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.