Alfa Laval Corporate AB

Good morning and welcome to our third quarter earnings call. Let me, as always, do a couple of introductory comments. Demand remains strong in all three divisions, in line with expectations, and order intake reached a new all-time high in the quarter. The slowdown in the global economy is not yet visible in Alfa Lavals and markets. The margin was negatively affected by demand capacity imbalances, especially in the marine division, and partly related to a weak cargo pumping market, while most business units in the group remained capacity constrained, fully utilized, and operate at the norm profitability level. Note that group margin was approximately 15.5% excluding the integration effect of the dismet acquisition. The complexity in the global supply chains are gradually improving with invoicing as well, and this is a continuation from last quarter, and we expect that to continue also into the fourth quarter. Finally, we are addressing the cost level in specific parts of the Marine and Energy Division, including the wind down of activities in Russia. In all, around 500 employees will be affected, and we expect the restructuring charge of somewhere north of 200 million SEK to be taken in the fourth quarter. We will be back to further information at that point in time latest. Let me then go to key figures. And first, let me just say that, obviously, as you all know, all the numbers are somewhat affected by currency, and for that matter, inflation. So, in comparability, that creates some problems. But nevertheless, that was true for the total numbers that we are presenting today. Let me still say that the 30% organic growth is a very healthy level, and the 50.2 billion SEC, a new record, as I indicated. The growth is broad-based across regions and applications. The invoicing is improving, but still lagging behind order intake. The invoicing backlog is having a negative effect on the margin, obviously. Invoicing is expected also to continue to improve into Q4. The margin decline sequentially of just below two percentage points had three main components. First, the integration effect of Desmet. I indicated that earlier. You should expect that that effect will be smaller in the fourth quarter. Second, the low volumes in cargo pumping affected both margin and mix in the marine division. This may take a few quarters to restore, depending on how the water intake and inflow looks in the coming quarters. And third, we do have some remaining issues related to imbalances in capacity and the old backlog execution. This will gradually improve from here, and obviously the restructuring program is to a degree addressing this issue. Let me then go to the Food and Water Division. Order intake was strong again, supported by the completed integration of this MET. There was a positive momentum in most end market, perhaps specifically with China in the food and water division as an exception to the rule with a weaker demand than previous quarters. Margin remained stable at 16.8% excluding the disinfect effect. The dilution, as I indicated, is expected to be smaller in the fourth quarter for the food and water division as well. Invoicing grew considerably. But still, we had a positive book to build in the third quarter and obviously a significant order backlog as a result. The energy division continued to have a strong demand related to energy efficiency solutions, and we continue to work with capacity increases across several areas in the division. The focus on application supporting the energy transition is continuing with the growing project pipeline. In the quarter, as you may have seen, we booked the first major project in hydrogen in Saudi Arabia, being just an example of how the water backlog on energy transition is growing. The margin was strong, reflecting a sound balance in the order book between cost increases and pricing, in addition to a positive mixed effect in the third quarter. One unit in the energy division, the business unit welded, struggles with effects partly from the energy transition towards renewables and partly as a wind down of activities in Russia. The unit forms part of the restructuring plan and will also be affected by the decrease of employment within the group. Then to the marine division. The demand was strong in almost all areas. In fact, even with an improved demand for cargo pumping towards the very end of the quarter. Order intake is on an unusually high level in relation to the yard ship contracting level of around 1500 ship. This is a result of a broader product portfolio supporting the increasing environmental demands and regulations. The margin was weak in the quarter, as I already indicated. Let me just repeat to you a couple of the aspects that is affecting the margin in this quarter. We had a continuation of the phase-out of the order book with all prices according to plan. As we have indicated, we expect this to be more or less completed towards the end of the year, moving into Q1. The mix change from scrubbers to ballast water continued. Obviously, we are expecting that to continue, but on top of that, with a somewhat weaker than normal margin in ballast water, that effect was a little bit bigger than normal in the quarter. Finally, we had a low contracting of product tankers and chemical tankers for a period of time, and that has resulted in a low load and a low capacity utilization and a low mix in the third quarter. As I indicated, this may remain a challenge in the next few quarters depending a little bit on orders and in-for-out orders in the coming quarters. The restructuring plan is addressing specific demand capacity challenges in the division with a positive impact latest in the first quarter 2023. Moving on to service. Service continues to grow with double digits in all three divisions. As noted already last quarter, this is an effect partly from high demand and partly from significant efforts in our service offering and service organization over the last five years. Invoicing grew but was still held back somewhat due to availability constraints both on the fields and in the distribution centers. In terms of the regional performance, as in previous quarters, we see a broad-based strong demand pretty much across all of the regions. What perhaps is noteworthy in this quarter is despite that Russia is out of the mix, Eastern Europe remains almost flat and like for like continues to grow, as do the other regions in this quarter. Finally, on the overall order intake situation, you've seen the picture already, so let me just make a couple of final closing remarks on the quarter before handing over to Jan. We are clearly conscious of the uncertainty in the global markets, but we still expect demand in Q4 to remain on about the same level as in Q3. We have, as I've noted, a couple of specific portfolio weaknesses. They are being addressed in various ways, including with the restructuring program that we now are launching. Finally, the order book stands at 37 billion CET. Obviously, a new record. You may even argue it's a bit too high, but nevertheless, it's a considerable order backlog into next year, and demand continues to grow based on the sustainability agenda. So while we are dealing with our margin challenges in some specific business units, we continue to drive growth and capacity across most of the company also in the coming quarters. And with that, I hand over to Jan.

