Alfa Laval : 2020 Q3 Quarterly report.pdf

Q3 2020

Advancing better™

Stable demand and unchanged profitability

Outlook for the fourth quarter

• Demand remained on a stable but low level in the third quarter.
• The operating margin was 17.6 percent despite lower volumes. Tangible effects from short term cost savings program.
• Continued good cash flow resulted in a low net debt.
• A public tender offer for all shares in Neles published on July 13. The acceptance level condition revised from 2/3 to >50 percent on October 15.

"We expect demand in the fourth quarter to be somewhat higher than in the third quarter."

Earlier published outlook (July 21, 2020): "We expect demand in the third quarter to be somewhat lower than in the second quarter."

The Q3 2020 report has been reviewed by the company's auditors, see page 26 for the review report.

Summary

	Q3				Jan-Sep
SEK millions	2020		2019	%	% *	2020	2019	%	% *
Order intake	8,935		10,728	-17	-9	30,561	32,966	-7	-5
Net sales	9,728		12,056	-19	-14	30,773	33,553	-8	-6
Adjusted EBITA **	1,710		2,141	-20		5,262	5,739	-8
- adjusted EBITA margin (%) **	17.6		17.8			17.1	17.1
Result after financial items ***	1,382		1,907	-28		4,053	5,361	-24
Net income for the period ***	1,038		1,447	-28		3,016	4,084	-26
Earnings per share (SEK) ***	2.46		3.43	-28		7.14	9.69	-26
Cash flow from operating activities	1,256		1,247	1		5,059	2,831	79
Impact on adjusted EBITA of foreign exchange effects	10		85			160	275
Impact on result after financial items
of comparison distortion items	-63		-5			-63	191
Return on capital employed (%) **						21.4	22.5
Net debt to EBITDA, times **						0.49	1.13

* Excluding currency effects. ** Alternative performance measures. *** Prior quarters 2020 have been restated, see page 18.

Comment from

Tom Erixon

President and CEO

"After the exceptional uncertainty regarding the macro economic situation in the second quarter, demand remained on a stable but low level in the third quarter. Compared to the previous quarter order intake was marginally weaker and in line with our expectations. The demand was stable to positive in most end markets in the Food & Water Division. The increased investments in energy efficiency applications could not fully compensate for a continued weak demand in the oil & gas sector.

The operating margin of 17.6 percent was largely unchanged compared to last year despite lower volumes. The short term cost savings program continued to deliver ahead of plan in all three divisions and savings amounted to SEK 225 million in the quarter. Also cost of quality continued to decrease, especially for larger engineering projects. This has been a key factor in the improved margin trend for the Food & Water Division, reaching 19 percent in the third quarter. The strong cash flow during the first nine months 2020 has resulted in a considerably lower net debt.

At the current demand level, the negative effects from the COVID-19 pandemic has resulted in some structural imbalances in the group. As we gradually move away from the short-term savings program and return to a more normal operational mode, a targeted restructuring program is under preparation. The details of the program will be announced latest in connection with the Q4 report.

In the third quarter Alfa Laval launched a public offering for all shares of Neles, a publicly listed company in Finland with a global position in several industrial flow end-markets. After the third quarter ended Alfa Laval modified the acceptance level condition from a 2/3 acceptance level to above 50 percent. This change reflects the strategic importance of Neles as a future growth platform for Alfa Laval. The Board of Directors of Neles have recommended the modified offer to the shareholders. The acceptance period expires on October 30."

Tom Erixon,

President and CEO

Q3

2020 Quarter Third Laval Alfa

3

26

Financial overview

Order intake

BnSEK											BnSEK
quarter										12 months
14													49
12													42
10													35
8													28
6													21
4													14
2													7
0													0
Q4	Q1	Q2	Q3	Q4	Q1	Q2	Q3	Q4	Q1	Q2
	Q3
2017		2018			2019			2020
		Order intake per quarter		Orders received rolling 12 months

Orders received was SEK 8,935 (10,728) million in the third quarter and SEK 30,561 (32,966) million in the first nine months 2020. Cancellations of orders were lower during the third quarter 2020 than the corresponding quarter last year.

Orders received from Service constituted 30.3 (30.4) percent of the Group's total orders received during the third quarter and 29.4 (28.9) percent during the first nine months 2020.

Order backlog

BnSEK		September 30		%
25					100
	22.8	23.3
20				20.7	80		For delivery next
					year or later
	14.9	15.2
15		13.0	60		For delivery
							during rest of
10					40		current year
					Part of last 12
5					20
					months'
	7.9	8.1	7.7
				invoicing
0					0
	2018	2019	2020

Excluding currency effects and adjusted for acquisition and divestment of businesses the order backlog was 8.2 percent lower than the order backlog at September 30, 2019 and 0.8 percent lower than the order backlog at the end of 2019.

Net sales

Net invoicing was SEK 9,728 (12,056) million for the third quarter and SEK 30,773 (33,553) million for the first nine months 2020.

Net invoicing relating to Service constituted 28.5 (25.4) percent of the Group's total net invoicing in the third quarter and 28.2 (26.7) percent in the first nine months 2020.

