Alfa Laval Corporate AB

And welcome to Alfa Laval's third quarter earnings call. And Fredrik and I, we're going to take you through the quarter. So let me, as always, start with a couple of introductory comments. Now, with a solid order book and good demand in service and short cycle businesses, sales grew 8% organically in the quarter. It was a stable and clean quarter operationally and earnings increased to a new record level of 3.2 billion SEC in the quarter on the EBITDA level. And then finally, as you noticed, we have adjusted our financial targets to better reflect our financial performance levels. And I will comment on the financial targets a bit later. So let me go to the key figures. Order intake was good in the quarter with a 10% organic decline as expected due to the normalization of demand in cargo pumping applications. In the short cycle business, both order intake and factory utilization is at a high or record high levels in several end markets and product groups. Sales developed well, supported by all three divisions and generated a margin of 18.4%. In all, it was a well-executed quarter with mixed effect contributing to the margin improvement. Moving on to the energy division. The market dynamics are shifting towards a stronger HEVAC heat pump data center growth and moderate expectations on CAPEX projects in the fossil fuel business. Cleantech remains on a positive growth track across a wide range of applications, despite growing concerns regarding the political support for the decarbonisation journey in Europe and in the US. Strong momentum in energy efficiency, growing demand for nuclear and an expected scaling making new technologies financially sustainable is the foundation for future growth in the cleantech sector. The margin was sequentially stable, but note that transaction costs related to the fifth cryo acquisition was charged to the P&L in Q3 on the energy division. So moving on to food and water. Order intake was firm in most end markets. Large order bookings were relatively slow, although the product pipeline still remains healthy in terms of outstanding quotations. Short cycle demand drove a positive mixed change with a healthy margin. The project business generated a positive margin improvement in the quarter, but we are still working through some project execution issues in the quarters to come. Then coming to marine. Profitability remains sequentially stable on a high and good level with good order execution in the quarter. While the record ship contracting year in 2024 will not repeat, contracting at the yards is expected to remain at about 2,000 vessels per year pace, approximately matching the global yard capacity. As expected, the 2024 contracted ships are now converted into our order books with record-level orders in several product groups within the Marine Division. The order intake decline compared to last year was entirely related to the expected normalized order level in cargo pumping, with new orders at the normal rate for the business. So on to service. Service has grown substantially over many years and now accounts for 31 to 32 percent of orders, structurally somewhat higher than historically. Still, this year we have worked through a lot of operational challenges, both related to physical distribution centers and the digital systems supporting the spare parts flow in the energy division. It is and was a needed scaling project to cope with the larger volumes, and with the troubleshooting behind us, we expect the Energy Division to return to service growth in line with other divisions. In the Marine Division, service accounted for 40% of order intake, supported by a larger install base and an aging global merchant fleet. If the aging fleet provides some tailwinds, the constant transfer of old tankers to the Russian dark fleet is a headwind and obviously outside our business scope. Then finally, a few comments on key markets. China and the US, accounting for approximately 40% of our business, had a strong quarter with good demand in many areas. Note that the cargo pumping affecting an otherwise growing business in both China and Korea. Most markets are stable to positive at this point in time in the quarter. But looking forward, Middle East CapEx projects may be negatively affected by the lower oil price. And with that, I hand over to Fredrik for some further comments.