Thank you, Tom. And as usual, I will start with the sales trend. So we expect the invoicing in Q3 to be higher than the same quarter last year. We realized sales of 13.2 billion, which is 28% above last year. Please note that we had three acquisitions completed during the quarter, and together they added approximately 500 million or 5% to the sales bridge. We also had a large positive FX translation impact on sales. Excluding both these impacts, the organic sales growth was 11.3% in Q3 versus last year. With regards to sales in Q4 2022, my outlook is as follows. Considering the record high order backlog and the somewhat improved supply chain situation, I expect invoicing in Q4 to be higher than the same quarter last year on a comparable basis. Then moving over to gross margin. So the gross profit margin in Q3 came in at 34.3% compared to 37.3% last year. We have seen a positive impact on margin from price increases coming through in a good way, especially in energy and for the water division. In marine, on the other hand, we have margin pressure coming from both the order backlog with orders taken before 2022, a negative mixed impact in capital sales, as well as a low factory load in the pumping system due to the weak tanker market. Finally, the acquisition of Desmet had a negative impact on gross profit margin of approximately 1%, considering the seasonal nature of the business with a large part of invoicing and profit coming in the later part of the year. As we look into Q4, we expect the challenge in the marine division to continue. However, we do expect a general better delivery situation with higher invoicing coming through due to the gradually improving operating environment. With regards to S&A expenses, they were up 13% in Q3 versus last year on a comparable basis. This increase is affecting the overall high business activity in the company, the inflationary pressure, but also that we are selectively adding resources in both our current businesses with high growth, but also in some of our more long-term business development areas. Compared to the first nine months of 2019, prior to the breakup of COVID-19, our S&A expenses are up 6% year-to-date on a comparable basis, despite the strong order growth and the high inflationary environment. 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 quarters to come. As mentioned by Tom, we have initiated a restructuring program in parts of the energy and marine division to address the known weaknesses in demand. The program includes a restructuring chart of approximately 200 million sick that will be taken in Q4 2022, and including a reduction of approximately 500 employees during 2022 and 2023, including the continued downsizing of our operations in Russia. Part of this will impact S&A resources, but the majority will impact COGS. With regards to the EBITDA margin, as you know, it came in at 14.7 in the quarter below last year due to the lower margin in the marine division, while the margin in food and water was slightly better than the previous quarter, excluding this month. And the margin in the Enid division was very strong. based on the EBITDA margins for the group in Q3 was 15.5%, excluding this month. Looking at some of the other key figures, so similar to S&A expenses, R&D expenses were up 14% versus last year on a comparable basis, again reflecting the overall higher business activity in the company. Net other cost and income increased by 60 million versus last year. Increases mainly explained by higher costs related to the ongoing changes to our manufacturing footprint. And so one-time items positively impacting other income in Q3 of last year. Financial net excluding FX impact was negative 50 million in the quarter. The FX gains losses were negative 55 million, giving a total finance net of negative 105 in Q3 versus a negative 88 last year. The tax rate was at 22.5% in the quarter and 25.1% year-to-date, slightly below our guidance of 26% for the full year. Net income and EPS was on approximately the same level as last year. Then we come to operating working capital. So the working capital increased by 1.3 billion in Q3, which is mainly due to an increase in inventories and trade receivables, partly offset by an increase in customer advance. The inventory increase has been driven by the strong order growth in combination with the fact that we are still operating in a challenging supply environment, including, for example, increasing level of semi-finished and finished goods inventory waiting for final delivery and invoice. The picture that you see shows the development of operating working capital during the last five years. where the bars show the absolute level of working capital, the blue line shows working capital in percent of order intake, and the orange line shows working capital in percent of invoicing. As you can see, the working capital in percent of invoicing has increased by some four to five percent in the last two years, while working capital in percent of orders are on the same level as 2022. Sorry, 2020. Hence, we have built up working capital along with the growth in orders, and we expect it gradually to come down as we execute on the record high order backlog and the supply situation stabilize. So, when looking at the cash flow, as I have commented on the working capital development in the prior picture, I will only mention a few additional things regarding the cash flow statement, the Q3. Cash flow from investing activities included payments of 3.7 billion related to the three acquisitions completed in the quarter, where of course the largest is the purchase price for Desmet of 3.4 billion. Secondly, our net debt to EBITDA position at the end of September, or the net debt position at the end of September stands at 13.2 billion with a net debt to EBITDA ratio of 1.5. On the FX side, the transaction FX effect on EBITDA in the quarter was a negative 25 million, and the translation impact was positive 145 million, giving a total net positive FX impact on EBITDA of 120 million in the quarter. Looking at the projection portfolio, we expect a negative FX transaction impact of 50 million, On the other hand, if the closing rate at the end of September remains, we would expect a positive translation impact that would more than offset the negative transaction impact for the full year. With regard to 2023, we see a potential large positive transaction effect related to the Euro-US dollar and the US NOC currency pairs. Then looking at the order backlog at the end of September, it stands at 37.6 billion, which is 29% higher than at year-end 2021 on a comparable basis, due to a positive book-to-bin ratio of 1.2 during the first nine months of the year. The acquisition of Desmet and Scanjet added 5.7 billion total order backlog in the quarter, And the order backlog now represents eight months of LTM sales on a comparable basis. For shipment in the remaining part of the year, the backlog amounts to 11.9 billion, an increase of 3.8 billion compared to the same time last year. And then let's move on to the sales bridge. So starting with the sales of 35.6 billion during the first nine months of the year, and as stated in the previous slide, the backup for shipment in the Q4 is 11.9 billion, which gives or adds up to a subtotal of 47.5. On top of that, you will make your estimate on the change in price, in-for-out, and FX effects. For your reference, the level of in-for-out orders during Q4 of last year was 3.6 billion. Finally, considering the project nature of this MET, business-level in-for-out orders in the quarter is very limited. So by that, I hand back to Tom for the comments on the outlook.

