Alfa Laval : 2022 Q2 Transcript

	Alfa Laval AB Into - Alfa Laval Q2 earnings call
Company:	Alfa Laval AB Into
Conference Title: Name: Alfa Laval Q2 earnings call
Moderator:	Tom Erixon
Date:	Wednesday, 20 July 2022
Conference Time: 10:00 (UTC+01:00)
Operator:	Good day and welcome to the Alfa Laval Q2 earnings call. Today's conference is being
recorded. At this time, I would like to turn the conference over to Tom Erixon. Please go ahead,
sir.
Tom Erixon:	Thank you. And again, welcome to our second quarter earnings call. Let me start as

always with a few intro comments to the report. First, demand was clearly strong. We are 27.7 billion SEK in the first half of 2022, organically up 14% and a new all-time high of 14.4 billion SEK in the second quarter, with a strong support from a growing portfolio of sustainability solutions. The margin remained stable at 16.5, despite volatility in commodity prices and supply chains in all, the operating conditions improved gradually during the quarter. Finally, then, although the group is increasing its readiness to meet the negative macroeconomic situation, market conditions are expected to remain favorable in the short term. I will return to that this year later on. Now let's move to the key figures. As I indicated, order intake strong at 14.4 and organic growth both year on year and sequentially of around 9%. A bit above our expectations, as you saw from the guidance last quarter. Invoicing also grew 9% organically, but still lagging behind the high order intake. We do expect to see a gradual improvement in the supply chains and consequently in invoicing during the second half of the year. On the divisional note, starting with the food and water division, we had another strong quarter after the record first quarter this year, adjusted for the large brewery order that we booked in Q1 this year of more than 700 million SEK. This was, in a sense an even stronger quarter driven by service volumes and transactional business.

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Alfa Laval AB Into - Alfa Laval Q2 earnings call

The supply chain disruptions for the group are mainly affecting the food and water division with a negative effect on margins, as we are not able to fully ship according to plans with an increasing inventory of finished goods. Finally, then the - on food and water. The antitrust process for this matter is now completed and we have all of the needed approvals in order to close the transaction. We do expect closing during the third quarter and possibly rather soon. I remind you that on a 12-month rolling basis this meant will add approximately 4 billion SEK in volume and some in the region of high single digit percentage margin excluding medium term synergies as we go forward. Moving on to the energy division, we had a new record quarter in order intake at 4.5 billion SEK. The order intake is, in a sense, a turbo effect driven by two factors. First, we continue to see growth in energy efficiency solutions and together with an emerging pipeline, although still small of projects in hydrogen and carbon capture, we see the energy transition playing out favorably for the order intake in the quarter and going forward. That in combination with a return of the CapEx investment cycle into traditional gas markets is now also leading to an increased order intake in especially natural gas in the U.S. and also to a degree in other geographies.

As we have indicated several times, we are moving on a strategy to become energy solutions independent on fossil by 2030. But in the meantime, we have expected one or two further investment cycles of which we have now entered the first. Regarding the margin, we kept it strong also in the second quarter after the first quarter, which was positively affected by inventory revaluations. It reflects a reasonable balance between commodity prices and our price adjustments to customers. Then the marine division order intake was back on record levels compared to 2018. I remind you that this is including a compensation for the approximate 1 billion SEK we had of scrubber orders per quarter during the peak of the retrofit period. You should also note that orders grew in a weaker market for ship contracting. This is a reflection of the growing importance of Alfa Laval's portfolio of sustainability solutions supporting shipowners to reach their decarbonization targets going forward. Margins remain on the lower level compared to recent years due to old backlog prices and mix changes from scrubbers to the less

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Alfa Laval AB Into - Alfa Laval Q2 earnings call

profitable pure ballast business. Given that we are sharing, as you know, the profitability in that business with our joint venture partner. As mentioned last quarter, the margin challenge will require some patience to work out. In-service, this was an exceptional quarter with organic growth of 20% from an already good level. It is a reflection of good market conditions, but it is also a result from five years of investing and building a competitive service offering to our customers.

Although we are pleased with the results so far, we will continue to build our service capabilities and capacity over the next few years. Then some final comments on order intake. We had, as I mentioned, a new record despite the relatively small impact from large orders reflecting solid business conditions in almost all regions and end markets. We may see some quarterly variations in our order intake over the next quarters, but short-term end markets are expected to remain on a good level. In terms of regions, obviously in this situation, essentially all regions were positive and indeed very positive. And you may notice that even Eastern Europe was stable despite the negative impact from eliminating orders from Russia. Excluding Russia, Eastern Europe grew by over 40%. So let me round off by saying that we have executed well during the five years on our strategy to regain technical leadership, customer focus and service. Going forward, we are increasingly focusing in building additional businesses in sustainable solutions for all three divisions. We will provide you with an update on the portfolio progress at the next Capital Markets Day in late November. And our ambition is if circumstances allow that we will host you in Copenhagen for you to more physically experience what we are doing in products and solutions for the next 5, 10 years to come. And with that, I hand over to Jan for some further details.

