Alfa Laval Corporate AB

Welcome to our earnest call for the third quarter. Let me start with a couple of introductory comments as always. We had another strong quarter with elevated demand in the marine sector and the book to build on 1.17 for the group. The service growth continued on a high level of 11% in the quarter. The strategic focus on the service business since many years continues with investments in both infrastructure and people. And finally, the cash flow was strong in the quarter at 3.75 billion SEC. The operational stability in the supply chain is on a good level after several years of work in restoring a normal level of operating working capital has given positive results with maintained customer service levels. And so with that, let me go to the key figures. Orders were a bit stronger than expected with good demand in all three divisions and sequentially stable compared to the second quarter. Invoicing is on a stable growth track supported by a record strong order book, but part of the project invoicing was on the low level in Q3, specifically in the energy division. The project execution is stable and good, but the phasing in terms of forecasting and recording percentage of completion creates a little bit of volatility perhaps between quarters. The margin strengthened in the quarter both year on year and sequentially, a positive mix and strong margins in several business units compensated for the slightly lower invoicing level. Now let's go to the division starting with the energy divisions. A strong quarter for the division, returning to order intake growth despite a weak EVET market as previously guided. Several end markets were growing in the quarter, including process industry and demand for data center applications. While demand for energy efficiency remain a strong structural driver of the growth, the key verticals in the energy transition does not develop in the speed needed to reach the climate goals. Still, the order intake for what we call clean energy applications continue to grow from a low level with the most promising steps in the pipeline for carbon capture applications. The margin was solid in the quarter with a limited negative effect from the low utilization levels in braced heat exchangers related to the heat pump market. Significant efforts to ensure operational performance together with growth in adjacent applications had a positive impact. There will be no speedy recovery in the European heat pump market specifically, but as previously guided, the third quarter was likely the low point in the demand cycle for this time. Moving on to the food and water division. As expected, the order intake declined compared to the last year due to the elevated level of large product orders from this map in Q3 23. The rest of the portfolio grew in the quarter on a solid level, supported by a continued recovery in the short cycle business, including service. The weaker market conditions in China reached the bottom of the cycle in Q3 last year and returned to slow growth paths since then. The positive trend continued in the third quarter on a higher level, and the market sentiments are overall more positive in China at this moment. Most end markets had a good development in the quarter, but biofuels remained low compared to last year. The project pipeline is, however, getting stronger, and the investment level both in ethanol and other fuels is expected to recover in the medium term. The margin was good in the quarter with better utilization in the short cycle businesses, and a strong project execution level above our financial targets. And with that, let's move to the Marine Division. The demand in the tanker market continued to drive the order intake to record levels, especially related to cargo pumping systems. All business units in the division grew, and the order book in the division now stands at 26 billion SEK until recently, normal level for the entire group. While strong demand most likely will remain for service and new applications for decarbonization, it will not compensate fully for a more normalized demand level in cargo pumping moving into the fourth quarter. The margin recovery continued as expected. Compared to the earlier record levels in 2019 at about 21-22%, the existing portfolio is back on historic levels. The difference compared to 2019 is related to the high margin scrubber retrofit portfolio, which is no longer in the invoicing mix, and the slight reallocation of corporate costs, which is higher on divisional level, but neutral on group level. And with that, let's go to service. So service continues to grow in all three divisions and most of the service scopes, including spare parts. We are comfortable that the service strategy works and will continue to invest in the growth plan going forward. The service margin is stable for spare parts and other comparable service scopes, but the mix is gradually tilting somewhat towards service works and invoicing from our service centers. This has for some time had limited effect on service margins, although it remains a healthy and accretive business, obviously. Then finally, a few comments on key markets. And as you can note, China is currently developing well and strong and is on a roll in 12-month basis, the largest market in Al-Farabal by far. Although both energy and food and water has a cautiously optimistic view going forward, the shipbuilding market has been the main driver of the growth. As shipyard capacity is getting fully booked, the water levels from China will perhaps normalize somewhat up to a slightly lower level. The U.S. has been strong in recent times, but the order intake declined in Q2 24 a bit unexpectedly, and the third quarter was also a little bit on the weak side. Given the strength of the U.S. macro and the current order intake weakness is considered mainly as delayed final investment decision, in part of the product pipeline, especially related to the food and water division. Otherwise, U.S. looks solid. Some weaknesses in both India and Southeast Asia were present in the quarter, but prospects are looking positive going forward, especially in India after the completion of the election process and the return of the investment levels in the ethanol business, among others. Market conditions in other geographical markets were generally stable to positive. And with that, I hand over to Fredrik for some further details on the financial performance. Thank you, Tom.

