Alfa Laval Corporate AB

trends together with the cyclical rebound in LNG and offshore applications.

The demand trends are expected to remain positive, but we do not expect to repeat the elevated level of order intake in the next quarter compared to this one. On the supply side, you may remember that in the supply chain and balances we had in 2022, they resulted in a restructuring program that was launched in the second half of 2022 in both the Energy Division and in the Marine Division for particular areas. With a strong order intake in these areas of low utilization in the fourth quarter and certainly in the first quarter this year, and the good progress we have in the restructuring program in the weak parts of the portfolio, we are expecting that these parts of our business will continue to gradually improve margins as of Q3 2023, as earlier indicated. The large capacity expansion project that we initiated about half a year ago is moving on as planned. The current demand trends are reinforcing both the need and opportunity related to the investment program and the longer term growth of Alfa Laval as a group. And with those comments, let me move on to key figures. As I said, the order intake was exceptionally strong in the quarter at the new record level of 18.4 billion SEK. And despite good invoicing, the order book reached a new high of 42 billion SEK or a book-to-bill of 1.3. The margin, the beta margin grew in line with invoicing as it should. And it was a good outcome given all the volatility in currencies, commodities and supply chain challenges that we've been working with during 2022 and to some degree also in Q1. On the divisional level, let's start with the food and water division. The order intake remained on a good level of 5.8 billion SEK in line with invoicing in the quarter. Compared to last year, we added Desmet as an acquisition. And on the other hand, we also have a distortion with a 65 million US dollar brewery order that was booked last year. So the comparison versus last year is a little bit difficult to make. All together, we feel the Food and Water Division was relatively stable in terms of order intake, with an exception of some weakness in China. Since the second half of 2022, we have commented that the demand has been somewhat soft in the Food and Water Division specifically. The margin was solid in the quarter for Food and Water Division, with all units performing well on a margin level based on good volumes and based on solid growth in service across the board. Going to the energy division, it was a very strong, solid and clean quarter across all of the business units. The demand was strong in all parts of the portfolio and the order intake was well balanced, covering all product groups. The big utilization issues we had in 2022 for welded heat exchangers, particularly driven by the cancellation of the order book in Russia, are now gradually being resolved with some positive margin effects expected from Q3 and onwards. The margin was elevated in Q1 just as it was last year. There were some reval effects in the quarter as it was last year. Last year, we indicated to you that the one-time effect was around 180 million SEC in the quarter. This time, the net effect is approximately 150 million SEC. You should not expect that to repeat. But as we said last year, there are many moving parts as we move into the next quarter, including price adjustments and PPV adjustments. So it's difficult to take it out as an individual number. However, for the year, you should expect a similar margin development in 2023 as you saw last year. In other words, the engineering division market in Q1 will not be expected to be repeated in Q2 and onwards. Still, the underlying profitability in the energy division was better than last year and with a good order book for the starting point is solid and positive for the divisional outlook. In this context, I would like to remind you that the large CAPEX project that we decided on end last year and partly beginning of this year, that capacity expansion project is mainly focused in the energy division. As part of this project execution, we expect costs of around 100 billion SEK per quarter being charged to the P&L during the remaining quarters of 2023 and in 2024. That takes us to the Marine Division. Order intake was exceptionally high, despite ship contracting remaining on a fairly modest level. All parts of the portfolio, except the planned ramp down of ballast water applications, developed well. Structurally, sustainability applications and service continued on a very steady growth in the quarter. And in addition, project orders in both offshore applications and cargo pumping were at high levels. Although the market trends and forecasts remain stable near term, a repeat of this rather elevated order intake for the Marine Division is not expected in the second quarter. The marine margin remained on approximately the same level as during the last quarters, which is a low level compared to historic levels. and in line with our guidance as before. With the old order backlog in boilers being gradually resolved and the order intake in cargo pumping gradually improving utilization rights in our supply chain, we expect a gradual margin recovery as of Q through this year, as we have indicated in the previous quarter, well in line with our earlier guidance. That takes us to service. The service growth remained at elevated levels in all three divisions and grew organically at the very high level of 18% versus last year. I have commented on this before in terms of both the underlying demand being strong, but we have during the last five years made significant improvements and investments into our customer service capabilities. It is now clearly yielding results in terms of high growth levels. On a regional perspective, North America is the only negative territory in this quarter. However, it is mainly affected by the large brewery order, as I indicated earlier. The business sentiment in the U.S. remains positive at large. For the rest of the regions, it is an all positive situation with especially strong demand in Asia, corresponding to almost 45 percent of our own intake. May I also repeat our guidance for Russia briefly. We stopped all new orders as of March 2022 and wrote off all of the sanction related already booked orders since then, amounting to a number well above 100 million euros. As part of a controlled wind-down process, the business activities are gradually closed down from Q2 onwards, with essentially one open project remaining in the food and water area to a value of approximately 1.5 million euros in fisheries remaining possibly until year-end. Our approach to deliver on the contractual non-sanctioned orders has been driven primarily by respect for our employees' security and the legal system in Russia. Let me just finish this by giving you a brief overview on our top 10 markets. On a rolling 12-month basis, China took over as our largest individual market from the U.S. in the quarter. The difference is not big, but nevertheless, it is a historic moment. India is back on the top 10. Rather logically, we see strong demand development in India as a whole. And in general, you can see a rather stable growth level on the last 12 months versus all of 2022 in most markets. And it reflects fairly well how we read the current economic environment for Alfa Laval as we're moving forward. And with that, let me hand over to Fredrik for the financial update.

