Alfa Laval Corporate AB

Good morning and welcome to Alfa Laval's second quarter earnings call. Fredrik and I, we will run through the financials with you and then obviously we continue with the Q&A session. So with that, let me go straight to the financials. Financially, it was a strong quarter with an all-time high of adjusted earnings of just above 3 billion SEC and a 19% increase of the EPS to a new record level of 487 SEC. We had strong demand growth in many end markets with an all-time high in the rolling 12-month service business and new record levels in the transactional part of the business as a whole. This partly compensated for the anticipated normalization of demand for cargo pumping systems in the quarter compared to last year. The conversion of the record high order book was well executed in the quarter, especially in the marine division with a margin of 24%. Finally, we feel we have a solid order book for 2025 and well into 2026, still above 50 billion sec as we speak. Together with a good pace in the short cyclical business, it provides a stable base for the remaining of the year. Now let's move on to the energy division. It was a stable quarter with order intake and invoicing sequentially unchanged. The service was a bit weak in the quarter due to significant changes and investments in new warehousing and software solutions. With the internal challenges resolved and good market demand, the situation may improve in the next quarter for the Energy Division's service business. After two years of weak demand in the HEVAC segment, the quarter was a turning point and returned to growth supported by better heat pump demand as expected. Order intake was further supported by good volumes in the transactional business. Large projects were a bit slow to convert to orders, including for clean energy applications. With the uncertainty remaining in the market, the project pipeline still looks healthy and robust for the second half of 2025. The margin was a bit lower than last year, but still on a good level at above 17%. A slower service business and a cost structure supporting the long-term growth plan had some impact on an otherwise well-executed quarter. Finally, we closed the cryogenic acquisition in France on July 7, and we welcome 700 new co-workers and a new technology platform into the Alfa Laval family. Financially, as we indicated earlier, we expect about 2 to 250 million euros in annual order intake and a slight accretive margin on a yearly basis for the energy division. Then moving on to food and water division. The demand was firm in many end markets, including markets like dairy and pharma. Our channel partners globally have done a great job, and distribution and short cycle businesses reached a new all-time high in the quarter. Service continued to grow at a healthy level in the quarter, which was full of many positives. The margin was stable to positive in most part of the business, but some executional problem in part of the product portfolio weighed on margins in both the first quarter and in the second quarter. Those are now larger resolved. In the Marine Division, market conditions were in line with expectations with a lower normalized cargo pumping demand and strong order intake and double-digit growth in all other parts of the portfolio. As guided previously, the strong yard contracting in 2024 is not yet fully in our books and much less so in the invoicing numbers. Invoicing as such was supported by yards trying to speed up delivery schedules of ships during 2025. We do not experience any negative effects of the trade war when it comes to the marine business at this point in time. It was in all a well-executed quarter in the division, with a good financial performance in several business units, including the pumping systems business. However, it was especially gratifying that the hard work to improve boiler profitability since the end of 2022 paid off with a solid second quarter performance. The outlook remained stable for the division in 2025 and beginning of 2026. Finally, then, we announced today that Samir Kanra, since many years back, the leader of our Marine Division, will retire on September 1st. And we will do an internal succession and have appointed Martin Berging, currently the president of the Framo and pumping system business, to the new divisional president starting on September 1st. Then going on to service. On a rolling 12 months, service was at all-time high, as I indicated, with an order intake of above 20 billion SEK. With order intake growth at 9% in the quarter and invoicing at 8%, the mix is slowly shifting towards service. It supports a stable margin development, but also ensures a good performance of Alfa Laval equipment around the world at customer sites. Our longer-term ambition to become a true service company has come a long way, with service orders above 30% for the Group and above 40% for the Marine Division in the first half of this year. Then finally, a couple of comments on key markets. China remained our largest market in the quarter. We have continued to invest in people, manufacturing and leadership in China during the years of geopolitical tension, and we will continue to do so. Although the rolling 12 months was a slight decline driven by the lower order intake for pumping systems specifically, all other parts performed well and grew in the quarter in China. The U.S. was positive in the quarter despite the trade disruptions and some project delays. The business sentiment in general in the U.S. remained optimistic, and the ongoing investments in Indiana to grow both our distribution and manufacturing capacity appear well-timed. All other markets were stable to positive, including Europe, but the growth expectations were not fully met in growth areas like Southeast Asia and India in this quarter. And with that, I'll hand over to Fredrik.