Thank you, Tom. So, hello, everyone. Let us get started by recapping the order intake in quarter three at 16.6 billion. Organic growth contracted with 10% in the quarter. A substantial part of this contraction stems from the lack of large or project orders. In the energy division, both the welded heat exchangers and circular separation technologies noted the absence of large orders. The smet and food systems in the food and water division denoted the same pattern. And finally, in the marine division, the continued normalization of tanker vessel contracting impacted the numbers. Important to mention in this context is that the project list remains strong, both in quantity and quality. It is the conversion to orders that is occurring at a lower pace, reflecting uncertainty in the market driven by external factors. Transactional business has a different development, up 8% in the quarter, comparatively excluding currency movements. Both gasketed and braced heat exchangers booked orders above the same period last year in the energy division. Fluid handling equipment, separators and decanters also booked higher order intake levels than in Q3 last year in the Food and Water Division. And finally, our traditional marine products are also continuing to outperform Q3 last year. Service was up 8% in the quarter, excluding currency movements. Currency has an overall negative impact of almost 6% and our acquisitions so far this year have a positive impact of 3% on the total. The same pattern repeats on the year-to-date basis and is an important input to any trend analysis. Book to bill in the quarter was 0.96 with a remaining strong backlog of 51 billion, of which 16 billion is slated to be invoiced in quarter four. The backlog price levels are well in line with current input prices and in line with current tariff levels. Now on to sales. 17 billion in sales in quarter three represents a strong historical level for quarter three. Our manufacturing entities are delivering to our customers on commitment and on high utilization levels, which is clearly visible in the gross profit boosted by a strong factory and engineering result. Currency once again impacts negatively on a comparative basis, but prominently organic growth is up 8% in the quarter. Worth mentioning here is that the proportion of large project business in the invoicing mix is high. Transactional volumes are up, but not to the same extent. Net sales for service grew 3.1% compared to the same quarter last year, accounting for a mix of 30%. We expect this mix pattern to continue into quarter four. Gross profit improved to 36.8%, boosted by better factory and engineering results, and positive purchase price variances compared to the same quarter last year. Operating income increased with 12.6% to 3 billion. Sales and administration expenses were 2.6 billion during the third quarter, corresponding to 15.4% of net sales. Research and development expenses were 427 million during the third quarter corresponding to two and a half percent of net sales. Earnings per share in the quarter amounted to 5.53 crowns and 15.22 crowns for the first nine months. The corresponding figure excluding amortization of step-up values and corresponding tax was 15.97 crowns for the first nine months. Now on to profitability. The energy division posted an EBITDA margin of 16.6%, which is lower than previous quarters due to a shift in mix towards large orders and costs related to the acquisition of fifth cryogenics. Continued strong sales in the transactional business portfolio and service compensated for a large project mix invoicing in the quarter yielding an EBITDA of 16.1% for the food and water division. The marine division continued with a positive mix of invoicing from cargo pumping systems and service, which yielded a 23.5% margin. On a group level, the adjusted EBITDA margin of 18.4% is high, with a record 3.2 billion in money terms, with a negative currency impact of 178 million. Now on to the debt position. Post three acquisitions so far this year, most notably the Fivs Cryogenics business, debt stands at 18.6 billion or 1.3 times last 12 months EBTA. Debt excluding leases at 0.86 and including leases at 1.1 last 12 months EBTA. Given our stated thresholds, the group retains sufficient debt power to complete further quality acquisitions as those opportunities arise. Cash flow from operating activities was 2.2 billion in the third quarter and 5.8 billion for the first nine months. The lower cash flow is mainly due to an increased working capital compared to the same periods last year, driven by inventory and predominantly WIP, and decreasing advance payment as large projects are invoiced. Acquisition of businesses in the first nine months was 9.3 billion, we're off 8.8 billion for the cryogenics acquisition and 529 million was due to two minor acquisitions. Financing activities amounted to 3.9 billion in the quarter and 4.5 billion in the first nine months. These numbers primarily composed of the additional debt added for the acquisitions of 8.7 billion and the shareholders dividend of 3.5 billion. Before concluding, some guidance for the quarter ahead and looking into 2026. CAPEX guidance for the fourth quarter is 700 million and reiterated guidance of 2.5 billion to 3 billion in 2026. PPA amortization of 175 million in quarter four and 580 million in quarter in 2026. These numbers include the preliminary purchase price allocations for the three acquisitions in 2025. Tax rate is guided to stay in the interval of 24 to 26%. And with that, I hand back over to Tom for some words on quarter four.

Thank you, Fredrik. Some forward-looking comments then as a summary. Let me start with the financial targets. The change in financial targets should not be seen as a change in guidance. We are making the adjustment because of two main reasons. First, we tend to overshoot the targets and consider them a floor level for performance. Now we are moving the targets into the present performance range, and it's important for us, including for internal reasons, that we have similar objectives externally and internally. Second, we want to recognize that the investments during the last five years into technology and capacity were made for good reasons. We believe we have invested our shareholders money responsibly and profitably, and we expect to continue to convert those investments into profitable growth in the next five year period. So finally, our crystal ball is no better than yours. If global macro deteriorates, if the energy transition stumble, if AI and data centers run into difficulty, we and others would find financial targets challenging. But with that said, we have changed the targets in terms of growth to 7% sales growth and the EBITDA margin moved up to 17% over the cycle. And we kept the ROSE target at the current 20% just to allow for the effects of future potential acquisitions. Regarding the next quarter, we believe demand in the fourth quarter is sequentially stable and on about the same level as in the third quarter. And on a divisional level, we expect the energy demand to be higher, the marine to be somewhat lower, and the food and water to be stable compared to the third quarter. So with that, let's get over to the Q&A session.