Alfa Laval Corporate AB

presentation. And after that, we will open up for Q&A. So let me start with a few introductory comments, as always. Let me remind you first that in 2022, we had several imbalances in the portfolio, both in the Energy Division and in the Marine Division. It triggered a restructuring program in the fourth quarter last year, which now is completed according to plan, supporting the margin improvement in the quarter. The imbalances from 2022 are now corrected. Additionally, the strong order intake continued for marine pumping system with a healthy order back book for 2023 and 2024. The marine division margin started to recover in the third quarter as previously guided. Global supply chains continue to stabilize, with customer service and lead times gradually returning to normal levels. The resulting improvement in the operating cash flow to almost 3 billion SEC was expected and welcome. And with that, let me move on to the key figures. Order intake remained on a good level in the quarter and grew 12% compared to last year, and sequentially, seasonally, somewhat lower, as indicated before. Invoicing grew 20% and provided a good volume support to the margin improvement, which ended on 16.7%. Note that the book-to-bill remained positive in the quarter. In all, it was a clean and stable quarter, a welcome change after years of turbulence. And with that, let's move to the divisional reviews, starting with the energy division. The clear weakness in the construction market for HEVAC applications was compensated from applications related to the energy transition and natural gas. The temporary slowdown in the heat pump market had limited effects in the quarter, but may have a moderate impact on the next two quarters. Margin remained on an elevated level, above 20%, supported by tailwinds in almost all areas, while the fundamentals are expected to remain positive in the coming quarters. The cost related to both R&D expansion and the capacity program is expected to have some margin impact going forward. In the Marine Division, order intake continued on a high level with good demand in almost all areas. Contracting levels in the yards, service demands from an aging fleet, and a strong offshore market provided a solid base for the quarter. As guided, the margin recovery started in the third quarter. A completed restructuring program, a rebuilding of the order backlog and the replacement of old pre-inflation order book to a new adjusted price level for boilers all went according to plan and earlier guidance. The basics are now in place for Q4 and 2024. In the food and water division, on aggregate, order intake remained firm with variations in the portfolio. Projects and service continue to grow, with transactional business remaining on a lower volume compared to last year. The weakness in the transactional business started in mid-22, and normally the cyclicality is somewhat limited in the food and water area. We may be at the bottom of the cycle for the transactional business at this point in the food and water division. Some actions have been initiated to ensure margin stability nevertheless. Regarding service, the growth continued on a high level of 12 percent, 14 percent last year compared to last year, with strong performance in all three divisions. The growth has exceeded normal service growth targets for a couple of years now. Ongoing initiatives and market conditions may support the higher than normal growth rates for some time to come still. In terms of the regional performance, this quarter had a somewhat more mixed picture than in recent time, reflecting some softness in the global macro. Most notably is the growth in China versus last year, supported by a strong marine business. Despite geopolitical concerns, China remains a strategic market for Alfa Laval in terms of technology, production, sales and service. Otherwise, Asia, Middle East and the Americans were strong in the quarter, with Europe clearly lagging behind in the third quarter. And that summarizes the quarter from my point of view. And I hand over to Fredrik for some further financial comments.

Thank you, Tom. So, on a 12-month rolling basis, order intake is at an all-time high, just shy of 70 billion, with an order intake in the quarter just above 17 billion, which is well in line with our guidance in quarter two. This represents a 12 percent increase from last year, however, sequentially lower than the record Q2. Organic growth accounted for some 3.7% of the total 12. Acquisitions contributed with 5.1%, leaving the balance 3.2% related to currency. Service continues to grow with 14% in the quarter, reflecting a high utilization rate of our equipment. Transactional sales remained at the same level as last year, and project business grew some 48%. Q3 book to bill was 1.08, increasing the backlog to 46 billion, of which 13 billion is for delivery in 2023, and the remaining 33 billion will be delivered in 2024 or later. 46 billion in backlog at current pace represents eight months worth of sales. Delivery to our customers continues to increase as capacity expansion programs and normalized supply chains allow for an improved output. The 20% growth compared to last year comes primarily from these initiatives and more service sales, giving a combined total 13% contribution in the quarter. Acquisitions 3%, and currency rounding off at 4%. As a side note, accounts receivable have increased in parallel, impacting operating working capital. However, we have not seen an unproportional increase in overdue receivables, a number we keep a close eye on. The increased sales and mix of sales booked in quarter three have resulted in a good gross profit level above 33%, and better than the equivalent in 2022. Margin on sales remained stable in the third quarter across the divisions for the transactional sales and for service sales. Pricing activities have matched inflationary pressures, while commodity prices have stabilized on a high level. The price effect of backlog... The effect of price in the backlog for project business starts to diminish as the backlog moves into invoicing and delivery. Capacity utilization impacts are actively addressed to match demand. Sales and administration costs have increased with 10%, driven primarily by inflation but also by acquisition, and added resources in growth areas. However, in proportion to sales, it is a favorable development to 14% of sales. R&D increases beyond inflation as we invest more in product development. Operating income increases 41% with a strong drop-through from increased sales, a favorable product mix, and completed restructuring initiatives in marine and the ongoing restructuring in welded heat exchangers. EPS increases from 2.92%. in Quarter 3, 2022, to four crowns, 29, in Quarter 3, 2023. Adjusted EBITDA margin for the Q3 was 16.7%. The 2% improvement in margin is mainly driven by increased sales, product mix, and the yield of restructuring programs. The adjusted EBITDA margin for the Marine Division improved to 15.1% compared to the 12.1% in Q3 2022. The energy division and the food and water division also contributed with strong margins, 21.6 and 15.5% respectively. Cash flow from operating activities increased to 2.9 billion compared to the 670 million in the same quarter last year. Free cash flow increased to 2.4 billion compared to 315 million last year, despite the higher CapEx level of 527 million in the quarter. We have noted three acquisitions in the quarter equaling some 232 million. Finance activities burdened the cash flow with another 804 million. This continues to reflect our current strategy to deleverage our debt position. Some more detail on this in the next slide, but all in all, a cash flow of 1.4 billion. Our current cash flow generation has allowed us to deleverage $1 billion and eliminate the short debt position incurred by the dividend payment. The euro exchange rate impacts negatively, increasing our debt position, bringing the final balance to 15.4 billion, of which is equivalent to 1.42 times EBITDA. Net debt on the same level as last year, but in relation to LTM, EBITDA drops substantially to 0.95. Adding lease liabilities, the ratio increases to 1.2%. Average funding rate on our debt is 192. And then finally, for some guidance, we reiterate our guidance around investments in 2024 between 2.5 to 3 billion. However, we lower our guidance in 2023 to 2.5 billion as we delay some of the investments and some of the investments take longer to take effect on the cash flow. Currency impact is calculated according to the consensus of currency given by banks at some 11.5 euros per crown. or rather 11.5 crowns per euro. And the PPA amortization decreases to 710 million SEC in 2024 as some of the marine acquisitions fall out. With that, I go back to Tom.

Okay. Thank you, Fredrik. And let us then finally... conclude on the outlook. As we have indicated in the report, the market conditions overall are expected to remain unchanged in the fourth quarter, with a weakness in some end markets compensated by positive tailwinds in sustainability-related applications. With a record order book of 46 billion SEC and a positive book to build in Q3, the load and invoicing for 2024 has been secured in many parts of the portfolio. And with that, let's move to questions.