Alfa Laval Corporate AB

Good afternoon and welcome to Alfa Laval's first quarter earnings call. Fredrik and I will give you an update on the quarter and then open for questions. As always in the first quarter earnings call we have to move on to our AGM direct following so we will stick to the timetable today so that also the visiting shareholders have a chance to meet us. With that let me then go to a couple of introductory comments first. So demand was stable in the quarter and in line with expectations across all divisions supported by a strong quarter for transactional business and service. The execution of the order book continued well and supported a solid invoicing quarter and a positive margin development. And last, the balance sheet is seldom in focus but today we should recognize that we are essentially debt free and the 24% rose is a healthy number indeed if I may say so. And with that let us go to key figures. So let me first clarify the order intake numbers for the quarter. Due to big currency movements in the order book of 52 billion SEC was affected to an unusual degree and the revaluation in the quarter of the order book amounted to 900 million SEC. We have always reported order intake net of revals and cancellations. Looking at the last 40 quarters this way of recognizing orders has reflected the underlying market conditions fairly. In Q1 the NOC versus dollar movement affected the marine division specifically and therefore included the reval of the order book into the bridge now and going forward. In all orders were stable at minus 3% organically both sequentially and compared to last year. The order book stands at 52 billion SEC and the margin in the order book is not affected by reval. Moving to the invoicing it increased with 10% and with a good mix effect the margin grew to 17.7%. And then on to the divisional reviews starting with the energy division. Order intake was largely in line with expectations and HVAC orders were well supported by demand in data center applications. The recovery in the heat pump business is still a quarter away or so. The pipeline of large orders was a bit slow to convert to booked orders maybe partly due to macroeconomics. Sales and margin were operationally stable and reflected well the underlying business conditions in the quarter. On to the food and water division. A stable quarter overall with a very solid and continued growth in the transactional business and service. The execution of the order book progressed reasonably well with invoicing growing 12%. The margin improved mainly due to a positive mix and the product business had both positive and negative deviations in all neutral to the margin. Then the marine division as indicated earlier the orders booked in Q1 excluding reval amounted to 6.4 billion SEC approximately just below last year and sequentially in line with guidance. This was expected to be the last quarter with elevated demand in cargo pumping and that guidance remain. We now have a massive order book in cargo pumping covering 2025 and 26 and partly beyond. The other marine businesses are still not fully reflecting the strong ship contracting of 2,400 vessels in 2024 in the order book at present. Invoicing developed as expected at plus 16% and the margin improvement continued driven by both mix and volume. Then service. It was again a strong service quarter with 5.8 billion SEC in service order intake. It was a new record with some margin. It was an unusually high share of orders especially in the marine division. Please note that adjusted for the reval in marine the service share would be 36% not 42% but it's still a very strong number. In terms of the market development in the regions most regions performed well with limited deviations compared to last year. Northeast Asia was again affected by both the reval of the order book and also a slightly decline in the marine orders. China continued to perform well especially in the food and water division. Southeast Asia was flat lacking a bit on large orders but with India and Middle East mainly driven by high capex spending in the Gulf. Europe was stable with some variations between North and South. Latin America and Brazil continued on a good level but compared to last year did not fully compensate for large Petrobras order. The U.S. was overall stable but slowing capex decision was a negative factor in the quarter compared to what could have been. Then finally a couple of comments on FIV cryogenics the outstanding acquisition. For a long time at Alfa Laval we have considered our options in cryogenics and we are excited to welcome FIV cryogenics to the Alfa Laval group pending the needed approvals. FIV cryo has a strong technology platform in heat exchangers and pumps complementary to ours. They have a strong position in the LNG business. Alfa Laval has a complementary market position with the same customer base hydrogen and carbon dioxide important future markets for gas liquefaction. We expect revenues in the short term to be at 2 to 2.5 billion sec at the margin somewhat accretive to the group. At the price of approximately 800 million euros the multiples are a bit more attractive than early market estimates. There are no synergies included in the forward looking numbers. We will continue to invest in capacity and technology for further growth in FIV. So synergies will be exclusively related to driving volumes and benefiting from FIV cryos technology in some other areas and applications important to Alfa Laval. We will brief on the business case further once the transaction is completed possibly around September this year. With those comments I hand over to Fredrik for some further details.

