Alfa Laval Corporate AB

Hello, and welcome to Alfa Lama's first quarter report. Fredrik and I will share some time going through the details. Because of today, we also have an AGM starting relatively soon. We need to limit this call to 45 minutes, so our apologies if our Q&A session is slightly short. With that, let me as always go to some first introductory comments before moving on to the presentation. Overall, we felt we had a stable quarter well in line with our expectations. The pattern of a strong transactional business and a hesitant project business continued in the quarter. Second, the implementation of the new operating model continued in a high pace with adjustments to the financial reporting, management appointments, and consolidation in various areas. The financial weight of the changes during this process was limited in the quarter. And then finally, with the war in the Middle East, our main priority has been employee safety in the region and appropriate customer support in difficult times. The financial impact on Al-Farawal was limited in the first quarter, and medium-term, the energy crisis may provide both some downsides and some upsides across the world in terms of our customer base. So with that, let me go to the key figures. We started 26 well with order intake growing sequentially and with a 6% organic growth compared to last year. Sales was on the low side partly because of a very high invoicing towards the end of 2025. Despite the lower invoicing and big currency movements, the margin improved slightly to about 18%, mainly due to positive mix. Moving on to the energy division, demand was as expected on a very high level across many end segments and with a continued recovery of volumes in HVAC, including the heat pump market. The data center business was as expected strong, and continue to grow in the quarter. Going forward, we are now starting to build the data center order book for 2027. We are, of course, concerned for our customers in the Middle East with the damage inflicted on critical infrastructure. The rebuilding process in the region is not clear to us at this point, but we are ready to put all available resources to support the regional needs in the years to come in this very critical situation. Then to the food and pharma division. Demand was firm with a 9% organic growth in the quarter. While the transactional business was on a new record level, it was gratifying to finally book a sizable oil and fats project in Brazil, including biofuel components. The outlook for biofuel projects is improving gradually with a viable product pipeline going forward. The consolidation of the BU structure continued in the quarter and in addition to building the future growth platform for the pharma business. In the ocean division, we remained as expected on a lower order intake pace compared to the record last year. But at the minus 12% organic decline, it was still a good quarter and better than expected. Ship contracting at the yards was very active due to high freight rates and longer shipping routes. It had a positive effect on orders in general and for cargo pumping specifically. In this application, we are now starting to build the order book for 2028. The end of the crisis may trigger additional offshore projects outside of the Gulf to gradually compensate somewhat for the shortfall of volumes. It may impact our offshore business in a positive way going forward. The margin remains stable at around 22% based on the solid order book, which will continue during 2026. Then on to service. On group level, we remained at about 30% of orders in service, for the ocean division higher due to the slightly lower capital sales, and for the energy division, the opposite at 25% of total orders due to significant growth in capital sales, especially on the data center side. Volumes were perhaps a little bit on the low side overall and flat compared to last year. We expect to regain the growth path in service going forward. In the ocean division, there is a negative effect, though, from sanctioned ships that we cannot serve, amounting to about 5% of the global fleet at this point. In addition, there is significant stress on ships and crews in the current crisis, which may delay some service work further. In general, though, as I said, we expect to return to growth in the year. A couple of comments on the top markets and regions. As you know, China and the U.S. are two top markets in some time, and both developed well in the quarter, with the U.S. on a new all-time high. Our expansion plans in both markets continue with full speed, with several slight investments in both countries. We also added a smaller Chinese heat exchange company to the group, supporting their growth plans, as well as creating a better coverage of the Chinese market for Alfa Laval as a whole. In terms of the regions, please note that the numbers includes currencies, so they're not organic. They are the overall growth numbers. And as mentioned, North America and Latin America had a very strong quarter with significant growth, especially in the North America. Europe was flattish, with the exception of Eastern Europe, that grew well in the quarter. Middle East and India both faced headwinds due to the ongoing crisis and the energy crisis, and that was reflected in the water intake at this point. And in fact, both India and Southeast Asia are the two regions with the biggest short-term exposure to the energy crisis at this moment. Finally, Northeast Asia had a good quarter overall, But of course, they are impacted by the very high marine orders from Q1 last year. Other than that, China and Northeast Asia developed well in the quarter. So that's a summary where we are on that, and I'd like to hand over to Fredrik for some further details. Thank you, Tom.