Jan Allde:	Thank you, Tom. And I will start with covering sales as usual. We expected invoicing in
Q2 to	be higher than the same quarter last year. We realized sales of 11.8 billion, which

represents an increase of 19%. Please note that we had positive FX translation impacts in sales on Q2 and excluding these sales were up 10%. Invoicing in the quarter was negatively impacted

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Alfa Laval AB Into - Alfa Laval Q2 earnings call

by the supply chain situation and especially the lockdown situation in China. However, invoicing gradually improved as the supply situation stabilized during the quarter. With regards to sales in Q3 my outlook is as follows. Considering the record high order backlog and a somewhat improved supply chain situation, I do expect invoicing in Q3 to be higher than the same quarter last year. Then looking at the gross margin. So, the gross profit margin in Q2 came in at 37.8 compared to 38.2 last year. The overall mix price impact was positive in Q2 as the negative impact from executing orders primarily in the marine division that was priced prior to the material cost increases was offset by an overall positive capital sales after sales mix as the service invoicing was strong in the quarter, as well as price increases coming through in a good way. We had a fairly good loading capacity utilization in most of our factories, with the exception of some sites in China that was impacted by the COVID lockdown situation, making the overall load volume impact negative in Q2.

The PPV matters impact was neutral in the quarter as higher raw material cost was offset by positive impact from metal hedges maturing in Q2. The FX impact on the margin was negative in the quarter. Finally, the acquisition of StormGeo had a positive impact on the gross profit margin overall. Now over to my outlook for Q3. The starting point is 37.3% reported in Q3 last year. We expect a neutral price mix impact, but a similar pattern from Q2, i.e., price increases and favorable capital sales service mix to offset the negative impact from increased material cost on the order backlog in marine. Based on the assumption of a gradually improving supply chain situation, we expect a good load and capacity utilization in our factories in Q3. We expect this volume, positive volume impact in combination with the metal hedges in place to offset the negative impact from higher raw material costs. Finally, we expect a continued negative FX impact on gross profit margin also in Q3. Then looking at the SG&A expenses, they were up 12% in Q2 on a comparable basis. This increase is reflecting the overall high business activity in the company, the inflationary pressure, but also that we are selectively adding resources in our current business with high growth but also in some of our more long-term business development areas.

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Alfa Laval AB Into - Alfa Laval Q2 earnings call

We do expect to gradually offset the higher SG&A costs by increasing sales volumes as we execute on the large order backlog in the next quarters to come. Finally, given the economic uncertainty, we are, of course, closely monitoring our cost structure and resource situation to be able to act fast in case we see signs of an economic slowdown. As you have seen, the EBITDA margin came in at 16 and a half percent below last year, mainly due to the lower marine in the marine - lower margin in the marine division. However, the profitability in the energy and food and water divisions were on a good level considering the high-cost inflation and the overall challenges on the supply chain. Then looking at some of the key figures. As I said earlier, on a comparable basis SG&A were up 12% and R&D expenses are up 2% versus last year, reflecting the overall higher business activity in the company. Net other costs and income increased by six to 8 million versus last year, excluding the restructuring cost that was booked in Q2 last year. This increase is mainly explained by the high royalty cost paid to our pure balance joint venture partner marine and also higher costs related to the ongoing changes to our manufacturing footprint. Financial net, excluding FX impact was -78 million in Q2, the FX gained losses in the financed net were -90, giving a total financed net of a -168 in Q2 this year versus a-130 last year.

Please note that we are higher - temporary higher interest costs in the quarter, which was related to the refinancing of our corporate bond program this year. The tax rate came in at 26.9 in the quarter, slightly above our guidance of a tax rate of 26. Finally, a net income and EPS was higher than last year, partly due to the higher operating income and partly related to restructuring costs booked in Q2 last year of 204 million. Then over to cash flow statements. So, cash flow from operating activities was 192 million in Q2, well below last year due to an increase in working capital. The increase in working capital of about 1.2 billion in the quarter was mainly due to an increase in inventories, partly offset by increasing customer advances. The inventory increase was driven by the strong volume growth, but also to secure deliveries to our customer during the supply chain challenges. The operating working capital as a percent of sales is expected to gradually come down as the supply situation stabilizes. Investing activities included CapEx

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