology and that aspect will be very important in the years to come. And the fit is very good on that. So it gives us a very good and strong market and technical position in an area which we think is important in the energy transition. So that's the strategic rationale for it. It's absolutely true that in a project business, although there will be synergies in the shape of component sourcing, possibilities for alpha-laval products, as a project engineering business, we don't expect 50% target. And that's why we are indicating that the sort of double digit percentage margin ambition is probably somewhere where you should put it. And currently, expect it to be just below perhaps. And with some integrated synergies, we'll be somewhere above. I remind you and everybody else that as a whole project business in terms of return on capital, it is a very profitable business. We have obviously down payments ahead. So we are cash positive in project execution. And from that point of view, it is supportive of our ROSA targets and somewhat dilutive to our EBITDA margin targets.

Okay. Thank you. That's really helpful. And my next question is on the organic growth in energy. Could you be able to give us a split on how much of that is driven by oil and gas, carpecs, versus the HVAC industry? You know, you also talk about that the energy division is still affected by the last oil and gas carpecs downturn. So if the carpecs continue to grow, should we expect a much higher margin than what you did historically during an upcycle in oil and gas carpecs?

I think the pricing side in the oil and gas is not going to be back to the real fantastic numbers back in the boom of 2014. I think the adequate comment is to say that the mix component with oil and gas is probably not dramatically impacting the margin based on mix for the energy division as a whole. So far, assets that are heavily dependent on the order backlog in oil and gas is still weighing on the margin in energy divisions. We are working in various ways to address that going forward, including long term, decreasing our dependence on oil and gas cycles. But there are some upsides in terms of starting to build and invoicing the gas side of this carpec cycle in the course to come.

But then given you have done really well this quarter, I mean on the margin side, does it mean that the HVAC industry and heat pumps, etc. has like a structurally higher margins than the more traditional oil and gas business that you're exposed to?

I mean we are not breaking margins on a very granular level. So I'll hold back what you need to consider on that is that also for the, you know, the fossil side is also has a substantial service mix. And so the mix changes between capex projects and services also affecting the situation. I wouldn't break end users into very different categories when it comes to margins. And but of course, what you could say is that when we continue to load volumes into existing product lines in whatever the end application is, that is obviously having some positive effects on the margin and the load in several areas are now very good. Some of that load goes into the gas side, the same heat exchanger production lines are used for both gas applications in terms of cooling and heating, as well as for data centers. So it's a little bit difficult to draw it just on an end user way. But as production line heat exchange technology is in an upcycle and never mind where it comes from in a sense.

Thank you very much. It's really helpful.

And we will now take our next question.

Hi, good morning. I'm Tandy Wilson from JP Morgan. I just have one question remaining actually. It's probably quite straightforward one. I just wanted to check on the comments around cash, which obviously you've been building as volumes have come up and I guess there's other factors in there as well in terms of holding on to inventory to deliver. I think the comment was that as the operational sort of situation begins to ease, we would expect that to sort of start to improve. Are we at a point now where we can expect the sort of the working capital position to be stable before we start to see improving? Or do you expect it to to build still into the second half?

Yeah, maybe I can take that one. Yeah, I think you should expect that the working capital, where we are sort of say I wouldn't expect that to continue to be built during the second half. So, as I said, as a percent of sales, I would expect the working capital will now start to go down and gradually normalize as we see the stabilization or improvement on the supply chain.

All right. I think we'll actually take the last question. We are starting to run a bit over time and probably also for you.

Perfect. We will take the last question.

Yeah, morning. It's Sven from UBS. I hope you can hear me. I keep it to just one question then. And that's on your sequential order intake guide of somewhat lower. You said that's based on seasonality and pipeline. I was just wondering, of course, if you look at the last years, it was always somewhat lower just simply from seasonality. So I was wondering if really mostly seasonality behind it and less so what you see on the pipeline.

Don't read too much into it. You know, in reality, it's even the seasonality can be a little bit volatile. So it's not every year over the last 10 years that you have absolutely clear pattern. And we see some variations in that. But I think. You know, we a lot of orders came through in Q2. And I think the only thing we try to voice clearly is that we don't see a shift in the market and the underlying market demands. But with the high throughput rate of orders and bookings in Q2, we are a little bit hesitant to believe that we will repeat that level every quarter going forward. So we are a bit cautious as to whether orders will come. But we see it more as quarterly variations than the trend curve. OK, thanks, Tom. All right. Super. Thank you. And I mean, you all know where to reach your one if there is any. We are five minutes overdue, so we leave that for for separate conversations. Thank you, and if not before, we will get together in connection with Q3 earnings call in late October. Thank you.