2021 Q3 Transcript

ALFA LAVAL Moderator: Tom Erixon 26-10-21/9:00 a.m. GMT Confirmation # 4686502 Page 1

ALFA LAVAL

Moderator: Tom Erixon

26 October 2021

9:00 a.m. GMT

OPERATOR:	This is Conference #: 4686502.
Operator:	Good day, and thank you for standing by. Welcome to today's Alfa Laval Q3
	Earnings Conference Call. (Operator Instructions) Please be advised that
	today's conference is being recorded. (Operator Instructions)
	I would now like to hand the conference over to your first speaker for today,
	Tom Erixon. Thank you. Please go ahead, sir.
Tom Erixon:	Good morning, and welcome to the Alfa Laval earnings call. As always, let
	me start with a few intro comments before moving on into the presentation.
	As you've seen from the quarter report, global demand remained steady and
	firm. It was a continuation of a synchronized global recovery and we see
	especially favorable environments, both in our core markets of U.S. and
	China. We are as a company now with about the 2019 level as well and in
	many areas, significantly above the 2019 level.
	The margin improved somewhat in the quarter. There was a lot of factors
	affecting the margin development, both in a positive and in a negative way.
	But if I would single out a specific factor, we have, over a period of time,
	improved underlying profitability of our engineering and product business,
	which is now in a stable performance level impacting specifically the margins
	of Food & Water positively.
	Now finally, we've seen an intense period of organic growth for a number of
	years, not least in this quarter. We see a need to increase our - an opportunity

Classified by Alfa Laval as: Business

ALFA LAVAL Moderator: Tom Erixon 26-10-21/9:00 a.m. GMT Confirmation # 4686502 Page 2

to increase our CapEx program into our existing technology platforms and growth opportunities in profitable businesses that we are already heavily involved in. In addition to that, as you know, we have been developing a number of new application opportunities primarily related to the rebuilding of Energy Systems and the Marine industry.

And those 2 together has triggered us to increase our expectations for the CapEx programs going forward. And we are now guiding you towards a CapEx in the region of SEK 7 billion, SEK 8 billion over the next 3 years. All in all, that's about the doubling compared to our previous footprint programs levels, and it's actually a quadrupling of the level of CapEx we used to have back in 2015 and prior to that.

So with that, if we go to the key figures. We came in, in terms of orders, about 30 percent above last year. It was more or less in line with our expectations. Our order book, it was continuing to strengthen significantly in the quarter and in the year-to-date. And invoicing remain pretty much as expected. So with the growth of 5 percent to 6 percent, we are obviously still building the order book for invoicing 2022 and forward.

The margin on 18 percent was satisfactory from the point of view that we see, obviously, a lot of inflationary pressure in the supply chain in our operations. And with a relatively slow emerging growth, the volume effects were limited. So from that point of view, we felt good about the margin improvement driven by the restructuring program that was launched in last year, driven by reduction of quality costs and driven by good productivity development across all parts of the organization.

Now moving on to the divisional levels. First, the Food & Water division, which came off a record pace in Q2 in terms of ordering. And although the quarterly order intake sequentially was a little bit down. It is still a very strong Q3 number for the division, compared to 2020 and 2019, those numbers are significantly above where we were. And I remind you that 2020 was a rather stable year from Food & Water division, not so much affected by the pandemic at the time, versus 2019, order intake was up 19 percent as referenced - sorry '21.

Classified by Alfa Laval as: Business

ALFA LAVAL Moderator: Tom Erixon 26-10-21/9:00 a.m. GMT Confirmation # 4686502 Page 3

We see basically a strong demand growth across all geographies, including, as I said, U.S. and China, but we also - that as happens quite rarely, see good growth in essentially all of the end markets and end applications of the Food

• Water supported by a number of areas, including veg oil, including brewery, including biotech, to just mention a few.

Volume effects were present in Food & Water as well as productivity and that compensated for somewhat of a negative mix and somewhat for an inflationary pressure and somewhat from a return of sales and admin cost to a more normal level after the big reductions in 2020.

Moving on to the Energy division. We had an all-time high in terms of order intake in the Energy division. It was many factors, but obviously, we see a continuous strong demand growth in sustainability-related applications with special focus on the energy efficiency solutions. We also see somewhat of a return to CapEx projects in the division. We see it in the Process industry. And to some degree, we see it also in the oil and gas.