Thank you Tom for that. Let's start with a quick recap for context on order intake. Order intake in the quarter amounted to 16.8 billion. A contraction of 8 percent of which almost 5 percent is related to currency revaluation of the backlog with some 0.9 billion. Most of the revaluation effect is in the marine division with 800 million. Otherwise the organic contraction of 3 percent is related to project order bookings where the final investment decisions are delayed as a consequence of current market uncertainties. Transactional and service business are on a good level and in many cases on a continued growth trajectory. Despite the rather significant order book revaluation the order book stands at a high level of 52 billion of which almost 32 billion is for invoicing this year. Our judgment is that the quality of the order book is high and pricing is in line with the market cost level for inputs. As of this moment we do not see any major disruptions to supply chains that would cause delivery delays but we continue to monitor the development closely. Revenue in the first quarter followed normal seasonality from a sequential perspective but posted a good growth of 10 percent supported by a strong order book as we just discussed. Our manufacturing units report stable operations and deliveries are in line with expectations with no abnormal customer requests for delays in delivery. Revenues in the quarter contained a balanced mix of project, transactional and service business which in addition to positive purchasing price variances and good manufacturing utilization levels yielded a gross profit of 36.8 percent compared to 34.9 in quarter one 2024. S&A cost increased with 6 percent which is a couple of percentage points above cost increases where additional FTEs become annualized. R&D spend also increases with 8 percent as we continue to invest in new product development. Drop through in the quarter is on a good level increasing operating income with 27 percent and boosting EPS to 4.82 crowns per share. The adjusted EBITDA result increased with 20 percent to 2.9 billion which increases the adjusted EBITDA margin to 17.7 percent which is better year on year and sequentially. For the last five years we have been on a growth journey and it is worth noting that despite some variations on margin levels we are now back to a high margin level with an almost doubled adjusted EBITDA result if we compare between quarter one 2021 and quarter one 2025. Cash flow from operating activities is burdened by advanced payments to suppliers, prepaid expenses and annual invoices as is usually the case in quarter one. It is also burdened by paid assessed taxes in Sweden that over time will be compensated by other tax jurisdictions. Capital expenditure of 634 million reduces cash contribution to a free cash flow before acquisitions of 771 million. Financing activities has a negative swing in relation to quarter one of 2024 primarily related to positive revaluations in that quarter. While interest debt cost and lease amortization remained on approximately the same level bringing the final cash flow for the quarter to 457 million. The 457 million in cash flow contribution has increased our cash balance to 8 billion which in net debt yields a net debt of net debt in comparison to the last 12 months EBITDA of only 0.13. The current balance combined with our triple B plus rating puts us on good position for our capital structure post the fees acquisition and the upcoming dividend payment. Finally some guidance in relation to quarter two and the whole year 2025. Estimated capex for Q2 is somewhat higher than Q1 at 0.8 billion. Whole year guidance remains on the same level as previously indicated. Currency impact given current FX levels points towards a positive currency contribution of 50 million in quarter one sorry in quarter two and 200 million in the whole year. PPA for amortization includes the fee does not sorry does not include the fee acquisition as the PPA will only be prepared after closing. Tax rate guidance remains in the span of 24 to 26 cents and there's a recommended dividend of 8.5 crowns per share to be approved by the AGM later today. Finally we can also communicate that given the uncertainty that prevails we have started an internal initiative to control costs as a preemptive action. It will not affect product development projects and should not be understood as a cost saving project rather a cost prudence initiative addressing discretionary costs. And with that back over to Tom.

Thanks Fredrik. So a couple of forward-looking comments and let me for simplicity just start with the divisional outlooks. Regarding the energy division we believe that demand will be somewhat stronger in the second quarter compared to the first quarter. For the food and water division we expect demand to be on about the same level as in Q1 and for the marine division we expect demand to remain on approximately the same level as it was in Q1 that is including the reval effect. So the posted number. For the marine division it's important to remember that all parts of the portfolio excluding the cargo pumping is expected to continue to grow while as we have cited you earlier the demand in the cargo pumping after exceptional quarters is coming down to a lower level for a number of quarters ahead. And with that I think we are ready for questions.