Thank you. And you already heard in general terms of you going forward. While there are concerns about how the global economy will develop, we still see a healthy pipeline and we expect or the intake in all three divisions to be on about the same level as in Q3. And with that, we are open for questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. Anyone who has a question may press down followed by one at this time. One moment for the first question, please. We have the first question from Matthias Holmberg from D&B Markets. Please go ahead, sir.

Hi, thank you, and thanks for the comments on the marine margin, which is where my question will be directed. It seemed like the 10 or 11 percent margin reported in q1 was sort of a low water mark based on the comments you made at that point but this obviously wasn't the case so i think it's really important to us to understand the drivers behind this soft margin which you've helped us with already but i think if you could explain sort of how much of the deviation relates to first mix headwind from the ballast water and the second the weakness in the pumping system And third, the mismatch between price and cost in the backlog would be very helpful. Thank you.

Ja, I don't think you're going to hear me talk about, but if you look and compare Q3 with the Q2, the main issue is related to cargo pumping in terms of mix change and utilization effects. On top of that, part of that decline is related to delayed order deliveries and a bit of a resulting mismatch of hedges and so part of that was a one-off that may be recovered in the in the coming quarters so let's say sometimes I make the comment that things are bad they're not necessarily as bad as I look just as they're not always as good as I look when everything looks fine so there are there are some aspects that come and go here but but it was

was the main driver was related to the cargo pumping business compared to q2 thank you and a quick follow-up as well the mixed wind from ballast water systems you made a comment on sort of the facing of how that should dissipate do you have any more granularity on that sort of are we talking one or two quarters or is it rather to the end of next year

I'm not sure what you are asking. If you're asking the exchange between, I'll give you the outlook on what is happening on the two environmental applications, the Scarborough side and the Ballastwater side. The Scarborough side went through its retrofit period quicker than anticipated, and it is today more of a new-built type of business than a continuation of the retrofit, so we don't expect that to come back in any meaningful way. It is still, given the big price delta and fuel delta in the market, there is still a pipeline of projects out there and we are still active in that market. So there will be some demand coming and going, but largely that is over time turning into a service business where we will have a meaningful presence and reasonable profitability, but it will obviously not be anywhere near where we were at the peak. In terms of the ballast water, we are starting to see the decline in the retrofit market as expected. It is happening now. We also are doing some adjustments to our capacity along those lines. So it's pretty much as expected. In that sense, the mixed effect from the ballast water side is expected to decrease as part of the, in terms of its share of the marine division. So I hope that is sort of framing your question a bit.

Yes, perfect. Thank you so much.

Thanks. The next question comes from Claes Bergerlund from Citi. Please go ahead.