So let's start with a quick recap on orders received. Quarter three closed well above expectations, mainly driven by marine ship contracting. However, we have also recorded good order intake in many of our transactional businesses, and in particular in the food and water division. Energy efficiency continues to drive good demand in the energy division, with a good order intake development in data centers, but a continued lackluster demand in HVAC. Currency has a negative impact on order bookings with 3.9%, while organic growth is almost 15% in the quarter, yielding a quarter order intake of 18.9 billion and a year-to-date order intake of 56.1 billion. Book-to-bill in the quarter was 1.17, adding to the order book, which now equals $52 billion, of which $15 billion is expected to be invoiced this year and the remainder in 2025 and 2026. The order book is judged to be on a good level with current and expected input costs. In a calendar year, quarter three is typically the lowest quarter for revenues as holidays disrupt and shorten invoicing routines. Having said that, we continue to see a growth trend in comparison to quarter three last year with 2.8%, which after eliminating currency impact actually is a healthy organic increase of 6%. Total for the quarter is 16.2 billion in revenues and year to date, It's a growth of 6.3%, equaling $48.6 billion. Sales in the quarter generated a gross profit of $5.8 billion, a gross profit margin of 36%, which is 2.8% better than the corresponding quarter last year. The latter as a result of a good service revenue mix of 31%, a higher factor in engineering results, that entirely offset the lower capacity utilization rates of our braced heat exchanger factories. S&A cost of 2.5 billion marked an increase of 11%, of which more than half is related to increased number of employees. R&D costs increased in line with our ambitions and innovation programs. Operating income at 2.7 billion, which after the financial net and taxes yields an EPS of 4.77 crowns, an increase of 11% to round off a strong financial quarter. Adjusted EBITDA margin is above 17% for the first time since quarter one 2022, at 17.3%, which is 0.6% higher than the same period last year, where currency has only a marginal negative impact. Instead, we have a substantial positive contribution from service mix, a good factory and engineering result, and good project execution outcomes on our projects. Good cash flow from operating activities at 3.7 billion continues to build on a strong EBITDA contribution. At quarter three, a cash positive change in working capital stemming primarily from accounts receivable. CAPEX was slightly above guidance levels in the quarter at 0.7 billion, bringing the free cash flow to a level of 3 billion. No acquisitions or disposals of note in the quarter, while financial activities mainly reflecting the continuing servicing of debt. Debt has decreased further in quarter three with another 1.3 billion since quarter 2, 2024, and almost $5 billion since quarter 3 last year, excluding leases now at 0.39 of LTM EBITDA and including leases 0.61. The current debt position continues to build our ability for future acquisitions without exceeding our debt target thresholds. Finally, to some guidance. Quarter four investments are expected to remain on similar levels as we have seen in the previous three quarters with an indicative range between 0.4 to 0.6 billion. Currency impacting quarter four is expected to be low as major currency pairs stay within current ranges. And with that final bit of financial guidance, I hand over back to Tom for a view on quarter four.

Thank you, Frederik. And then let me come to a couple of comments on the outlook for Q4. In general, as you may have noticed, we feel that most end markets and geographies remain stable deposit for us. Also, the marine sector is in a very strong demand period, which is not expected to stop in the short term. After record level in the tanker segments with substantial order books in the shipyards and in Alfa Laval, this is expected to moderate the order intake looking into Q4 and slow total demand in the next quarter for the group. So on a divisional level, for the food and water division, we expect a somewhat higher demand in the quarter. For energy division, We expect demand to be on approximately the same level as in Q3. And for marine division, for the comments from earlier, we expect demand to be on the lower level in Q4. And with that, we are happy to take any questions.