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their telephone. In the interest of time please limit yourself to one question. Anyone who has a question may press star and one at this time. The first question from Daniela Costa, Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you. I will focus on a question on margins. Actually you had very strong margins in marine. The orders are coming down including what you flag in pumping systems particularly which I believe you had said in the past as a creative. Can you talk through the margin sustainability going forward and how do you see this balance between that and sort of maybe orders slowing down in coming quarters?

Yeah, thank you. I'm not going to give guidance comments as to where a margin is going to go but reflecting on where we are it is true that the cargo pumping is secretive to the marine margin. That had some effect. We have also as you know worked with profit improvement programs specifically in the boiler segment where we had a nice improvement coming through in the quarter and on top of that we've for some time seen a strong service business developing in parallel to the capital sales. So all of that makes us very comfortable with where we are and both the current order book and the pace of short cycle businesses in marine. And to some degree that holds true also in food and water when it comes to service, when it comes to short cycle. So we were ending the quarter on a good note.

Thank you.

The next question from class Bergell in the city please go ahead.

Yes, hi Tom and Fredrik, so you highlighted Tom's low decision making there in energy and put the water on the larger side but if we zoom in on marine the other half of the business outside cargo pumping have you started to see any sort of hesitation thinking about obviously this is a business that should benefit here from the earlier contracting of course and given the global trade backdrop potentially changing wonder if conversations had started to change a bit extra as well that was my first one.

No, I think it's difficult to jump the conclusion on that. I think what has been true for some time is that the contracting was unusually strong in 2024. The forecasted numbers were exceeded towards the end of the year so it's no surprise that the first quarter in terms of contracting is starting on a somewhat of a slower level but I don't see any meaningful impact on the current marine activities in terms of the business from the current trade disputes.

Yeah, it's probably true. Then my second one is on PIV. It seems like a very nice fit. Can I just ask you on the longer term growth prospect it seems like you imply in the near term high value of the energy division compared to the energy division but if you think about a bit longer term is this kind of sort of a 10% growth business if we look further out if we want to sort of look at the prospect and then also it's a decent deal but you have a very strong obviously very strong balance sheet a lot of higher power to do more deals if you could sort of help us a little bit with the remaining white spots and how you think about the balance sheet at the moment. Thank you very much.

Yeah, the PIV as I indicated has two exposures going forward. One is on the LNG side and compared to when this discussions and dialogue started the LNG market has for several reasons strengthened and now and going forward in the next five years compared to we were a couple of years ago so the LNG application will remain important. At the same time the carbon capture application, the hydrogen application is developing a bit slower than expected but that's obviously in our world a very significant growth opportunity for us going forward where cryogenics is absolutely crucial so what the growth rates will be I think will largely depend on what you believe on the transition and the climate policies going forward. We still hold to the transition leader strategy and we believe that things are going a bit slower than we hoped but over time that's where we're going to go so it will be a fantastic story for us if the world develops the way we want to and if it doesn't develop the way we want to it's going to be an okay investment. I think that's how you know it's an okay investment with an optionality that is super important. Then I would add to that that the part of the technologies that FIV is using is very advanced and is very interesting for us in some other heat exchange applications as well so we actually gain access to a know-how and a technology that is a bit more useful for us so we are very excited about this and I dare to say that also at FIV the team is quite excited to join us. White spaces, there are many but it's very difficult for us to speculate in terms of our next coming acquisitions but let me just say that probably in the region of 10 to 20 billion SEK is still sort of available should we have the right opportunities going forward. We are continuously scouting, there is a pipeline and yeah so this may not be the end of the story this year.

The next question from John Kim Deutsche Bank please go ahead.

Hi good afternoon. I'm wondering if we could just spend a little bit of time on the energy division. HVAC it'd be helpful to get a bit of color on what you're seeing on commercial versus residential. I know that the change in refrigerants has prompted an opportunity to upsell or resell into the base. Just wondering what traction looks like on that and given current outlook when you see an HVAC trough I suppose or a turn.

Yeah I think we passed the trough on HVAC. I don't have a real good split between residential and commercial for you. I don't know if you have a better update Fredrik. No

in the current levels it's probably 60 in favor of commercial and 40 in residential.

But you initiated the new refrigerants projects way back then so maybe you want to comment on that.

