Alfa Laval Corporate AB

level and sequentially stable despite clear signs of a slowing global economy. Demand is expected to continue on about the same level in Q3 with some adjustment for normal seasonality effects. Regarding the supply chains, after years of challenges, the supply situation continued to improve with increased invoicing and cash flow as a result. The positive trend is expected to continue and the group's focus to improve customer service, lead times and working capital remains. Finally, the earlier supply-demand imbalances in parts of our energy and marine division that we talked about during 2022 are now removed based on the recent restructuring program and a strong order intake during the last three quarters. The earlier guidance of a gradually improved margin in the marine division starting from Q3 and onwards is confirmed, everything else being equal. And with that, let's go to the key figures. The organic growth of 9% was strong given the economic slowdown. Alfa Laval was negatively affected in the short cycle transactional business, but this was more than compensated for by strong growth in service and projects. Although customers face increasing difficulties in project financing, a reasonable share of a strong project pipeline converted to orders in Q2. The margin at 15% was a bit lower than we like, driven by a 1.5% margin decrease in food and water, mainly a mixed effect from increased project share and partly currency effect. So, while the drop-through from high invoicing did not fully materialize on the EBITDA level, it did fully convert on the net profit and EPS level. Moving on to the energy division. The global energy transition continued in the quarter with strong order growth. The capex cycle for natural gas specifically also continued on a high level with project orders more than compensating for a weaker transactional HEVAC market. The margin continued on a high level with good cost control and pricing discipline supporting the result. Please note that the expected OPEX cost related to the capacity expansion program did not fully materialize in Q2 as forecasted, but is expected to do so from Q3 onwards. On to the Marine Division, demand remained firm across almost all applications with elevated demand, especially in the offshore and cargo pumping sector. Service continued sequentially on a record high level. A consistent strategy of investing into service products and capability is clearly yielding positive results for the Division. The rather large margin decrease that occurred from Q3 2022 was driven by a long order book in boilers exposed to inflationary effects and a depleted order book for cargo pumping systems. After another solid quarter of rebuilding the marine order book, the earlier guidance of gradually improving margins from Q3 remains in place. The demand remained steady. Moving on to the food and water division. Order intake was at an all-time high at almost 7 billion sec in the quarter. The growth was strongly supported by Desmet, the acquisition from last year, which continues to perform well above the acquisition plan in end markets with a positive momentum. the margin decreased in the quarter with 1.5% versus last year. In addition to the expected allusion from De Smet, both currency and the impact from a slower transactional market affected the margin. While the margin was not perfect, it is worth noting that the beta result increased to 960 million SEK, 40% above last year. The transactional demand is on a lower level than last year. We may see somewhat of a recovery towards the end of the year, but short-term actions will nevertheless be taken in order to address the demand-supply balances during the third quarter. Then on to service. The exceptionally high growth in service at 20% organically in the first half of 2023 across all three divisions continued. Earlier, we had some concerns that we saw some pent-up demand from the pandemic, but at this point, we feel our investments into digital capabilities, improved management of the install base, and a better service execution is driving a structural growth in the service business compared to earlier. And then let me round off with a couple of geographical comments. Already in the second half of 2022, we indicated a weaker food and water market in China specifically. That trend has continued in the first half of 2023 and to some degree also spread to the transactional part of the energy division. At this point, the transactional short cycle market is clearly softer in most regions. In that perspective, we are in the middle of a business downturn. A strong marine market, demand from the energy transition and a strong project pipeline is compensating for the weaker macroeconomics. And as a result, all regions are showing a positive growth number on an aggregate level across the division. So with that tour around the world, let me hand over to Fredrik for some further financial comments.

Thank you, Tom, and hello, everyone. Order intake reached yet another all-time high, 18.4 billion SEC in the quarter, representing a growth of 28%, whereof 9% was organic, 13% structural, and 6% on currency. After sales, energy division project business, marine pumping systems and desmet orders are the main drivers in the quarter and compensate for a softer transactional business. Improving supply chains and investments on increased capacity made it possible to invoice a record 15.9 billion SEK worth of products and services, an increase of 34% compared to Q2 last year, of which 17% is organic, 10% through acquisitions. Nevertheless, backlog continues to increase with a high book-to-bill in the period. Reiterating, invoicing in the quarter has remained strong and on a high level, with a gross profit margin of 32%, which is burdened by a heavier share of project business invoicing. Sales and administration costs are in line with expectations, given acquisitions, expected inflationary increases, and increased activity levels. Cost-to-sales ratio reflected a positive development, going from 16.4% to 14.7%. R&D increases are mainly related to inflation and increased activity levels aimed at product development, both in existing and new applications. Operating income is up 22% compared to Q2 last year, which increases the earnings per share from £2.75 to £3.63. Adjusted EBITDA in the quarter reached 2.4 billion SEK, which is an improvement with 21% on the same quarter last year, of which only 4% is driven by acquisitions. On a total basis, the 15% adjusted EBITDA margin for the quarter was diluted with 0.6% by acquisitions, 0.3% by currency, and 0.6% by an unfavorable revenue mix largely coming from the marine division. As indicated in previous reviews, we expect that trend to be broken in quarter three. 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, as we have previously stated. A bit of a deep dive. Food and water had a rather large adjusted EBITDA movement in the quarter and therefore we have chosen to highlight the margin bridge for the division. It becomes evident that the bulk of the dilutive effect comes from Desmet. Having said that, this was both expected and communicated. Desmet is performing strongly with an order intake of 2.9 billion SEC that exceeds our forecasts at the time of the acquisition and with a strong project portfolio going forward. Finally, although we worked to smooth out the impact of percentage of completion in invoicing, the margin in the first three quarters is lower than the final yield in quarter four. Less visible is the impact of utilization rates in our high transaction product manufacturing units. Here we have taken action to rebalance capacity. Moving on to cash flow. Quarter two generated an EBITDA of 2.8 billion SEK. Cash flow from operating activities yielded 1.3 billion SEK, a substantial increase in the quarter. However, 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. Acquisitions so far this year include marine performance systems, which delivers a system that reduces the water drag on the hull of a vessel, and we executed an option to purchase further stake in Klimatempo, a geographic addition to marine digital strategy. We expect capital expenditure to accelerate in the coming quarters, bringing 2023 close to the guidance of 3 billion SEK. and we expect a strong cash flow development during the year. Order backlog is now at 45 billion SEC, of which 20 billion SEC is for delivery in 2023, 25 billion SEC in 2024, 53% increase year on year, and a current backlog that corresponds to four months of current invoicing level and pace. Quarter two book to bill was 1.16%. And finally, we reiterate some of our guidances, and we reiterate a guidance on the CapEx level for the next two to three years of 3 billion SEC. And with that, I hand over back to Tom.

Thank you, Fredrik. And let me then repeat and restate our outlook statement and how we look at the short-term development. And as we expressed in the Q report, despite the slowing economic activity, we believe that the demand in Alfa Laval's markets will remain relatively unchanged in the third quarter sequentially. In the energy division specifically, we think that situation is going to be relatively unchanged sequentially, whereas in the food and water and the marine divisions, we may see some seasonal effects as to how the order intake developed in the quarter. All in all, a fairly stable market outlook for Q3. And with that, we are ready for questions. Thank you.