So the oil and gas order intake as we guided to you in the last quarter, we had a bit of an uptick in the oil and gas service related business as a lead indicator. And in fact, in this quarter, we saw a modest return on CapEx project in the oil and gas sector.

Our expectations for the oil and gas order intake remains relatively modest compared to historic level, but it confirms the view we've been holding for a couple of quarters that we passed the bottom. And at this point in time, there may be a small upside as we move into a next up cycle in the oil and gas sector.

Service for the Energy division grew substantially across all applications and all geographies. It was a really strong service quarter, and it was supported by larger service projects as well, which came in unusually strong in the quarter, probably a little bit of a pent-up demand situation where those projects were not present in the order book during 2020.

Classified by Alfa Laval as: Business

ALFA LAVAL Moderator: Tom Erixon 26-10-21/9:00 a.m. GMT Confirmation # 4686502 Page 4

The margin remained stable despite the negative PPV development. It is the division that is mostly affected by the material price increase and those were largely compensated by operational improvements and quality cost reductions.

Then on to the Marine division. We believe that the division is now returning to growth in terms of order intake, clearly, and that means that from an invoicing point of view, we feel we probably have passed the bottom of the cycle in this sector.

The contracting of new vessels and ships in the shipyard remains on a positive trend. The expectations have been upgraded somewhat, and most people would believe that we probably end the year at somewhat above 1,500 ships, 11 where we haven't been for many years.

Now I'll remind you that so far, the order intake as a result of increased ship contracting has had a limited impact on the order intake for the division so far in the quarter, whereas we expect some effect from this moving into 2022 and perhaps to a degree even in Q4.

With the absence of order intake growth on the new ships, what we do see is a growth in environmental applications, and we also see a strong return of the service business including all of the different service scopes for the Marine industry. At this point in time, we have the ability to do onboard services on the level that we were not able to do with last year. And that, together with increased utilization of their fleet, drives spare parts business and service business alike.

The margins remained stable in the quarter with some positive effects from mix and from the restructuring program, which was largely addressing overcapacities in the division, whereas volume and inflation had a negative impact on the mix. All in all, stable.

Let me finally say that the StormGeo acquisition is, as you know, well completed. The company is operating as a business unit in the Marine division. It's operating well in line with our expectations and well in line with our financial plans, and we feel good and positive about the development opportunities relating to this acquisition going forward.

Classified by Alfa Laval as: Business

ALFA LAVAL Moderator: Tom Erixon 26-10-21/9:00 a.m. GMT Confirmation # 4686502 Page 5

Then a couple of comments on service overall. In fact, StormGeo is providing an increased share of service revenue in the Marine division and in the company as a whole. The whole development of digital services is ongoing on a broad-based level in the group and the investment that we've done into digital service, remote service and so forth in other parts of our Alfa Laval service portfolio is playing a role in the growth rate we currently see.

We have firm demand across all divisions an element of catch-up, as I mentioned before, but also a positive trend that we have returned to, which should, to some degree, remain stable and continuous in the years to come.

In terms of the growth, it was unusually strong, as I said, in the quarter, we were 21 percent up year-on-year, and we were 12 percent up sequentially to an all-time high number from the service business as a whole. A few comments on the overall order intake take graph.

As you can see, our base business was very strong in Q3. So recognizing we normally have and do have some seasonal negative effects in the Q3 period for our transactional business. The base business development in the quarter was very strong. So we had relatively speaking, a few large order announcement and, relatively speaking, a very strong underlying demand for our transactional business.

Now if you look at the last 2 quarters, quarter 2 and quarter 3, those together are our 2 strongest order intake quarters ever. And I would like you just to take note that our previous peak in late '18, early '19, was strongly supported by a scrubber business.

And if you compare the level of activity from the scrubber business now compared to them, we have compensated the drop of order on an annual run rate level of about SEK 3 billion with driving the mix in other areas of our portfolio to the same level.

So not only is there a pretty good growth rate overall for the group, but it also is a growth that is compensated and adjusted for the mix in the group in a very good level. Those, of course, the volume as such, but also the mix change are

Classified by Alfa Laval as: Business