Thank you. Hi, Tom and Jan, Claes at Citi. So my first question is on the cost program, the $200 million spread across both energy and marine i'm just trying to understand the program on the pumping system side better we know that contracting across the tanker spectrum is down 70 already orders are now improving from a low level will take some time until this is impacting your p l but just to understand here um we get the structural take out on welded is this also a structural component on the pharma side or is it just

because of this demand weakness because we we hear of a quite solid product anchor outlook for the next couple of years from from obviously a low level now but if you could comment there tom thanks yeah i i think you're spot on number one uh the our cargo business and the farm acquisition is is a very strong company with a strong strong performance culture so in terms of our restructuring program we are trying to manage through uh limited time of weaker demand and we expect that that will come back we are somewhat supported in this context by the fact that the offshore business is very very strong as we can reallocate some people into other other places we are taking a cautious approach to with respect to the organization in Bergen and the restructuring program. So I concur with your judgment on that. The situation in business units welder was not new. We've been working with it for a couple of quarters, so it was not related to this quarter results in any way. We are partly gravitating in that unit from fossil dependency in applications towards others and some other structural changes and with the effect of a relatively low capex cycle in the, on land refinery Petrochem side over period of time and then the cancellation of the Russian backlog that was done earlier this year. The utilization has been low, the structural change is there and so we are addressing that. So you don't necessarily see that in the energy division margin, but you can rest assured that we are running this company based on performance on all our units and not just a handful of them.

That's good. My second one is on Desmet, and it seems like a more seasonal business, more geared to the fourth quarter than we thought. Then you have acquisition-related costs. The dilution will be smaller into the fourth quarter, you say. But could you comment on these acquisition-related costs, including the PPA effect? I just, they're quite big, if I back it out, or is the underlying margin investment lower than we thought? Obviously, yes, that has to do with the seasonality, but if I can get the underlying margin also in the quarter, that would be very helpful.

Well, we gave you the guidance in connection with acquisition that you should expect this MET to operate at approximately a double-digit level, sort of in the order of magnitude of 10%. And we are not changing that guidance. So that is a yearly guidance. There is an aspect of how the results are managed in this map with a cautious accounting approach and leading to a relatively high profitability at the end of the year and somewhat lower in the first three quarters. And we saw, so it was not necessarily only driven by a bit of a one-off cost and adjustments entering into the Alfa Laval structure, but also how the accounting is being done. We will review whether we to have that sort of quarterly variations, it is somewhat of a difference compared to how we run our project engineering business that we already had in food systems. And for your reference, it may be noteworthy that we are in that business in the quarter clearly about 10%. So we are very comfortable as to where we are in our engineering business as a whole. And with this map, that's what I'm saying that you should expect clearly a smaller impact of dilution in the fourth quarter and we may be back to you in the capital markets day or latest in the q4 report as to how how you should address this question in terms of forecasting for next year but the overall yearly guidance remains what it was when there's no bad news following the acquisitions we are online with a plan

Okay, no, that's good to hear. My quick very final one is on marine and thinking about your sweet spot as you talked a lot about before in terms of the content per vessel. Let's say compared to five years ago, Tom, is it 10, 20 or even maybe 50% higher in certain categories? and also on lng this is a strong segment where contracting has been strong it feels like you're yet to see the order growth in some of these stronger categories impacting you positively more like in 2023 so yeah if you could comment on that thank you

Yeah, I think we are, I mean, we may get back to you at the capital markets day in terms of, because this is a changing picture, not quarter by quarter, but certainly year by year in terms of how we build the program and how the specifications on the contracted ships are changing over time. We see, I would say, overall, if you leave the specific issue of the cargo pumping a little bit on the side, the overall sweet spot and mix has been relatively stable for us in terms of where our sweet spots are versus the dry bulk and other segments that is perhaps less of an opportunity for us. It's fair to say that our scope on any given ship is up with double digit based on our offering, based on and equipment decisions made by ship owners at this point in time. And as we indicated a number of times, the multi-fuel solutions is one of the aspects that is supporting the order volume per ship. So I think, you know, we are pleased with where we are. I think with the contracted volumes that are there, although L&D, as you rightly point out, is a strong segment, i think is is uh our expectations in our intake versus how the mix looks like is is quite in line with where we think it should be thank you the next question comes from max yates from morgan stanley please go ahead thank you very much just just my first question is around uh around price cost and obviously we've had as we've gone through this year we've had

the raw materials, then we've had sort of freight, and now we've got wages. And I guess what I wanted to understand was as we go into next year and you look at the sort of price increases that you're putting through today, do those already reflect say, 7%, 8% wage inflation that we're likely to see when you're delivering the contracts that you're taking today in 12 or 15 months' time. I'm just trying to understand. It's very difficult, clearly, in this environment to get ahead of this stuff. But how are you managing that when you think about pricing today?

