Alfa Laval Corporate AB

Welcome to Alfa Laval's fourth quarter report. And we are in a newly inaugurated studio in Lund, so transmitting from here first time. Hope all will work well together with me. I've got Fredrik Ekström, our CFO, and we will run through the normal presentation. You will lose out in picture during the actual presentation, and then we will be back in full picture as we move into the Q&A session. I also want to alert to you that due to a bit of time pressure on the schedule today, we will have to run the Q&A a bit shorter, so approximately quarter to 11, we will have to discontinue. So I hope you can have some understanding for that. And with that, as always, let me go to a couple of introductory comments. Now, first, obviously, as you've seen, demand remained strong in Q4 with record levels of order intake across several businesses. The outlook also remained positive overall. Secondly, the global supply chains continue to stabilize with solid invoicing and improving cash flow in the quarter, especially towards the end. Thirdly, the energy transition drives demand beyond normal growth rates and existing capacity limits. To support our customer base, we announced the largest investment decision in our history yesterday, amounting to 3.8 billion SEK. In balancing the decision between a weaker global economic outlook and supporting the global reduction of carbon emissions, the climate was the winner. Finally, we charged 440 million SEK in the quarter, The earlier announced restructuring program is progressing as planned with changes in the Marine Division and the Energy Division. We have also provided for all our remaining exposures in Russia as the wind down of our existing operations continued as earlier announced. The decision in February 2022 was to stop all new orders, cancel all sanctioned contracts on the order book. The legal entity is gradually becoming non-operational as we move into 2023. And with that, let me go to the key figures. Both order intake and invoicing grew in fourth quarter with approximately 15% organically. Sequentially, the growth was about 4% organically on order intake, slightly better than expected and guided. Earnings improved on the back of higher invoicing with some downward pressure on the margin. The main margin challenge was related to the specific businesses included in the restructuring activities. Going then on the divisional level, starting with food and water, we had a good quarter overall with good demand and an exceptional invoicing. A few end markets, and China specifically, were a bit weaker in the quarter. Margins held up well, supported by good performance in the engineering business, both regarding the SMET and our own food system, reaching double-digit profitability, both of them. Going to the energy division, the strong demand and invoicing trend continued in the quarter, supported by several applications related to the energy transition. The margin decrease compared to last year was mainly due to the business unit welded now being restructured. The cancellation of the Russian order book and the earlier softness in the fossil investment cycle created significant utilization and load issues in business unit welded. Improved order intake in Q4 and the planned actions and restructuring is presumably improving the situation during 2023. The Marine Division had a very strong demand and a record quarter in terms of order intake supported across most of the portfolio, both in applications related to sustainable shipping and the more traditional offshore business. Specifically, demand improved for cargo pumping in late December, with improved factory load expected from Q3 and onwards. The margin improved sequentially in the Marine Division due to mix and volume, but we still have some work to do during the first half of 2023. As indicated before, the second half of 2022 and the first half of 2023 is likely the bottom of this cycle when it comes to the margin development. Moving on to service grew to record levels and beyond our expectation. The trend was positive across all three divisions. As said many times during the last six years, the work to strengthen our service offering is paying off. In addition, we may have an element of pent-up demand from the period of the pandemic supporting the growth numbers even further. Then on to the regional picture. All regions, including China as a whole, had a good development in the quarter. Russia is now removed from the comparison going forward. But even with Russia included in Q4 2021, the numbers for Eastern Europe was still positive year on year. A final comment on the order intake as a whole. If you consider the last three quarters, it puts us on a running rate of approximately 60 billion sec on average when it comes to order intake. After hovering around 40 billion plus in 2020 during the pandemic, the growth is exciting, but also somewhat challenging. Customer service remains the priority for us, resulting in higher than normal operating costs. If demand remains stable, we should gradually resolve the imbalances in our supply chain as we move into 2024. And with those comments, I hand over to Fredrik for some further financial details. Thank you, Tom.

