Alfa Laval Corporate AB

Good morning and welcome to Alfa Laval's second quarter earnings call. Fredrik and myself will run through the quarter with some details and then we open up for Q&A as always. So let me start with a couple of introductory comments. 2024 started well, with solid demand and a record order intake for the second quarter and also for the first half of 2024 as a whole. The order book now stands at 50 billion sec, also a new all-time high. We expect markets to remain on a similar level in Q3 sequentially, although order intake is expected to be somewhat lower. In all, we had a clean quarter in a stable operating environment with solid project execution and a good invoicing level as a result. In fact, all financial KPIs moved in a positive direction, including a strong cash flow and a return on capital employed of 22%. The balance sheet matters, and it is now in a very good shape. So with that, let me go to the divisional review. The energy division, to start, had a good demand with the exception of the HEVAC segment that continued to be weak in the quarter. Otherwise, demand was firm across almost all end markets. The order intake decreased sequentially and year-on-year was more than accounted for by the HEVAC slash heat pump market, whereas the rest remained slightly positive sequentially. Margins held up well, despite the low utilization level in parts of the portfolio, due to a combination of short-term cost adjustments and longer-term structural improvements in part of the product portfolio. Looking forward, we expect the third quarter to be the bottom of the cycle for the braced heat exchanges with a significant exposure to the European heat pump market. Volumes in Q3 are expected to remain low, and the low utilization during the summer months may affect the energy division's margin somewhat in the quarter. From Q4 onwards, the trend in the braced heat exchanger area is expected to turn positive, irrespective of the heat pump market, with other applications, including data centers, driving the demand going forward. So moving on to the food and water division, market conditions developed as expected with a lower water intake in part of the product portfolio and a continued improvement in the transactional part of the business. The transactional improvement that started already in China in Q4 2023 is is now stronger and geographically more broad-based. The growth with our channel partners was solid in the quarter, with the exception of a weaker business climate in the U.S. specifically. Invoicing recovered after a lag in the first quarter 2024, and as a result, both the operating margin and the beta improved to a good level, especially given the high share of project invoicing in the quarter. Then on to the Marine Division. Ship contracting at the yards remained very strong, especially in the tanker segment. The growth in the second quarter was obviously mainly driven by the tailwinds in the contracting market, but also to some degree by the environmental portfolio adding to a higher sales potential per ship. In all, the environmental portfolio accounts for approximately 4 billion SEC on a yearly basis and 12 months rolling, or about 20% of the total order intake for the division. The margin pressure during the last year is now fully behind us, as indicated already in the Q1 earnings call. The order book looks solid for 2024 and for 2025 at this point. Then a couple of comments on service. Service has been on a strong growth path for the last few years. But during the second half 2023, it looked a little bit like a small trend shift. In the first half of 2024, however, we are back to good growth numbers and sequentially and about flat in Q2 versus a very strong Q2 2023. Both the marine division and energy divisions continue to grow sequentially and year on year, whereas food and water division decreased somewhat. Looking forward, the underlying growth momentum in service remains in place. Then finally, a couple of comments on the regional situation. Northeast Asia was strong, including China. China is now at an all-time high level on rolling 12-month basis. The region is obviously supported by a strong marine demand. Southeast Asia was overall okay, but some large HVO projects last year resulted in an order decline year on year, but otherwise market conditions were okay. India was slow in the beginning of the second quarter due to the election. Otherwise, the region, including Middle East, was stable. Europe had both some positive and negative variations in South and Northern Europe, but it was mainly driven by normal fluctuations in large order bookings. And then, finally, North America was weaker after a long period of strong demand, whereas Latin America continued on a positive growth trend. And that sums up my comments on the quarter, and I hand over to Fredrik for some further financial details.