Yeah, it's a good question. Let me just reflect on where we feel we are at this moment, and then I'll try to make some reflections in going into next. I think if you look at our energy division as a whole, and if you look at the food and water division as a whole, and if you look at essentially all our marine business, excluding the long order book on the boiler side, we have managed the cost inflation pricing up until now in a reasonable and stable way. So uh the the the margin pressure that you see on the alpha level group is not a general cost inflation margin it is some specific structural and capacity imbalances in the group that needs to be resolved with the exception that that we have been repricing and redesigning the boil product so that we can return to an acceptable margin during the next year and so so Our experience so far is okay. Looking forward into next year, we are making our standard cost assumptions pretty much around now when it comes to all of the input variables. And we set the standard cost that is the basis for gross margins calculations and the pricing. I don't want to go into detail as to how that looks, but you're right in that we are expecting a somewhat higher salary and wage inflation than we've been having historically. Whether we are exactly on your level or not, let's leave that aside. But we are also clearly aware that we need to work with productivity as an aspect in compensating for cost increases. We always done so, we will continue to do that into next year. The commodity prices are likely to be lower in dollar, but of course the dollar strength is clouding a little bit the impact on the commodity prices. So given strong dollar and still reasonably high commodity prices, actually those remain on a somewhat of an elevated level. The energy cost doesn't hugely affect us, but clearly with a somewhat European dependency in our supply chain, we are a bit exposed to that. I'm not alarmed by the situation. I think it's maybe over. ventilated as a large issue for the industrial sphere. But of course, it is not a positive cost reduction opportunity going into next year. We will muddle through. So, you know, my feeling is we are much better balanced in the way input cost looks like and expectations look like into next year than we were this year. The moving parts were more complex, unpredictable than they appear to be going into next year. So I'm a bit more comfortable as to how we manage gross margin and pricing levels for 2023 than I was for 2022. That's sort of my words around your question.

I hope it fits on. Okay. That's helpful. And maybe just a quick follow-up. I mean, the margin, obviously, that looks very strong within this set of results is still energy, which is up a lot year over year and up a lot in the first nine months. So I guess I just really want to just to double check here. Is there anything in this that is exceptional if we think about sort of sales flat to slightly up next year in this division? Is there any reason we would see a normalization in this margin or is would you put this more down to mix of revenues some of the i think you've you've sort of more recently said that the the kind of hvac and refrigeration is higher margin than energy now so yeah just just framing that margin and whether there's anything we should we need to think about in terms of the actual absolute level that's being achieved here i'm i'm cautious as to predict you know strong margins going forward we'll we'll

We'll have to take it quarter by quarter. You know, I sometimes make comments as to structural changes in the portfolio and how we see that impacting the, say, the underlying profitability. In the food division throughout the years, that comment has mainly centered around a reduction of cost of quality and the better claim situations in the group. And that has had a structural meaningful impact on the result. I think if we look at the energy division, My reflection on that would be that if we go back to 2015 when we had a huge oil and gas peak and a huge contribution mix in favor of the fossil fuel side, that turned into, let's say, a negative part of the mix going from, you know, 2016, 17, 18. And we are now quite far in the energy transition from fossil dependencies in part of our product areas into the renewable side and energy efficiency side. And that in itself is a positive mixed aspect for us. And I think that is structural compared to a couple of years ago. And as I indicated, we are trying to resolve the business unit welded, which still is not delivering in line with our group targets. And so we have some way to go there. We may have some headwinds in other areas, but that's my language around you know how the cockpit looks like in the in the energy division

Okay, and maybe just a very quick final one on net debt to EBITDA. So you're at one and a half times currently post the acquisitions. I guess I wanted to understand how you think about that level in relation to possible future M&A or further buybacks. Is there a level you have in mind that you'd like to get that to before you would consider doing more M&A and buybacks, or just how you think about capital allocation in that context?

I think the key point right now where we are is that we have to ensure that we work down the working capital, which is on an elevated level, and we know why. So the priority one is to work that down back to where it should be, and I kind of indicated that in my graph. So, I would say, even though it's running now around 1.5 on that , we would expect that to come down to, let's say, closer to 1. And then I think we would look at the situation, but I don't think we would return to initiate the share buyback program anytime soon.

Very helpful. Thank you very much.

The next question comes from Daniela Costa from Goldman Sachs. Please go ahead, ma'am.

Hi, good morning. I have three things, some follow-ups. But first, in case I missed it, I wondered if you comment on the savings amount that you expect precisely to generate from the restructuring and if there's any way to split it between the divisions. The second thing I wanted to ask you following up on uses of cash on your CapEx increase that you had announced on the last CMD and whether you would think of reducing that given sort of like current macro environment and other things. And then a final thing, just to follow up on all the debate around mix impact inside. In this case, it was pumping systems, I guess, that we were a bit surprised by how big the mix impact is. But when you look through your three main businesses, what is the sort of level of these portions that you have on? Is it very wide? Are some in some divisions like the different product sets more comparable? But just to gauge where could we have these type of surprises in the future? Thank you.

