Alfa Laval Corporate AB

Good morning. Fredrik and I would like to welcome you to the full year 2023 earnings call and share some comments and reflections on the quarter and on the year. Let me, as always, do a couple of introductory comments on the year. The full year, 2023, was kind of a ticking-the-box type of year. The invoicing grew 22% to 64 billion SEC, reflecting a solid order book and stable supply chains, finally. Cash flow finally returned to normal conversion rates and reached 9 billion SEC, or three times that of last year. The marine division started a strong margin recovery in the second half of 2023, as earlier guided, and reached an 18% margin in the quarter, well in line with expectations. And finally, earlier acquisitions performed well and ahead of plans, with a strong development for both the SMET and Stormgeo as the prime examples. So a good year overall. In Q4 specifically... Demand remains sequentially stable in line with guidance and reached an invoicing record level. Looking into 2024, we have a solid order book of 45 billion SEC, 8 billion SEC higher than last year. And the demand trends in the in-for-out orders looking into 2024 are a bit mixed. The transactional business in food and water turned positive in Q4 after six quarters of weak demand, so perhaps somewhat of an improvement ahead. And the HVAC sector turned negative in Q4 due to weak construction market and a slow heat pump market as well. So that is the preconditions as we move into 2024. Now let me go to the key figures for 2023 as a full year. It was a solid year with all numbers improving more than 20%. We are especially pleased that EBITDA is growing faster than sales in a period with heavy investments in R&D and capacity expansion. Finally, the bottom line was really strong with earnings per share at 15.3 SEC, an improvement of 50% compared to last year. The key figures for the fourth quarter specifically also had solid numbers, generally better than last year. Order intake was sequentially stable, and invoicing reached a new record level. The margin development was mixed, and I will comment that on the divisional level. So let us go to the energy division first. The demand remained firm in Q4 in most end markets, with the exception, as I mentioned, in the HVAC segment. While the lower construction activity will likely last for all of 2024, the heat pump market specifically is expected to gradually improve from mid-2024, as inventories are reduced in the value chain and installation levels start to recover. The margin of 73% was lower than the elevated margins from previous quarters this year, but still on a healthy level. In addition to the mix and absorption effects from the HEVAC segment, the reval effects turned somewhat negative in the quarter after a period of positive reval earlier in 2023. Turning to the marine division, market conditions remain positive in the quarter and is expected to stay favorable in 2024. Yard capacity will be the main bottleneck going forward. The decreased order intake compares to a strong last year and is within normal quarterly variations. The previous margin challenges are now behind us in the Marine Division, in line with the guidance from the beginning of last year. The order book is replaced with a better priced mix in 2023 prices, and the depleted order book in the cargo pumping area is now rebuilt well into 2025. In summary, the one billion second earnings for the Marine Division in Q4 was actually a new record and a good confirmation that the turnaround plan has been completed. Going to the food and water division, we had a massive order intake of 7.3 billion SEC in Q4. Invoicing was also solid and met high comparable numbers from last year. In all, the market conditions have been mixed in 2023 with a clear weakness in the transactional business and with a strong demand in the project business. Order intake excluding the SMET was essentially unchanged compared to 2022. Finally, in Q4, the transactional part turned positive compared to Q4 last year after a number of weak quarters. The underlying margin was somewhat bearish. better than reported, as claims, provisions, currency and some specific underabsorptions affected the quarter. Excluding these effects, the margin would have been close to normal levels. Moving on to service, we had record year for all three divisions with a total order intake and invoicing at around 19.5 billion SEC. Demand is expected to remain firm, but may plateau a bit for a while after three years of very rapid growth. The gross margin has stayed stable throughout the growth journey. Let me then round off with a couple of regional reflections. Essentially, we have positive growth numbers for order intake everywhere in 2023 and Q4 specifically. Noteworthy is that India and Middle East continues fast growth, as well as Eastern Europe, now with Russia completely eliminated from the order book. Asia as a whole remains above 40% of total group order intake, despite the weak macroeconomic situation in China. And let me just round off with... a reflection on our top 10 markets. In fact, despite some concerns about the Chinese macroeconomic situation, China developed quite well in 2023 with a healthy growth supported by a strong marine market and solid demand in the energy sector. And with that, I'd like to hand over to Frederik for some further financial comments.