Thank you, Tom. Good morning. Let's jump directly into a financial summary of the second quarter. Order intake in the quarter amounted to 16.3 billion, sequentially stable from quarter one. Currency driven revaluations of backlog cancelled each other out across divisions. Translational impact of currency amounted to some 6% and organically a negative comparable at 7.8%, mainly driven by the normalization of contracting level of vessels using marine cargo pumping systems. We see a similar pattern in the year-to-date numbers with a negative 5.9% organic order intake and a 5.1% currency impact. As mentioned by Tom previously, and worth a repetition, is that the transactional business and service continue on a positive growth trajectory. Uncertainty, on the other hand, continues to delay conversion of a healthy large ordered project list to orders. The order book stands at some 50.3 billion with an almost equal split of invoicing facing for this year and in 2026 or later. We judge this order book to be well aligned with the current price and cost levels. The marine division accounts for roughly half of the total order book and the total order book corresponds to 8.8 months at current LTM sales pace. Revenue in the quarter was lower at a negative 4.1%. However, note the organic growth was a positive with 2.3%. Currency had a negative translational impact of 6.5% on invoiced values, while structure contributed positively with 0.2%. Net sales of Forest Service grew with 2% compared to the same quarter last year, accounting for a mix of invoicing of 31% compared to 29%. Sequentially, the quarter increased with 2.2%, which is in line with normal seasonality. Year-to-date sales figures show an overall positive comparable figure with 2.6%, with a notable part coming from an organic growth of 6%, with a large contribution from Marine Congo pumping system deliveries. Now to some profitability details and highlights of quarter two. Gross profit at 37.6% is an improvement from 33.4% last year, driven by positive deviations on production results and purchasing price variances. S&A continues to increase, but at a lower pace of 4.0%. R&D costs phased in weaker in the quarter, making a contraction of 2.2%. And accumulated, these movements brought the operating income up with 5% to 2.9 billion in the quarter. Adjusted EBITDA improved to 17.8% from 16.7%. The effective tax rate in the quarter was within our guidance corridor of 24.9%. EPS increased 19% to 4.87 Swedish crowns and finally return of capital employed of 24.4% to cap off a financially strong quarter. Some additional details on the development of the adjusted EBITDA of 3 billion, which is an all-time high. Volume contributed with some 120 million, mixed with 614 million, cost impacted negatively with 481 million, and currency had a negative impact of 184 million when we bridged quarter two last year. Our manufacturing sites are operationally stable. That contributed with predominantly positive production results and with positive purchasing price variances across the board. Sales mix and volume growth are also contributing positively to the margin. Finally, currency has a negative impact of 6% on the total adjusted EBITDA. Now some comments with regards to cash flow. Cash flow from operating activities amounted to 2.2 billion, impacted negatively on a comparable basis by the increase of work in progress inventory. As a side note, in these uncertain times, we have good control on accounts receivables and the associate maturity profiles. CAPEX programmes continue in line with plans and have a capital allocation of 676 million in the quarter, bringing the free cash flow to 1.5 billion. The acquisition of the sonic anti-fouling system technology company NRG marks the acquisition in the quarter for 461 million. Financing activities show a positive net of 801 million after the payment of dividends to our shareholders with 3.5 billion and the bond issuance round of 400 million euros. With a final cash flow contribution of 1.8 billion in the quarter. Our debt position in the quarter has increased with 400 million euros of issued bonds, preparing for the closing of the FIIs cryogenic business acquisition. The net of incoming cash from the bonds and the payment of our annual dividend reflects in the cash balance. Net debt at 4.6 billion or 0.34 in relation to last 12 months EBTA. Net debt including lease liabilities then at 0.6 in relation to last 12 months EBTA. To anticipate the question, our net deposition excluding leases post close of the acquisition stood at 1.02 compared to the 0.34 of LDM EBTA per quarter close. A final position that still leaves us plenty of room for further acquisitions should opportunities arise. Now finally to some revised guidance. CAPEX programs continue and we expect some 0.7 billion to be recognized in quarter three with an expected annual level of somewhere between two and a half and three billion. PPA amortizations expected at the level of 125 million in quarter three and 490 million for the year. Those numbers exclude the closed five cryogenic acquisition. An update for that will come after quarter three. Tax rate guidance remains between 24 and 26 percent. And with that, I hand back over to Tom for some outlook statements.

Thank you, Fredrik. And looking to Q3, I already briefly commented on some post-Q2 issues. The first one, that we have a new captain on the ship in the Marine Division. Martijn Bergink will take the bridge as of September 1st. He spent his last six years managing Framo, the pumping systems business. into an unprecedented growth period strengthened performance in the offshore business and established an emerging position in aquaculture fish farming in bergen and so he is well equipped to move on and we look forward to joining having him join the group management team And the fifth cryo, as I already mentioned, for most of Q3 that will be included in the books. And we are not only excited about the growth it provides us, but it's an immensely talented team in terms of people and technologies. And so we look very much forward to continuing developing that business in our family after their long and successful track record with the fifth group in France. So regarding the demand situation, we expect market conditions to remain stable sequentially and overall demand to be somewhat higher sequentially in Q3 than in Q2. On a divisional level, we expect the marine division to be on about the same level as in Q2. The energy division, even without the acquisition, is expected to have a high demand and even more so, of course, following the acquisition and integration of the cryo business. And then finally, food and water to be lower in Q3, mainly driven by a normal seasonal pattern. So all in all, we look relatively positively onto the market conditions in Q3. And then before handing over to questions, I just want to give you the heads up. If you haven't noticed, we will actually do a physical capital market stay in our new site in Flemingsburg outside Stockholm. After many years, we moved it into new modern facilities, and it is the center for our house speed separation technology and a number of interesting emerging technologies in the marine division. So we thought with new labs, with new technology, and a new site, and on top of that, a relatively new divisional president in the Food and Water Division launching the new direction for the division going forward in Food and Water. We thought that merited the opportunity to bring us all together. So we know it's a busy week for most of you guys, and we are doing it as travel-friendly on a Monday as we can, and hope you have the possibility to join us. And with that, we hand over to the Q&A.