• Organic: change excluding acquisition/divestment of businesses.
• Structural: acquisition/divestment of businesses.
• Service: Parts and service.

	Order bridge
SEK millions/%	Q3	Jan-Sep
2019	10,728	32,966
Organic 1)	-8.5%	-4.4%
Structural 1)	-0.4%	-0.3%
Currency	-7.8%	-2.6%
Total	-16.7%	-7.3%
2020	8,935	30,561
1) Change excluding currency effects

	Order bridge Service
SEK millions/%	Q3	Jan-Sep
2019	3,266	9,543
Organic 1)	-9.6%	-3.6%
Structural 1)	0.0%	-0.1%
Currency	-7.5%	-2.2%
Total	-17.1%	-5.9%
2020	2,707	8,978
1) Change excluding currency effects

	Sales bridge
SEK millions/%	Q3	Jan-Sep
2019	12,056	33,553
Organic 1)	-13.2%	-5.1%
Structural 1)	-0.3%	-1.2%
Currency	-5.8%	-2.0%
Total	-19.3%	-8.3%
2020	9,728	30,773
1) Change excluding currency effects

	Sales bridge Service
SEK millions/%	Q3	Jan-Sep
2019	3,090	9,004
Organic 1)	-2.5%	-0.8%
Structural 1)	0.0%	-0.3%
Currency	-7.7%	-2.2%
Total	-10.2%	-3.3%
2020	2,775	8,705

1) Change excluding currency effects

Income analysis

		Q3		Jan-Sep	Jan-Dec	Last 12
SEK millions	2020		2019	2020	2019	2019	months
Net sales	9,728		12,056	30,773	33,553	46,517	43,737
Adjusted gross profit *	3,507		4,292	11,197	12,223	16,763	15,737
- adjusted gross margin (%) *	36.1		35.6	36.4	36.4	36.0	36.0
Expenses **	-1,541		-1,923	-5,135	-5,801	-7,701	-7,035
- in % of net sales		15.8		16.0	16.7	17.3	16.6	16.1
Adjusted EBITDA *	1,966		2,369	6,062	6,422	9,062	8,702
- adjusted EBITDA margin (%) *	20.2		19.6	19.7	19.1	19.5	19.9
Depreciation	-256		-228	-800	-683	-1,073	-1,190
Adjusted EBITA *	1,710		2,141	5,262	5,739	7,989	7,512
- adjusted EBITA margin (%) *	17.6		17.8	17.1	17.1	17.2	17.2
Amortisation of step-up values	-209		-254	-653	-769	-980	-864
Comparison distortion items	-63		-5	-63	191	189	-65
Operating income	1,438		1,882	4,546	5,161	7,198	6,583

* Alternative performance measures. ** Excluding comparison distortion items.

Q3

The gross profit has been affected negatively by a lower sales volume and the product mix in capital sales.

Sales and administration expenses were SEK 1,368 (1,676) million during the third quarter and SEK 4,486 (5,117) million during the first nine months 2020. The figures for the first nine months corresponded to 14.6 (15.3) percent of net sales. Excluding currency effects and acquisition/divestment of businesses, sales and administration expenses were 12.9 percent lower during the third quarter and 9.9 percent lower during the first nine months 2020 compared to the corresponding periods last year.

The costs for research and development during the first nine months 2020 corresponded to 2.5 (2.4) percent of net sales. Excluding currency effects and acquisition/divestment of businesses, the costs for research and development decreased by 14.7 percent during the third quarter and 3.1 percent during the first nine months 2020 compared to the corresponding periods last year. The decrease in the quarter is explained by an overall lower activity level due to the COVID-19 pandemic.

Earnings per share was SEK 7.14 (9.69) for the first nine months 2020. The corresponding figure excluding amortisation of step-up values and the corresponding tax, was SEK 8.40 (11.18).

Comparison distortion items

	Q3	Jan-Sep	Jan-Dec	Last 12
SEK millions	2020	2019	2020	2019	2019	months
Other operating income
Comparison distortion
income	-	-5	-	191	260	69
Other operating costs
Comparison distortion
costs	-63	-	-63	-	-71	-134
Net comparison distortion
items	-63	-5	-63	191	189	-65

BnSEK						%
15										42
12										40
9										38
6										36
3										34
0										32
	Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
	201 7	201 8	201 9	202 0
						Net sales
						Adjusted gross margin in %
BnSEK		%
2.5										18
2.0										17
1.5										16
1.0										15
0.5										14
0.0										13
		Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
	201 7	201 8	201 9	202 0

Adjusted EBITA

Adjusted EBITA margin in %

2020 Quarter Third Laval Alfa

4

26

The comparison distortion cost in 2020 is relating to the realized loss at divestment of the operations in DSO Fluid Handling Inc in the U.S.

The comparison distortion income in 2019 was relating to a realised gain at the divestments of part of the air heat exchanger business related to commercial/industrial air heat exchangers in the Greenhouse division to the LU-VE Group. The comparison distortion cost in 2019 was relating to a realised loss at the divestments of the last remaining Greenhouse operation