All right. Let's see. Let's take the first one. There was structuring. We have not communicated a detailed number yet. I expect that we will return at the capital markets day or latest in connection with the Q4 report in terms of how we look at that program. What I think what is important to communicate is that this is not a program for execution. next year. This is something, it's not a program that is launched based on a WEQ free margin. It is related to situations and capacity imbalances that we've been aware of and been anticipating throughout this year. So we are quite quickly into the program and part of the execution is ongoing as we speak. So you should expect perhaps somewhat a usually front loaded situation on that. But let us come back to comment on that. You know, the other aspect, if I take your third question, that you should be aware of is that this number is not a net number. It's a gross number for those areas that we need to affect. At the same time, you see the growth rate ongoing in a number of our areas. And so the answer to your question is yes, we are continuing the investment programs more or less in line with the CAPEX guidance we've been given. We are expecting to come in a bit below our CAPEX guidance for this year. We will return at Captain Morgan's day with an update on where we think it will be next year. But the situation today is very much one of one foot at the brake and one on the gas pedal in the sense that if you believe that the hydrogen infrastructure will be built out over the next five years if you believe that the heat pump market in Europe will be implemented in order to decrease the dependency on actual gas etc etc it's very difficult to combine that outlook with the downturn and I think we are in a situation where we will make sure that customer can rely on our delivery capability and our CapEx program to follow them in their growth trajectory. And so we really have a mix of situations across the company that we are trying to deal with in a good way. We are currently not prepared to go back on our growth programs in anticipation of a more difficult situation. We will obviously be prepared to slow down or adjust if needed, but I think the core What you probably will see in terms of CapEx is a concentration of capital allocation and resources to the core strategic growth CapEx. And we probably will run down maintenance CapEx and other aspects to be a bit receptive to the fact that the risk level in terms of growth and capital allocation has increased somewhat. It's a trade-off decision that we need to make, and I think we are clear on how we want to go about it. Then your final question on mix is a good one. I think what we are seeing with respect to the cargo pump aspects versus others is somewhat of a bigger mix effect than we typically would have in any of the division. The one that I've been pointing to before, and you should be aware of, of course, is that our engineering business now represents you know, with the acquisition of this MET and our food systems engineering business, that amounts to somewhere between 650, 700 billion euros within the food division. And at the double-digit margin plus, of course the mixed impact of how much do we do on engineering projects versus component and system sales that is a mixed effect in the food and water division and that's why we had a structural effect of although it was a bit elevated or looked a bit too aggressive, specifically in the quarter. And as I indicated to you, other than that, the water division margin was at normal levels of 16.8%. So that's probably the main one. In the energy division, you can conclude that one out of four units is not delivering its needed performance. and we still manage the divisional margins on a good level. So you have one out of four cars that you may assume either is going to remain a bit of a problem or there's an upside in terms of us being able to turn it around.

Thank you.

Okay, thanks.

The next question is from Sebastian Kuhn from RBC. Please go ahead.

Yeah, I have a follow-up question on the sudden margin drop in marine, the 500 bps. Could you maybe give us some kind of a split where you would say, okay, this is due to FRAMO, this is due to particularly low margin deliveries, this is due to raw material energy or the timing of price and cost. Can you give us a split of why we see this sudden drop? I think this was not yet explained very well. That would be my first question. Thank you.

I think we've been unusually transparent as to the components. I think I've been unusually transparent in saying that the main difference sequentially between Q2 and Q3 is the promo effect. If you would have preferred us to announce this a quarter ago, number one, the in for out and the contracting in this area is quite sudden. We are sometimes sits with bigger orders before those are even seen in the clocks on forecasts. You know, we don't typically guide you on all plus and minuses ahead of time when it comes to margins. So, you know, but what we did discuss even at the last quarter report was that the contracting level for tankers has been low and was low. And some one of you guys asked the question and we answered it correct at the time. So, you know, it is what it is. I can't give you a clear answer as to how the comeback will be. All I can say is September saw somewhat better contracting. Whether that is a trend or whether it will take some time and whether the slots are available short term to drive the product volumes into production early is a little bit difficult to predict. We are where we are and the effects were, you know, as I indicated, quite big in the quarter. But, you know, I think that's the guidance I can give you.

And then how much of that performance in marine and in the margin was a surprise to you that evolved during the Q3? I mean, you just indicated that you had kind of an idea that FRAMO might not deliver very well in Q3. But how much of that was a surprise to you? Or did you already say, okay, this is not going to be a strong Q3. This is in our budget. These are the deliveries. So was that already kind of in your mind? understanding or was there something popping up more lately because we had you know companies reporting on extreme energy cost increases Was that a big concern or did this not?

