Alfa Laval Corporate AB

So good afternoon and welcome to Alfa Laval's first quarter earnings call in 2024. And joining me is Fredrik, our CFO. And so we will go through the presentation. We have an AGM starting in a while. So we're going to be a little bit tight in the meeting and we intend to finish a quarter two. With that, let me go to a couple of introductory comments, as always. First, as you noticed, overall demand remained strong in the quarter, despite volatility in several end markets. A good conversion of the product pipeline and strong growth in service compensated for weakness in end markets like HVAC and offshore. Invoicing was lower than expected for several reasons, with some negative margin impact, especially on the food and water side. Invoicing is expected to return to anticipated levels in the next quarters. Finally, the group continues to exceed all communicated financial targets. At the same time, we are in a heavy investment period, both within R&D and the capacity expansion program. We remain committed to lead the energy transition while maintaining healthy profitability and a strong balance sheet. And with that, let's go to the key figures for the quarter. Order intake was stable year on year and grew 8% sequentially, with invoice length slightly below the expectations. Consequently, the order book grew to about 48 billion SEK, and the book-to-bill in the quarter was 1.23. EBITDA improved slightly versus last year, but with a margin that decreased somewhat. Let me comment on the margin development on the divisional levels. So moving on to the energy division, most end markets continue to grow on a healthy level, with the exception of the HVAC market. Especially the heat pump market was weak, as expected. Lacking volumes have to a degree been compensated by gains in other applications related to the braced heat exchanges. The order intake and margin will continue to be negatively affected in the next quarter by the weak HVAC market, but as previously guided, a gradual improvement is expected in the second half of 2024. The elevated margin in the first quarter 2023 was, as you know, partly due to the positive inventory reval effects at the time, excluding that the financial performance was stable compared to last year. The unusually high growth in service continued in the quarter, with the growth in the energy division of 20%. And service accounted for 31% of order intake in the quarter. This is a structural difference from the past, and compared to five years ago, the service share was at that time at 24%. So in terms of the split between capital sales and service, we have a different situation in that division now and expect it to continue going forward. The ongoing capacity expansion program is progressing well and in line with plans, although at a somewhat slower pace than originally communicated. Moving on to food and water division, the demand was strong in the first quarter and grew 10 percent versus last year. The sequential decline of about one billion sec from a record fourth quarter last year was expected and mainly related to this meant. Invoicing was lower than expected, as I indicated before, and related to several factors. Some customer delays, some supply chain disruptions from the strike in Finland and logistics at the Red Sea, and perhaps the Easter week during the end of March, which is typically a strong invoicing period, may altogether have created the handwind. The margin in the Food and Water Division was negatively affected as a consequence, specifically in the two business units running projects, the business unit Food Systems and business unit Desmet. The margins in other BU's were stable to positive. We see no obstacles for invoicing to return to expected levels from second quarter and onwards. Finally, the Marine Division, where demand was stronger than anticipated and grew 30% sequentially following a solid 2023. A clear and anticipated decline in the offshore market due to a congested supply chain was more than compensated in other areas, especially in the tanker market. Invoicing grew as expected, and the margin recovery that started in 2023 continued at a good pace. A solid order book is now secured for the rest of 2024 and well into 2025. The service growth continued with another solid quarter and on a healthy level. And then moving on to the summary comments on service. Entering 2024, we had some concerns regarding the growth after record 2023, but with a somewhat flat development towards the end of the year. Instead, 2024 started well with an organic growth of 7.5%. The execution of the service strategy started several years ago and is progressing well. The global service organization is now significantly stronger than a few years ago, and the ambitions remain high for the coming years. For good reasons, the group aspires to become a good service company. And then a couple of comments on the geographic split. And first then, please note that the chart is modified somewhat from before and now better reflects our operating structure. Also note that the numbers now refer to the share of global sales and the growth compared to the same quarter last year. With that said, America remains strong, especially in South America in this quarter. Southern Europe performed well, mostly due to some large orders. China and Northeast Asia was positive, mainly due to a positive shipbuilding market. India and Middle East was a bit softer in the first quarter, but underlying business conditions in both these regions remain very positive going forward. So in terms of our top 10 markets, finally, as always, you will see that U.S. and China competes for the top spot with approximately 20% of group sales each. Given the macroeconomic concerns in China, the growth in the quarter was satisfactory. And with that, I'd like to hand over to Fredrik for some further financial comments.