And good morning. During quarter four, we have delivered a record amount to our customers, in part due to the improving supply chains and in part due to the high backlog and order intake we've had over the last 12 months. Sales closed at an all-time high of 16.5 billion in the quarter and 52.1 billion for the year. The gross profit has in most business units had a good development in the quarter. Our pricing initiatives have offset a good part of the inflationary pressure and the overall margin also reflects a positive mix in capital sales. Invoice backlog with orders taken prior to 2022 and low factory loads in business unit welded heat exchangers and marine pumping systems affect the margin negatively. The underlying negative contributions are being addressed through the restructuring programs that Tom mentioned in his introduction. Sales and administration expenses were 2.1 billion during the fourth quarter and 7.9 billion during 2022. The full year corresponds to a 15% of net sales. If you exclude currency effects and acquisitions, sales and administration expenses increased approximately 10%. That increase shows a return to normal levels after the pandemic years. The cost for research and development during the fourth quarter corresponded to 3% of sales, an increase that marks a return to pre-pandemic levels and increased innovation ambition. Earnings per share were at 10.89 by the end of the year compared to 11.38 the year before, and corresponding adjusted EPS numbers are 12.78 versus 12.98. Q4 sales of $16.5 billion represents a growth of 41% compared to last year, of which 14% was organic growth, 11% currency related, and a final 16% related to acquisitions where Desmet contributed with $1.9 billion. Service sales constituted 28% of the group's net invoicing in the fourth quarter and 30% for the full year. In summary, a solid sales quarter that saw the first, even if modest, reduction of backlog in quite some time. Summarizing, 2022 sales reached 52.1 billion, which is 27% better than 2021, of which 11% was organic, 10% currency, and 7% structural, of which just met represents 2.1, 2.5 billion SEC. There's been a turbulent year with continued supply disruptions, capacity imbalances, lockdowns, rising inflation, rising interest rates, and continued uncertainty driven by Russia-Ukraine war. Given this, it is reassuring that the demand from our customers remains strong and prioritized. Sales in quarter four yielded an adjusted EBITDA of 2.5 billion, corresponding to 27% growth, of which 6% was currency-related. That yielded a margin of 15.3%, which was diluted by FX with 0.6%, and structure-driven dilution of 0.5%. The overall margin reflects that our pricing initiatives to a considerable extent have offset inflationary pressures and a positive impact from capital sales mix. The low factory loads and backlog orders taken prior to 2022 are affecting the margin negatively. Adjusted EBITDA for the year ended at 8.2 billion, which is 16% higher than 2021 with a currency component of 5%. Finally, adjusted EBITDA margin for the year of 15.8%, which is in line with expectations. From a cash flow perspective, the increasing EBITDA contribution is materially offset by working capital and movements. Record high sales have increased accounts receivable with 2.1 billion and decreased the balance of advance payments as sales are recognized with a heavy impact in quarter four and for the year. Supply chain disruptions have eased towards the end of the year. However, COVID lockdowns in China and the war in the Ukraine have created uncertainty that continues to persist in high inventory levels. Initiatives to reduce and optimize have already been started and will continue during quarter one 2023. Nevertheless, the cash flow is impacted negatively with 3.1 billion on a full year basis. Cash flow from operating activities in quarter four amounted to 1.7 billion and 3.3 billion for the year. CapEx of 1.9 billion were primarily allocated to capacity increasing initiatives and acquisitions to the tune of 3.7 billion included as met at 3.4 billion, Scanjet at 237 million and Bunker Metric 13 million. Closing quarter four and the year with a positive cash flow and free cash flow. We are increasing our CAPEX guidance to 2.5 to 3 billion SEC per year over the next three to four years in order to capture growth opportunities in the area of energy transition and service. In quarter four, we have also quantified and charged two comparison distortion items in cost provisions. The first one related to the restructuring program covering marine division and business unit welded heat exchangers, as communicated in the last earnings call. The program will address capacity imbalances in the supply organization and reposition for future business. A restructuring charge of 367 million has been charged in the fourth quarter and the expected payback in approximately two years. The second one relates to Russia, as Tom has already explained. Closing backlog in quarter four shows the first modest reduction of a historically large backlog with a book to bill in the period of 0.96. The acquisition of Desmet and Scanjet increased the backlog with 5.7 billion at the time of acquisitions. Excluding currency effects and adjusted for acquisitions, the order backlog was 30% higher than the year before. On to some guidance. As mentioned before, CapEx guidance will increase to 2.5 billion to 3 billion per year. Currency impact is expected to be positive based on currency rates per closing of 2022. Amortization of step up values continues with a modest increase in 2023 to start declining in 2024 with current structure. Tax rate guidance remains in the span of 24 to 26%. The board of directors proposes a dividend of six crowns per share equal to the dividend of last year and to be voted on on the upcoming AGM. And then a final guidance. We, going forward, are going to change the way we report our divisional numbers, going from EBIT to adjusted every day level. This to simplify how we communicate with the market. Below follows a conversion in anticipation of the quarter one report where we will implement this change. And with that, I hand back to Tom for some closing comments.

All right. Thank you, Fredrik. And then to the outlook statement, and let me first say that of course we are acutely aware of the concerns on the macroeconomic situation in the years to come. We see how The business down cycle is affecting many parts of businesses on the consumer side. On the industrial side, we still haven't seen those effects and we haven't seen them in Alfa Laval's end market. So in that perspective, we see an unchanged situation as we move into Q2 sequentially compared to Q4 on the group as a whole. We may see some variations between end segments and divisions. Specifically in the energy segment, we expect an unchanged demand. In the food and water division, we may see somewhat better conditions. And in the marine division, after an all-time high and super strong situation in Q4, we may see somewhat of a softer market conditions coming into Q1. And so with that, we are happy to take questions.