There is no other factor than if orders come in and we load production, then we see less of an effect. And if we don't load it, you know, so it's a very binary question. And so surprise or not surprise, you know, the monthly order intake is always a surprise in all parts of the business. And in this one, it tends to be a little bit binary. So we see strong quarters and weak quarters. The thing that is different in this situation specifically is that we had a number of week quarters based on exceptionally historically low contracting volumes at the shipyards and eventually we are running out a little bit of the backlog. So that's why the financial consequences in the quarter is bigger than what you normally see. But in terms of the actual order intake volatility between quarters and months, that is normal to us.

yeah final question uh at what capacity do you run from or at this point in time and given that there's not much tanker orders coming through tanker market is terrible still uh how long do you plan to run from or at that low utilization thank you um i'm i'm i'm not gonna

and give you a capacity number. It's clear that we're going at low capacity utilization in the cargo side. We go at the high capacity utilization in the offshore. That doesn't fully compensate, but it helps. The question on, you know, the difficulty in giving you a production is not just related to, you know, arrogance and not willing to communicate. What we can't know for sure is what lead times new orders would be booked with. And, you know, that's just an intransparency in the market. And I'd rather refrain from estimating this at the moment in time. All I can say is, you know, we saw somewhat better situation than previously in the year, whether that is a trend. I refrain to guess. You know, and what will come in and decide the short term in the next couple of quarters is going to depend on which slots at the yards are being booked. If they are reasonably near term, it will support the situation quite short term. But if it will be longer delivery times, than the fact we'd be lingering with us for a couple of quarters. So I would, if I were you, take a somewhat cautious approach to the next few quarters and then we will update you as we go forward.

Understood. Thank you very much.

The next question is from James Moore from RedBud. Please go ahead.

Yeah, thanks. Good morning, everyone. I've got a few questions. One is on the relationship between your orders and the general industrial macro environment. And you helpfully said you're not seeing any signs in your own markets so far. But if we look back over the last 20, 25 years, you've often seen orders in all three of your business have some relationship. to the macro picture. And if we were to see an industrial downturn in 23, I wondered if you could just talk about how you see your current sensitivity to those industrial trends at the moment. The second one is on pumping systems. I wondered if you could give us a flavor for where the pumping systems margin was in the quarter. I'm really trying to understand the potential if you recover it and where you think it could get to and whether we should think about it being in the same sort of position for a quarter or so or whether it can recover more quickly than that. And finally, my last question is on price cost in the backlog. I mean, you talked a bit about having executed some of the negative net price costs in the backlog but still having some more to go. I wondered if you could size the impact it has had to group margins and how long you've see that as a challenge.

Quantifying is not my favorite topic. We try to give, you know, the numbers that we are comfortable in giving. But let me just say that on, you know, the macro versus us, of course you're right, and I'm certainly not going to put you know, Alfa Laval in the position of declaring, you know, recession proof, you know, I expect that there will be impacts as we see and if we see this economic decline continuing down. Now, there are two factors that are a little bit different for us if we look at the scenario going forward. The first one is Even if demand drops 10, 15%, it means that the demand will approximately approach our level of invoicing. That is, we have never been able to catch up in terms of activity and manning and capacity to the existing demand situation. And in fact, had we been, you know, at shorter lead times and at higher capacity, our water intake would have been even higher than it is today. So, you know, we are already in a discrepancy versus the underlying demand, and that first hit is going to be taken by just, you know, aligning invoicing levels at current level with the underlying demand. If we look at any reasonable scenario above and beyond that, you know, with the normal assumptions that the service business remain a bit more steady and there are some other parts of the division that are not so fluctuating you know take another 10 which means a 20 down on the total thing and and 30 30 well for 35 40 percent decline in in capital sales you know even if you go to that scenario it's just an adjustment of 10 versus the top line today so so we feel we are in in pretty normal territory if it should come to a situation where we need to adjust to a completely different business scenario. So that is, let's say, for contingency planning. The other aspect that I was on to before is that If we are going to continue anywhere close to the Paris Agreement targets when it comes to the changes in energy mix and changes in energy efficiency and saving in energy consumption in order to alleviate the situation, it's difficult to combine that with a downturn. And so they are balancing factors. I'm not betting the whole scenario on that political stability will ensure that we are moving according to the environmental targets, but I think it is a factor in how to judge the cyclicality over the next cycle. So, you know, it's on top of mind. The impact as we see it right now is limited. The impact in next year should it come to that is potentially somewhat softer in terms of our industrial systems and our capacity adjustment than normally. That's my language around that.

Well, thanks. That's very helpful. Are you able to give us a flavor for pumping systems profitability? I mean, is it a low single-digit margin or a heavy loss-maker? I'm just trying to understand what it could mean when you return it to normal profitability.

Well, there's nothing structurally that's changed in terms of that. So it is a pure volume number. If we have the contracting we need, we are back to normal.

Thank you very much.

There's nothing else in the equation.

Thanks. The next question is from Lars Broson from Barclays. Please go ahead.