Thank you, Tom. So, good morning, everyone. Let us get started with a summary of the main financial highlights for quarter two, starting with an order intake that was record-breaking at 18.9 billion, or equivalent to 3.5% organic growth. Lifting the order intake for the first half of the year to 37.2 billion, equivalent to 1.1% growth. Service accounted for 27% of the order intake. Energy division order intake continues to be burdened by the market demand in HVAC in general with particular weight from heat pumps. Food and water grew across most of the business units with an expected contraction of HVO volumes coming down or rather normalizing from high demand levels. Marine order intake was strong across most end markets and it was another strong quarter with a good margin contribution to backlog. Backlog continues to grow with a book-to-bill of 1.08, reaching a record level of 50 billion, which divides equally into deliveries in 2024 and 2025 or later. This represents a growth of backlog of 10% and corresponds to about nine months' worth of revenues on an LTM basis. Our evaluation is that the backlog is well in sync with current commodity and input prices. Revenues in the quarter grew with 10.4%, with an organic contribution of 11.2%, reaching 17.5 billion. The mix is tilted towards project business, and service represents 29% of the total. The current delivery capacity, current throughput of supply chains, and the current backlog support a continued good revenue recognition level for the remainder of the year. In line with the quarter, the first half of the year has been strong, with a revenue growth of 8%, sales to an accumulated level of 32.4 billion. The gross profit ratio improved with 1% to a level of 33.4%, driven by good factory and engineering results and good profitability yields from invoice projects. S&A increases with 11% in the quarter, of which about half is initiative-driven and half is inflation-driven. R&D costs decrease with 1% in the quarter, which is related more to cost-facing than a reflection of activity levels. Operating income margin improves with 2.2% to 15.6% compared to the same quarter last year, which after tax yields and earnings per share increases increase of 12% in the quarter to 4.08 crowns per share and 8.15 for the first part of the year. Quarter 2 yielded an adjusted EBITDA margin of 16.7% or 2.9 billion in money terms. Organic impact was accretive with 1.7%, boosted by increased revenues and good capacity utilization. Currency and structure have negligible impact in the quarter. Energy division posted an adjusted EBITDA ratio of 19.1%, which is a normalization in line with what we have indicated before from the elevated levels of last year. Food and water division posted an adjusted EBITDA ratio of 15.3%, which compares favorably to quarter two last year with increasing levels of invoicing. Finally, the Marine Division posted an adjusted EBITDA ratio of 18.4% in line with restructuring programs, a healthy backlog, capacity utilization, and a backlog in line with input costs. Cash flow from operating activities just about doubled in comparison to Q2 last year to 2.6 billion. Capital expenditure continues in line with guidance and accumulates to 1.5 billion after the first six months of the year. Free cash flow in Q2 at 1.9 billion, well above Q2 last year. Some substantial movements in finance activities, with the payment of dividends to shareholders of 3.1 billion, maturity of a bond of 300 million euros, of which the latter was refinanced with only 1.6 billion in newly issued commercial papers that we expect to repay during the year. More on debt position in the next slide. Debt decreases with 4.7 billion from quarter two last year to a level of 11.7 billion, where net 1.7 billion was not refinanced in the quarter. As a consequence of the latter, cash and cash equivalents decreased compared to quarter one, but remain on a healthy operational level of 4 billion. Average funding rate continues to increase, both compared to last year, but also sequentially to 2.4%. Current net debt ratio, excluding leases, closes quarter two at 0.62, which is half the same amount of quarter two last year. And to finalize the financial summary of quarter two, some guidance going forward. CapEx for the year is expected to land in the range of 2 to 2.5 billion. Currency is expected to have a positive impact on the result based on current FX levels. Amortization of PPA is expected to be on the level of 700 million. And finally, we expect average tax rates for the group to be in the interval of 24 to 26 percent. With that, I hand over to Tom for an outlook on quarter three.

Thank you, Fredrik. And as you've seen, we expect demand to be somewhat lower compared to where we were in the second quarter. I remind you that we're coming out of a new record level, so we don't really see any major shifts in the market moving into Q3. Specifically, on a divisional level, we expect demand in the energy division to be higher, We expect the food and water to be somewhat lower and we expect demand in the marine division to be somewhat lower. So that's how we see the trend in terms of market expectations, the contracting market in the shipping sector. is expected to remain high throughout the second half of the year, as you can see on Clarkson data and other publicly available sources. And we also have a very strong product pipeline on the energy division side for the second half. So all in all, a pretty solid base for how we go forward and an expected Q3 that will be, compared to last year and in general, quite positive. So with that, we hand over to questions.