Thank you, Tom. And hello. Order intake, as mentioned, reached an all-time high in the quarter. We're off 39% total growth. Of that growth, 25% was organically driven, 7% structurally, and 7% by currency. Base business also set a new record level in the quarter. Noteworthy is that that puts Alfaval on a 9.5% compounded aggregate growth for the last three years. Invoicing in the quarter has remained strong and on a high level. Gross profit margin landed at 34.5%, which is below last year, however, sequentially higher than Q4 and then on a comparable basis for the whole year last year. S&A costs are in line with expectations given acquisitions, expected inflationary increases and increased activity levels in a growing business. Cost-to-sales ratio reflected a positive development, landing at 15%, down with 2% from the same quarter last year. R&D increases are mainly related to inflation and increased activity levels. Operating income in money terms is 68% above the same period last year, which then increases the earning per share to 3.6 compared to 2.2 crowns per share last year. A strong first quarter. Improving or rather less disrupted supply chains have facilitated more deliveries to our customers. New capacity resulting from the multiple CapEx programs has also boosted our delivery capability. 15% organic growth, 33% in total growth. Nevertheless, backlog continues to increase with a strong book to bill in the period. Adjusted EBITDA is 31% above last year in money terms, on about the same level in margin as previous quarter one, and improved sequentially. As previously noted by Tom, the development of the EBITDA margin on a divisional level is positive across the company. Adding some further detail, the development of the EBITDA margin has had a dilutive effect from acquisitions of 0.6%, which was in line with expectations and in line with project business. Currency had a marginal effect. while the organic impact coming from a favorable mix and pricing had a positive impact of 0.5% EBITDA margin. Commodity prices and inflationary prices are well offset. And finally, restructuring programs to address capacity imbalances are well underway and will start to have a meaningful impact in quarter three. Working capital continues to burden cash flow, where inventory levels are the main contributors. We have initiated multiple activities to address purchasing volumes and optimizing inventory levels to reflect the current remaining supply chain disturbances and uncertainties. We expect capital expenditure to accelerate during the coming quarters, bringing 2023 close to the top of our guidance, some 3 billion SEC. Financing activities is negative, as we have chosen not to refinance one of our commercial paper tranches that matured in the quarter. We expect a strong cash flow development during the year. Order backlog stands at 42.2 billion SEC, of which 24.8 billion SEC are for delivery in 2023. 17.3 billion SEC are for delivery 2024 or later. That represents a 59% increase year on year. And the current backlog corresponds to 5.3 months of the current sales. Quarter four, book to bill was 1.3 billion, 1.3, sorry. And energy backlog was a 10 billion, food and water backlog at 15 billion and marine backlog at 17 billion. Finally, a reminder of some of our guidance on CapEx. We guide the market to a 2.5 to 3 billion SEC investment pace over the next three years. We guide on a currency impact on EBITDA for 130 million in quarter two and 375 million for the full year. And then we have amortizations of almost a billion in 2023. We expect the tax rate to be between 24 and 26 percent. And with that, I hand over back to Tom.