Thank you. Hi, Tom. I was going to try and follow up on that, actually, around the Frank Morn development. Maybe firstly, if I can, Tom, what is driving the shift in deliveries? It sounds like it's really around slots at the yards. At the same time, it doesn't sound like you've got a huge amount of conviction. That comes through in the next couple of quarters. So maybe just to clarify, what is really sort of driving this, so to say, lack of invoicing in the quarter? If I can, secondly, also to the restructuring program, I appreciate you won't give us details around the marine specifics of that, but what's your assumption behind the restructuring plan? Is there a risk here that your, should we say, slightly more positive tanker outlook means that you don't take the necessary measures in the short term? And I'm curious also how much you can offset by reallocating to offshore pumping. What's the operational overlap here between marine pumping systems and the offshore bit? Thanks.

Let's see, if I start from the back, there is essentially no overlap between the two Bramall businesses of offshore. However, the manufacturing sites are relatively close to each other, and we are able to transfer and safeguard all of our competence base by moving between the units. So, in that sense, it's very helpful. I, you know, I don't, You know, you always have to adjust your restructuring according to the situation as is and your expectations going forward. And we have a great deal of respect for the business that we are running out of Bergen and the long-term dependency fleet owners on that business so we would make sure that we have the capacity to ramp up we the only thing we know is that this is a temporary decline I can't give you the exact timeline for how it will come back but that's a small burden for us to carry versus the customer service and the dependencies and and then partnerships we have with our customers there so so I'm not particularly worried about The other part of the restructuring is more structural in nature. Obviously, there were implications from running down our Russian activities. Obviously, there are some implications in part of the product portfolio related to fossils. So we are well aligned in terms of how the process is moving. And I feel comfortable in a situation when we are growing organically with 30% that we still find opportunities to optimize productivity. and manning with a magnitude of 500, I think it's just somewhat unusual. And I think we are taking an opportunity of doing the right thing here. So I feel good about the program.

You've been very clear about the strong performance culture at Framboise. You don't clearly seem to be questioning the organizational or operational setup in the business. It's a business that has a huge amount of autonomy within the context of Alfa Lavalin where integration has been very limited, you would say, at least operationally. i think we know now where visibility is very low and very very significant norwegian cost base i'm just clarifying that there isn't a re rethink here in terms of what should be done to this business should we go into a more sustained downturn on the tanker side now i would say on the contrary i think we have been adapting the rest of alpha laval more to the to the promo business model if you like the autonomy that we have between

14 operating units in the group is what allows us to, on the one hand, reduce manning and capacities in the three of our units and one of our sales companies to the order of magnitude of five to 600. On the other hand, grow with double digits of 20, 25% in other areas where we are in big cap program. So, I think our flexibility and agility in a very complex operating environment is the key for why I, you know, I recognize that you would have preferred to see a better financial performance in the quarter. But I think that the fact that we are where we are and it's as good as it is and we manage the growth combined with trying to deal with the problems is completely related to more decentralized decision making and business unit profitability targets are measuring than we had before. So, no, we are not going restrict the operational freedom of our Norwegian friends.

Clear. Can I try two quickfire before I hand it over, please? Number one, on ballast water treatment, historically we've talked about margins there before royalty payments being on a par with marine. That was last year in the mid-teens. Is that still the case, number one? And number two, just on Desmet, I think we've all been a bit fooled perhaps by the seasonality in that business. That seasonal margin profile where you've got a fourth quarter is about half of the full year invoicing. Is that a business where, again, the first three quarters are low single or break even and then a high teens margin quarter on an underlying pre-PA basis? Is that the right way to think about it?

yeah you're you're kind of right and we will guide you appropriately as we move into next year as to whether we make some modifications to that or or not but that was just important for me to to make the point that uh you know we're not changing the yearly guidance uh understand that the effects was a bit bigger than anticipated in the quarter and and expect something slightly more decent in in in the fourth quarter uh that was the in this method sorry the other part was

Just on ballast water treatment, if we can, on ballast margin.

There is no real underlying change. What is happening in the market is that we're going to less retrofit and more new build in the mix, and that is somewhat negative on the margin. On the other hand, we start to see the service margins and service business coming in as a balancing factor. So I don't think structurally we're going to see a big change on balance. the the guidance that the the ballast water business is is yielding somewhat above the group performance level before splitting the profits clear thank you tom ladies and gentlemen due to the time we have to stop the q a session now and i hand back to tom for closing comments thank you and uh it's obviously uh was a good time to discuss part of the development we will continue to do so on the capital market stay in copenhagen if you have not notice that will actually be a very good opportunity to get acquainted with some of the development projects that we are running across the board in a group. So we are very excited about hosting you on site in Copenhagen at the Food and Water Engineering Center. I think you will enjoy it. So I hope you can join us. And then my final comment would just be to extend my thanks and gratitude to Jan. This is the last quarterly report with Jan, and at the next one, and in connection with the capital markets, you will meet Jan's successor, Fredrik Ekström, who has been running our heat pump related heat exchanger business for many years, and he's returning to the financial field after many years in business control. And we wish him welcome, and you will, as I said, meet him at the capital markets stage. So thank you, Jan, for five years of great service.

Thank you, Tom.