Thank you, Tom. Market demand in quarter four resulted in an order intake of 16.9 billion, representing a growth of 7%, of which the majority was organic. Service grew with 6% in the quarter, and transactional business grew with some 5% in the quarter. On a whole year basis, this represents an all-time high order intake of 70.7 billion, a growth of 20%, of which 10% is organic, 4% currency, and the remainder structural. After a record order intake in 2023, our sales backlog stands at 45 billion, of which 32 billion is for invoicing in 2024, and some 13 billion for invoicing in 2025. The majority of the backlog is at 2023 pricing levels. Based on last 12 months figure, we have an in-for-out requirement of 31.6 billion or 50% based on a 12-month revenue. Q4 book-to-bill was 0.95%. Quarter 4 resulted in the highest revenue quarter for the group, invoicing 17.8 billion, a growth of 8%, of which 7% is organic. On a whole-year basis, the group recorded revenues of 63.6 billion, which is a 22% annual growth, of which 12% is organic, 4% currency, and the remainder structural. Mix was heavy on projects and service. Gross profit margin rose to 31.6% in the quarter, which is 0.2% higher than last year, despite several one-off provisions and adverse hedging contracts compensated by volume and service mix. Sales and admin in the quarter increased with 13%, of which half is inflation-driven and the other half is driven by initiatives and added resources. Ratios to sales remains at 13.6%. R&D costs increases reflects our continued investment on innovation, but remains low in relation to sales at 2.3%. Net other cost and income has a positive deviation driven by somewhat lower CapEx project costs and by a sale of a previous manufacturing site. Operating income increases with 43% to 2.6 billion. The financial net cost increases with rising interest costs and debt and adverse financial exchange rate yields. Finally, EPS increases with 26% to yield 3.77 crowns in the quarter. Adjusted EBITDA margin in the quarter landed on 15.9%, which is an improvement of 60 basis points. Of that improvement, 90 basis points comes from organic development, 20 basis points comes dilution from currency, and 10 points dilution from structural changes. Translation on transactional FX impacts on adjusted EBITDA for the quarter amounted to negative $4.3 million. Eliminating for additional provision, one-off costs and under-absorption in the quarter, margins are more or like on a normalized level, as Tom mentioned before. On a whole-year basis, the adjusted EBITDA margin improved with 30 basis points to yield 16.1% margin. Translational and transactional FX impacts on adjusted EBITDA for the year amounted to $415 million. EPS for the whole year increased to 15.31 crowns, an increase equivalent to 41%. Cash flow from operating activities came in at 3.9 billion in the quarter, boosted by positive balance movements on receivables and inventory. CAPEX in the quarter came in as expected and finance activities is burdened by 1.5 billion in amortization of debt, exchange losses and interest costs. Cash flow from operating activities for the whole year came in at 9.2 billion. CAPEX programs closed at 2.4 billion, well in line with our guidance, resulting in a free cash flow of 6.7 billion for the year. Financing activities came in at negative 5.5 billion, and that is mainly composed of a dividend of 2.5 billion and amortization of debt of 1.7 billion. Final cash flow for the year, just shy of 1 billion, but with a stronger and balanced balance sheet. Our strong cash flow has allowed us to service debt and strengthen our capital position. Debt has decreased with 1.7 billion to 13.3 billion, which is equivalent to 1.13 times EBITDA. Cash balances amount to 5.9, bringing the net debt position to 7.4 billion, or 0.63 times EBITDA. Now to some important guidance for 2024. We have, over time, increased the scope of our central functions. These costs need to be considered as an intra-group service and not only shareholder costs from a tax perspective. Following international law, OECD transfer pricing guidelines and the recommendations of the Swedish tax authorities, we have decided to invoice more central costs to the group principal companies in accordance with Alfa Laval transfer pricing policy. This moves a substantial portion of corporate costs from a corporate consolidation level out into the divisions as the costs are recognized in the principal companies. On the slide, you see the simulated effect on the 2023 numbers. Note that there is no impact on the group as a whole. And some further financial guidance. Our CapEx level is moderated to 2 billion in 2024. and is expected to resume previous guidance of 2.5 to 3 billion in 2025, the latter to better reflect the expected market demand. Currency impact is expected to remain positive in Q1 and 2024 given the current closing averages. Amortization of step-up values just shy of one billion in 2024. Tax rate guidance remains in the interval 24 to 26 percent. And finally, a proposed increased dividend of seven and a half crowns per share. And with that, I hand back to Tom.

Thanks, Fredrik. Let me then come to the outlook statement, and I'm going to put some words around it before we go to the divisional level. The demand trends, as I indicated before, they point a little bit in different directions as we look into 2024. And the volatility, if we look 23 and back, has been rather high in specific segments. And so this situation is probably going to remain into 2024. To summarize that on a divisional level, for the marine division, conditions are generally favorable and is expected to be somewhat higher sequentially than in Q4. The Energy Division has mixed demand trends and is expected to be on about the same level in Q1 sequentially. And finally, Food and Water Division had an exceptional demand in Q4 in the project business. Demand in Q1 is therefore expected to be lower sequentially. For the group as a total, we estimate that demand situation will be somewhat lower in Q1 compared to Q4 2023. And with that, we are open for questions.