So moving on then to some comments around orders received. But before I start, I have some additional comments on order intake and a quick word on the change. we have adopted an order intake approach that reflects new orders in the quarter only, meaning revaluations of the order book are not deducted from the order intake. This is highlighted and explained in more detail in Note 1, referring to accounting policies in the Quarter 1 report. And now to some additional comments on order intake. A clear impact on the comparability of figures is currency rates, where the SEC has appreciated against both the Euro and the US dollar over the last 12 months. This impacts the comparability with almost 10%. The structural component is related to acquisitions and mainly due to volumes of the cryogenics business. Organic growth in the quarter exceeded 6%, with the energy division accounting for a good part of that increase. with growing data center volumes and a recovery in the HVAC and markets. Food and pharma also noted a strong organic growth intake in its two largest markets, oils and fats, and dairy, while the ocean division remained stable with a normalized marine pumping systems order intake. The order book closed in the quarter at $48.7 billion compared to the $48.3 billion at the year-end 2025. $32.1 billion of this is scheduled for invoicing this year. The current order book supports a continued good invoicing level, and the order book is assessed to be in line with current input cost levels, and the book to bill in the quarter was $1.1 billion. Onto sales. Currently, we are only experiencing minor disruptions for our supply chain related to the escalated geopolitical tensions, primarily the conflict in the Middle East. Once again, we are impacted by currency with almost 9% negative comparability. Organic growth at almost 2% with a structural contribution of 3.8%. The aggregate impact is negative with 3.3%. with a quarter sales level of 15.9 billion. This level, which is somewhat lower than expected, is affected by delayed invoicing of projects, to a minor extent transportation disruptions, particularly related to the Middle East, and normal seasonality from quarter four to quarter one. Our gross profit margin was on a high level of 39.9% compared to 37.5% in quarter 1, 2025. The positive delta can be traced to an accretive invoicing mix of transactional business and service, a strong factory and engineering result, and good purchase price variances from cost levels set in our standard costing. On the cost side, S&A increased with 1.9% in the quarter and R&D with 4.2%. Approximately 75 million cost increase in the quarter was related to the new divisional structure. Amortization of step-up values increased to 174 million, reflecting the acquisitions made during 2025, with majority related to the cryogenics business. Taxes also landed within guidance range, and operating income in the quarter landed at 2.7 billion, and finally an EPS of 4.59 crowns, with the majority of the deviation stemming from lower invoicing and currency impact. Adjusted EBITDA of almost 2.9 was, as previously mentioned, supported by a strong factor in engineering results, positive purchasing price variances, and an accretive invoicing mix of transactional business and service. Negatively impacted by currency with 264 million and 75 million related to the new divisional structures and strategy initiatives. 18.1% adjusted EBITDA margin in the quarter exceeded the 17.7% in quarter one of 2025 and is well above our target level of 17% over a business cycle. On debt levels, they have increased from quarter one last year, reflecting the financing of the cryogenic acquisition. In the quarter, we have an MTN bond of 300 million euros that has matured and been repaid. 1.2 billion in commercial papers was issued, and we expect to issue a further amount of commercial papers during the coming quarter to cover the upcoming proposed dividend of 3.7 billion. Net deaths in relation to the last 12 months EBITDA was just shy of 0.7. The increase in lease liabilities reflects the balance sheet impact of renewed long-time leases for some of our operating footprint. Cash flow in the quarter saw a strong EVDA contribution of $3.7 billion. Working capital change had a negative impact of $1.5 billion, where the majority comes from the building up of work-in-progress inventory and a strategic buildup of buffer inventories for some commodities that we believe are at risk of disturbance from the disruptions that are caused by the conflict in the Middle East. Capital expenditures were somewhat below guidance at $529 million and yielded a free cash flow before acquisitions of $708 million. Acquisitions in the quarter accounted for a cash flow impact of $565 million, stemming from the majority share acquisition of the Chinese heat exchanger manufacturer and a $50 million share in Industriekraft. Finally, the contribution of financing activities is related to the repayment of the EMT and bond of 300 million euros and the issuance of commercial papers of 1.2 billion. Finally, some financial guidance going forward. We expect CAPEX to remain high but stable within the range of 0.6 to 0.8 billion in the next quarter and a whole year level within the range of 2.5 to 3 billion. amortization on about the same level of quarter one with 175 million and in the next quarter and 600 million for the entire year. And finally, a tax interval of 24 to 26% for both quarter two and the entire year. And with that, I hand back to Tom for some forward look commentary.

Thank you, Fredrik. And while history is clear, obviously forecasting in today's environment is somewhat complicated. We don't consider that the looming energy crisis and the war in the Middle East is having any major impact on our outlook in this moment in time. In general, we're somewhat more optimistic about the year now than when the year started about a quarter ago, and demand specifically sequentially for this year in the second quarter is expected to be on a group level somewhat higher than the first quarter. And on a divisional level, we expect the energy division to remain on the current all-time high level in the second quarter. We expect demand in the ocean division to be higher than in the first quarter. And we expect the food and pharma division to remain at approximately this level with both some upside and perhaps downside depending on how larger projects are materializing in the quarter. So that's where we are in terms of our forecasting and a crystal ball. And with that, I'd like to open up for questions.