Yeah no it's nice to see now finally that the natural refrigerants are starting to take a real position in the market both when it comes to process chillers but also heat pumps where it's different refrigerants. One is of course carbon dioxide and the other one being propane. It will higher the efficiency. It will enable the substitution of well hung boilers and I think that's an important part of it because the temperature program that you're able to reach with propane is much higher and then of course the environmental footprint of both the new refrigerants is much lower. It is also to the advantage of our product which then has a lot of features that are enabled by the two new refrigerants and then of course serves also as an entry barrier. So I think it's an exciting prospect ahead and it really allows for the substitution of fossil heating. Yeah so

I

think

should we think of it more as a growth factor or margin improvement? Sorry? Should we think of it more as a growth sector or margin improvement?

Our growth sector is where I would place it. I don't know Tom if you see it differently.

I think you have to have the R&D muscles to be able to follow this and I think we are the technology leaders in this area so the more difficult it gets the more it is to our advantage when it comes to market positions. So I think it puts us in a good space. We are ready with the product program. I'm actually showing it at AGM today so I wish you were there but it's in a good place and I just wanted to add on the Hivak side that we think we passed the trough. We are a bit cautious where we go on Hivak in Q2 but certainly on the second half of this year we expect to have a better traction especially on the heat pump side where we're going back to some sort of normality after a long period of very very weak demand so it remains an upside for us going forward.

Thank you. The next question from Vlad Sergievsky Barclays please go ahead.

Yes gentlemen good afternoon. Thanks very much. If I can ask on marine profitability please do you think there is more upside versus Q1 level from the mix or operating leverage as you move 25 and to 2026 and are there any meaningful parts of marine business which are underperforming compared to your own internal expectations and could catch up supporting the overall mix?

Well I think on your second point I would say you know we are pretty much where we want to be. They're always a little bit of listen if the piano was playing everything clear you know I love to see that day but there's always going to be a little bit of slips and things but I think for us the quarter in marine was quite clean and so I don't think there are improvement. We did restructuring activities in end 2022. We are still restructuring and working on an improvement program for the boiler business so we're not completed there. So that completion will take this full year so into 2026. We know we will be a bit better where the market prices and competition will be we don't know so but I think I have to say it was an okay quarter for us. In terms of the mix I don't see that changing dramatically in the quarter to come. We are on a good level with order books and and so invoicing accordingly so I think in my book this was a fair reflection of our operational performance in marine in the quarter.

Thank you very much and if I can ask about energy as well how do you see demand which is related to oil and gas segment given the recent direction of commodity prices and also would you be able to give us some more clarity on what was or how big was this inventory evaluation effect on the margin last quarter?

There was no inventory reval effect last quarter. Last year I think it maybe which was elevated so let's go back. We expressed during a couple of quarters the fact that we were working with an I think the difference Q1 last year and now is about the percentage point. I'm looking at Fredrik. About a percentage point so around half the difference. This level here we think is as we expressed a good reflection of the operational performance of the unit bearing in that we are still not fully loaded back on the heat exchanger side for the braced heat exchangers on heat pumps. So that's kind of where it is. In terms of the fossil side it's okay. It wasn't a super strong quarter for fossil but we believe the gas we are mainly driven by the gas application and we don't see an immediate change on those announced projects and where they're going. So for us it's too early to call the investment cycle over. There is a number of products in the pipeline here so I think for the short term it will not change dramatically for us.

Thanks so much. Thank you very much.

The next question from Andreas. Please go ahead.

Thank you and good afternoon. A couple of questions. First it looks like you have changed the facing of the backlog deliveries a bit. Is that based on customers postponing deliveries or is it just based on your internal judgment of when the backlog will be delivered?

So we're continually looking at our backlog and of course that's in tight dialogue with our customers and sometimes it is about fitting our manufacturing windows and sometimes it's about fitting their ability to receive the projects or the components. So it is a bit of both but we continually assess the facing of the backlog and when it's large projects and you know it falls on the wrong side of the year then it results in a complete movement in backlogs. So we will continually do so but I don't recall there being particularly large movement. I think what you see is a more pronounced invoicing in the quarter that causes a movement in how the backlog is faced.

Okay and then can you explain why the backlog did not move in size despite the significantly stronger SIEC because I guess the backlog is based on the currency rates at the end of Q1.

