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 percent 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 percent 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 percent, and with a good mixed effect, the margin grew to 17.7 percent. And then on to the divisional reviews, starting with the energy division. Order intake was largely in line with expectations, and HEVAC 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. Onto 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 project 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 rivals 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 remained. 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 percent, and the margin improvement continued, driven by both mix and volume. Then service. It was again a strong service quarter with 5.8 billion SEK 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 percent, not 42 percent, 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 growing well, 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 a 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 SEK, 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. And with those comments, I hand over to Fredrik for some further details.

And thank you, Tom, for that. So 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% is related to project order bookings, where the final investment decisions are delayed as a consequence of current market uncertainties. Transactional and service businesses 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 at 10% 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% compared to 34.9% in Q1 2024. S&A cost increased with 6%, which is a couple of percentage points above cost increases where additional FTEs become annualized. R&D spend also increases with 8% as we continue to invest in new product development. Drop through in the quarter is on a good level, increasing operating income with 27% and boosting EPS to 4.82 crowns per share. The adjusted EBITDA result increased with 20% to 2.9 billion, which increases the adjusted EBITDA margin to 17.7%, 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 Q1 2021 and Q1 2025. Cash flow from operating activities is burdened by advance 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 had 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 yields a net debt in comparison to the last 12 months EBITDA of only 0.13. The current balance combined with our BBB plus rating puts us on a good position for our capital structure post the FEEVS 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 does not include the FIVS acquisition, as the PPA will only be prepared after closing. Tax rate guidance remains in the span of 24 to 26%, 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 cost 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 guided 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.