Thank you, Tom. Hello, everyone. Let us get started with a summary of the main financial highlights for Q1, starting with an order intake that landed at 18.3 billion, which is 0.6 lower than quarter one 2023. However, worthy of note is that currency had a negative impact comparatively and both structure and organic growth compensated. Equally worthy of note is that Q1 is among the top three order intake quarters. Service accounted for 29% of the order intake and base business for 32%. Energy compensated for the entire slowdown of the heat pump demand. Food and water grew across most of the business units with a continued recovery on base business. Marine order intake almost entirely compensated for the low portion of offshore business. So all in all, a strong order intake with a healthy mix. A good order intake in the quarter means that we can continue to build on our backlog that now has accumulated to a book value of 48 billion. 31 billion is currently planned for delivery in 2024 and 17 billion for delivery next year or later. This is, in money, the highest backlog the group has carried, of which the current part represents 8.9 months of sales based on the last 12 months' revenue figure. Both book to bill for the quarter, 1.23, and our evaluation is that the backlog is well in sync with current commodity and other input prices. Sales in the quarter grew with 5.6%, again with a negative impact of currency and positive structural and organic growth. We have experienced delays to our ability to invoice in the quarter, causing some of the planned revenues to defer forward. Food and water was particularly affected in the quarter. However, we expect to recover this project invoicing gap during the year. The latter more than well supported by the backlog. As previously stated, invoicing in the quarter increased with 5.6%, with the majority of the growth coming from the marine and energy division. The food and water division fell short on invoicing, both in comparison to last year, but more importantly, to the expected invoicing in the quarter. which results in a lower gross margin or gross profit contribution. The revenue mix was balanced with 30% portion of service and 70% capital sales. The revenue mix was... Sorry. I came off. Sorry. Some imbalances in production results remain in this volatile period with some end markets going up and down. With some short lag, we have counterbalanced... most of that imbalance. Both S&A and R&D reflect planned increases in line with added capacity and business development capabilities and are expected to moderate in pace in the coming quarters. Operating income increases 2%, while the profit before tax increases with 9.8% to 2.2 billion, yielding an EPS of 4.07%, which is 12% higher than last year. Q1 yielded an adjusted EBITDA margin of 16.3% or 2.4 billion in money terms. Organic impact was dilutive with 0.4%, mainly driven by the shortfall in invoicing and cost increases. Currency and structure also contribute with dilutive developments in the quarter. Energy Division posted an adjusted EBITDA ratio of 19.8%, which is a normalization in line with what we have indicated before from the elevated levels of Q1 last year. Food and Water Division posted an adjusted EBITDA ratio of 14.1%, which also compares lower than Q1 last year, mainly impacted by delayed invoicing. Finally, the Marine Division posted an adjusted EBITDA ratio of 17.9, which is a normalization in line with the recovery of profitability that started last year. Cash flow from operating activities contributes to improved yielding 1.7 billion in the quarter with a diminishing negative impact from working capital, which confirms a new balance with less capital bound in the balance sheet driven by our backlog under execution, manufacturing activities, inventories and invoicing. Capital expenditure reached 818 million in the quarter. It received that we continue to invest on growth to support our current manufacturing capabilities, but also new and expanded manufacturing capabilities and, of course, business and product development. To reiterate what we have said in previous quarters, we have clearly not stopped our investment programs. We have, however, refaced them to suit the current and expected market demand. Nonetheless, the free cash flow improves to 933 million. The positive development on our cash flow impacts cash and cash equivalents and current deposits positively in the quarter, bringing the balance to 7 billion. Debt now 1.2 times EBITDA and 0.6 times of EBITDA in the last 12 months in relation to net debt. Average funding rate continues to increase on the back of current interest rate levels, but we are continuing to work on this continued position, and an expansion of activities should Such an opportunity arise. Excuse me. Let me rephrase. We are in a continued good position to finance an expansion of activities such an opportunity arise. And to finalize the financial summary of Q1, some guidance going forward. CapEx for the year is expected to land in the range of two to two and a half billion in line with previous comments in this presentation. Currency is expected to have a positive impact on the result based on current FX levels. Amortization of step-up values is expected to be on a level of 700 million. And finally, we expect average tax rate for the group to be in the interval of 24 to 26 percent. With that, I hand over to Tom for an outlook on Q2.

Thank you. And regarding the outlook... As you are aware, several of our end markets are a bit volatile. Heat pump market, offshore market and a couple of others that have been well communicated. And based on that, we were a bit cautious moving into the first quarter of this year. As you could notice, we came in a bit stronger. And that is despite the fact that most of the downside was already materialized during the quarter. So we've been able to compensate in a better than an anticipated way. Given that most of the running rate is already in the books for first quarter on the weaker side, we are somewhat more optimistic moving forward into Q2. And we expect demand to be somewhat higher sequentially in the second quarter compared to the first quarter. And on the divisional level, we expect the demand in the marine division to be somewhat higher. We expect the demand in the energy division to be somewhat higher. And we expect the demand in the food and water division to be somewhat lower. And with that, we are open for questions.