Yeah so without getting too technical about the question so the big movements in the backlog or the revaluation of the backlog happen when we book in a currency that is not the same as a reporting currency. I'll use the example of Framos since it's the most apparent one here. Most of those orders or the majority of those orders are booked in US dollars but the Framo entity reports in NOC that causes a revaluation and it's a revaluation we do every single month so it's nothing particular to a quarter it's something we do on every month. In fact if we had done the revaluation a few days later it would have had a completely different outcome but that's besides the point. The point is we have always chosen to have a backlog that reflects the invoicing value of that backlog and when I say backlog of course I mean the order book and not delayed orders in any shape or form. It is the movement that you see then from 52 to 52 despite the movement of the order intake is the difference of that is the revaluation in this quarter.

Okay and then lastly on the the outlook so you had orders of 16.8 including the revaluation effects and my understanding is that that is included in the outlook for the second quarter but is that outlook also based on say current currency rates?

The answer is yes we don't speculate in the currency so you know the order book stands where it is until we revalue it but it's correct to understand that if I would make the bridge for you this way if last quarter we came down 900 million SEC because of currency this quarter we see that corresponding decline on the cargo pumping side so we are back to approximately the same level as we were in Q1 assuming that the currency is not moving one way or another it could go both ways obviously.

Absolutely. Thank you very much both of you.

The next question from Sven Vajar UBS please go ahead.

Yeah good afternoon my question was also exactly around that point because I was also wondering if the starting point for the group guide is the 17.7 rather than the 16.8.

We completely understand.

So now you basically said the starting point is 16.8. It is. Okay thank you.

I mean I think at this point in time if I just may you know we looked at the difference between over the last 40 quarters and there have been very few quarters with any meaningful numbers so although we are going forward including that in the bridge we don't expect that generally speaking it will be a difficult factor to take into account for or we know it will remain pretty stable so but anyhow for clarity's sake.

The next question from Sebastian Kuhne RBC Capital please go ahead.

Thank you for taking my questions. The first one is on the energy side. You spoke of very strong demand from data centers. Could you maybe give us a bit more detail on you know whether this is liquid cooling or conventional air cooling with the gasket and heat exchanges and what portion of business of the energy business that is currently on order intake.

I think currently and take into account that these numbers are moving and can move quite rapidly but if I would take a sort of a running 12-month rate we are somewhere around 2 billion, 2 billion plus second order intake. I am not sure what the exact split we have but probably a bit less than half of that is gasket applications and the rest is so we are moving the mix for us has been moving clearly into liquid.

Excellent. The second question is again on the currency. This revaluation of the order book also means you then book lower revenues for existing contracts and you give some indication on the FX translation transaction effect but I think this is not related to the existing contract. This is just you know transaction. I guess you have some hedging for the existing contracts in place that go below the EBIT line. Could you shed some indication of you know whether we will see tailwinds from the hedging of the contracts that you had to write down? You are

absolutely right. The revaluation of the order book is related to currency and affects the invoicing value to the extent that it reflects the same value as we have in the order book. However, when we enter each one of these contracts of course we do put a hedging contract in place then that is of course to protect us against these currency movements. So from a generation of profit the order should be protected assuming we keep the same timeline as the contract is based on. But so the answer to the question is if we have done everything right then the timing clicks as it should. It should be profit neutral from the expectation or from the level that we took the initial contract on.

Yeah so profit neutral therefore margin-incretive for at least for the time that you bring those conflicts through the P&L.

Sure if you assume that the current FX level stays exactly where it is then your assumption is correct. I wouldn't make that assumption.

Yeah thank you very much.

The next question from Mark Yates, Morgan Stanley. Please go ahead.

Thank you. Good afternoon. Just I wanted to ask around tariffs and I imagine you sort of like everyone else has been doing sort of quite a lot of work internally to try and better understand how it may affect your business. I guess the first part is is there any kind of direct impact that you've uncovered kind of as this has been rolled out? And I guess the other question in the US. I'm just wondering given your market leaders you have a kind of good view of the market. How much of the market comes from China? I.e. nothing to do with your business but is there an argument that you may have a competitive advantage in the US if you produce locally because some of the sort of lower end of the market gets knocked out because you can no longer because competitors can no longer export from China. So just thinking through some of the direct impacts as well.

Thanks. Good question. If you take a brief answer on tariffs the answer would be it doesn't have any meaningful impact the way we can see it in the quarters to come. We are either covered in contracts or have implemented price increases accordingly. So we don't feel that is much of a topic for us. In terms of our imports into US they are to the degree they exist mainly related to Europe. So it's almost a non-existing part that goes from China and that is related to the fact that there were tariffs on China already before. So we had done our product flows several years ago. So it's not too much of an issue for us. The question is where is the macroeconomics going as a result of it. That ties on to your second question. It's a good question. I cannot give you a super clear answer but it is clear that there are among other things in the spare parts market pirate copies from China coming in to the US on the side. I hesitate to say that it's to our advantage. It's a disruption for customers and everybody but I don't think we are disadvantaged versus the market when it comes to our presence in the US or how terrorists will affect us or the dependency on China. I think we are possibly somewhat positive in that scenario but I don't want to make too much of a statement around it.

Okay and just really quick follow up. On your energy guidance of demand up now I completely understand it's almost impossible to guide in this kind of environment but I just want to understand kind of what it is that you're seeing in your business that is making you. Presumably it's related to one of the sub-segments. Is it because you're a bit more optimistic on HVAC? Is it something else that you're seeing? Is it because of timing of some orders and some may be since this quarter? Just to understand kind of the thought process behind that. Completely appreciating it. I

think the short cycle business is running in an okay pace. We don't see big changes on that up until the end of the quarter so we don't feel it's prudent to change our outlook in the quarter when there is not a clear signal on it. The project pipeline is always subject to some sort of probability calculation and of course the probability is difficult to set specifically but if we look at the pipeline per se and the projects in the pipeline per se that project pipeline is not weaker than it was before and there are some opportunities in that and there are some you know things we would like to see differently but all in all when we look at those numbers this is to the best of our knowledge the most probable outcome that we have. We are clearly aware that should market go more negative it could affect some of those decisions but I think our line of sight is pretty much as good as it was last quarter last year so I'm not exceptionally worried about the outlook. It is our best representation of what we see.

Understood thank you very much.

The next question from Karl Dienberg, Carnegie please go ahead.

Thank you very much. So two questions from my side relating to the energy division. I wanted to come back a little bit on the margin development here year on year. If you could just remind us the magnitude of the effect of the underutilization you're facing on the base side and also the magnitude of the evaluation effects that you're mentioning here in one queue. Is that roughly half of the 200-gauge contraction or yeah any sense there would be help for just to understand what that could look like in H2A to get a little bit better volumes in the back?

Yeah well let's put it this way I think the when we look at the utilization levels for the brace heat exchangers to address that question directly we have a real good tailwind when it comes to the the data centers and the heat exchangers for liquid cooling and that means that a lot of the what would have been an under capacity driven by the lower heat pump volumes is to a very to some to an important degree mitigated and of course that is something that have said from the beginning that if it wasn't going to be the very quick ramp up of the heat pump volumes we saw that the conversion to liquid cooling was going to come on the horizon so are we being able to utilize everything to the optimal levels the answer is no but on the other hand it's on a good level that doesn't necessarily have a too big of an impact on the result or the margin of the energy division and then to your question of the revaluation I think Tom already to a very large extent answered it it's not so much that there isn't an absence of revaluation it's the gap between one

being there and the other. you you you you you you you needs

to be multiplied with somewhere between 1.05 and 1.1 depending on product groups and so you know the pricing effect is there for customers nobody likes it but that's where it is we've taken the policy decision that we calculate the tariff costs without margin so that part of the price increase that we put on is reflecting purely the cost of covering the tariffs we think that is the right way to deal with our customers we're not going to make money on tariffs we don't feel that's fair way to price our product so you could say that to a very limited degree if these tariffs remain in place at the current level there will down the road be a very marginal margin effect on the U.S. but given that it's only a part of our products and a part of our turnover I think it will not be noticeable in the group accounts.

Thank you very much that's super helpful.

That was the last question I would like to turn the conference back over to you gentlemen for any closing remarks thank you.

Okay well thank you very much and some of you maybe we'll see at the AGM in a little while and we're going to display some of the fantastic new products on in launching phase including some from Fredrik's whole unit so we're looking forward to that thank you very much and we speak to you in a quarter at latest thanks.